All Things in Moderation

Slow news day. Markets are higher this morning on a mixed bag of economic data. Bonds and MBS are down.

A few economic data points this morning: Challenger and Gray announced job cuts fell 24%, productivity was revised downward from 2.2% to 1.8% and initial jobless claims fell to 323k. Unit Labor costs were revised to -.1% from -.5%. Given what we saw in the personal income numbers – that pretty much all of the increases in income were due to increased transfer payments – it looks like costs are increasing without any corresponding increase in output – a recipe for stagnant wages.

Junk Bond King Michael Milken has a good editorial about the unintended consequences of government meddling in the housing market, the biggest one was the housing bubble.

Speaking of unintended consequences, the unpopularity of obamacare is proving to be a big one for Democrats. The Administration has decided to delay rules prohibiting high deductible insurance plans until after the midterm elections and through 2015. Of course this will ensure that obamacare will remain a battleground issue for 2016.

Markets are flat this morning as Ukranian Euphoria meets a putrid ADP jobs report. Bonds and MBS are flat, after bonds cratered yesterday, with the 10 year yield trading to 2.7% from 2.6%.

The ADP jobs report came in at 139k, much lowers than the estimate of 155k. More importantly, January was revised downward form 175k to 127k. The first impulse is to blame the weather, but construction increased 14k. Manufacturing was flat, and (you guessed it) financial services fell. Friday’s payroll estimate is 150k, which now seems high. N.B. – ADP has been a pretty lousy predictor of the BLS number lately, so keep that in mind. FWIW, Mark Zandi of Moody’s believes weather is playing a part here, which is creating some pent-up demand for workers. He is calling for some 250k prints in the Spring.

Last week’s flight to safety bond market rally, helped increase mortgage applications by 9.4%. Both purchase and refi apps rose the same amount. The indices also benefited from an easy comparison with the holiday shortened prior week. The average 30 year fixed rate mortgage fell from 4.53% to 4.47% last week. Refis as a percent of all loans fell to 57.7%.

The FHA insurance fund will have a positive capital reserve balance at the end of 2014 and will not require a draw from the U.S. Treasury. FHA is asking for authority to collect an additional administrative fee, which will undoubtedly annoy affordable housing advocates who are pressing FHA to reduce fees. This fee may be part of the White House’s 2015 budget, which is DOA.

First time homebuyers continue to struggle with tight credit and competition from professional investors. Until the first time homebuyer comes back to the market, the housing recovery (and the mortgage business itself) will be fragile. This also speaks to the completely bifurcated credit markets out there. While credit to consumers is still tight, banks are throwing money at private equity firms and institutional investors.

It has gotten so bad that private equity firms are outbidding strategic buyers in industrial mergers, which is astounding when you consider that strategic buyers have the benefit of synergies and private equity firms do not. Historically, private equity firms were the ones who would swoop in to buy assets on the cheap; now they are winning bidding wars.

This speaks to a theme I have been discussing for a while – the stock market is at or near record highs, and yet the broader economy is in a completely different place. Corporate America is flush with cash, and wages / hiring are flat. Ironically, the cash they have will probably be spent on productivity enhancing CAPEX, which will be good for stocks, but not necessarily good for wages. Consumption and wage growth are currently correlating at 95%, when that number has been closer to 50%. So, when you have about 2% wage growth, you get about 2% GDP growth. Which accounts for this kind of “meh” recovery we have had.

The market giveth, the market taketh away. Stocks are up (and bonds / MBS are down) on positive developments in the Ukranian situation. Expect more of the same until the situation resolves itself. LOs, be sure to explain to your borrowers that rates will be very volatile for the near future and floating is playing with fire.

Home prices rose .9% month over month and 12% year-over-year in January, according to Corelogic. Prices remain 17.3% below their peak in April 2006. We had seen a bit of a divergence between the indices, with Case-Shiller observing month-over-month decreases (would signal a flattening of the index) and FHFA still reporting month-over-month increases. CoreLogic’s numbers suggest Case Shiller is the outlier.

Obama is set to unveil his new budget today, which will increase spending and taxes. This is a political document, meant to frame the debate for midterm elections this year. It has absolutely zero chance of being implemented

Speaking of political acts, if you like your health care plan, you can keep it (at least through midterms). Obama is planning to delay another part of obamacare, which forbids non-compliant insurance policies until after the midterm elections. Side note, obamacare accounted for the big increases we saw in yesterday’s personal incomes and personal spending report.

Stocks are weaker and bonds are stronger on developments in Ukraine. While this situation should not have much of a direct impact on the US, it will push rates lower at the margin on the flight to safety trade. Equities will be vulnerable to the risk on trade.

Personal Income and Personal spending came in much better than expected in January. Incomes increased .3%, while spending increased .4%. December spending was revised downward from .4% to .1%. The PCE core index came in at .1%.

The Markit US PMI came in at 57.1, a little better than expected, while the ISM indices were stronger as well. Construction spending rose .1%, which again was better than expected.

We have a lot of data this week, culminating with the jobs report on Friday. The other big report will be the ISM surveys. That said, geopolitical concerns will probably drive the bond market more than the data will.

The Hardest Hit Fund money (that was intended to be used to modify mortgages and help homeowners in distress) is now being used to demolish homes. In Detroit alone, 70,000 homes (or 19% of the total inventory) may need to be torn down. It may turn out that much of the shadow inventory is stuff that really isn’t going to affect supply because it is unsaleable.