Morning Report – The Fed frets about excessive risk-taking 6/4/14

Posted on June 4, 2014 by Brent Nyitray

Vital Statistics:

 

  Last Change Percent
S&P Futures  1917.9 -3.9 -0.20%
Eurostoxx Index 3240.1 -7.7 -0.24%
Oil (WTI) 102.5 0.1 0.06%
LIBOR 0.227 0.000 0.11%
US Dollar Index (DXY) 80.49 -0.150 -0.19%
10 Year Govt Bond Yield 2.55% 0.02%  
Current Coupon Ginnie Mae TBA 106.5 0.1  
Current Coupon Fannie Mae TBA 105.5 0.1  
BankRate 30 Year Fixed Rate Mortgage 4.18    

 

Stocks are down (and bonds are up) after the weak ADP jobs report, which is signalling a weak nonfarm payrolls number on Friday. 
 
ADP payrolls came in at 179k, below the 210k expectation. The Street is forecasting 215k jobs for Friday’s report. FWIW, the ADP report has been downright lousy at predicting the big number lately (notwithstanding last month), so I wouldn’t read too much into it. 
 
Mortgage applications fell 3.1% last week, even though mortgage rates fell a couple bps. Purchasese fell 3.6%, while refis fell 2.9%. 
 
The final revision for first quarter productivity came in at -3.2%. Unit labor costs rose 5.76%. Not sure how much of that was driven by obamacare / bad weather. Flattening productivity growth could be a good thing generally, as it means employers have squeezed just about all they can get from current employees and will need to hire more (or spend more on CAPEX). Either one is bullish for the economy.
 
The ISM Services index jumped to 56.3 in May, versus 55.2 in April and expectations of 55.5. Not quite post recession highs, but close. So we continue with the pattern of strong data, weak data. 
 
The Markit US Services PMI and composite PMI were both strong, although a little weaker than April. Still a 58 handle is a good number regardless.
 
The census bureau has a cool application where you can find out all about trends in home construction – things like typical number of bedrooms, number of bathrooms, square footage, amenities. One thing that jumps out is that the luxury end is doing better – we are building less homes under 1800 square feet, and the big percentage growth is in the 4000 + square feet bucket. The smaller starter homes probably won’t get built until the first time homebuyer feels confident enough about the future to buy. Household formation remains depressed, which is keeping housing starts depressed, which is keeping the economy stuck on a 2% growth trajectory instead of a 3% growth trajectory. The turnaround will happen – I thought it would be this year, but it is looking like a 2015 event. I’m starting to feel like Linus in the pumpkin patch preaching about pent-up demand, while waiting for a 1.5 million housing starts print.
 

 

The calm before the storm? The Fed is worried about complacency in the markets. The VIX index has gone 74 straight weeks below its long-run average, which is a similar environment to 2006 – 2007. Junk spreads are widening, and junk issuance is growing as investors reach for yield. William Dudley commented: “Volatility in the markets is unusually low… I am a little bit nervous that people are taking too much comfort in this low-volatility period. As a consequence, they’ll take more risk that really what’s appropriate.” For what its worth, I think the VIX is useful for describing what has already happened in the market, not as a predictor of what is going to happen. Yes, there is the old market saw of “VIX is high, time to buy, VIX is low, time to go,” but a low VIX doesn’t necessarily mean markets are going to fall out of bed – look at the low VIX levels in 94-95, which preceded the mother of all stock market rallies. VIX invariably spikes AFTER the fit hits the shan, not before. It represents market players paying up for option protection, and that is a trailing indicator, not a leading one.

 

 

 

 

With respect to the junk issuance, investors (in particular defined benefit pension funds and insurance companies) are reaching for yield because the rate of inflation for their liabilities is largely insensitive to interest rates. The actuarial tables couldn’t care less if the Fed is driving down rates via QE – they need to earn X% on their fund to cover expected costs and that’s that. If they can’t get that in Treasuries, they’ll move to assets that can. Invariably that means they have to move out on the risk curve. We have seen this movie before, in the 1950s. FWIW, Dr. Cowbell thinks low rates are here to stay, and that “this time is different.” Most dangerous words in investing, ever. Anyway, it is nice to see the Fed muse about excessive risk taking, although IMO the biggest risk is probably in the so-called “risk free” long bond. 

 

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13 Responses

  1. Let the mutherfuker burn!'s avatar
    I'm Now Kevin's Biatch, on June 4, 2014 at 10:32 am said:

    Apparantly the dead Tea Party ain’t.

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  2. jnc4p's avatar
    jnc4p, on June 4, 2014 at 12:05 pm said:

    On occasion, Vox & Matthew Yglesias can grasp basic economics:

    “Anywhere you look, local real-estate markets and regulatory dynamics are complicated. But in San Francisco there is a basic underlying reality. The city’s physical dimensions are constrained, and a lot of people would like to live and work there. Thanks to the miraculous technology of the elevator, it is perfectly possible for lots of people to live and work in a small geographical area via the mechanism of tall buildings. But when tall buildings are banned, space becomes scarcer. And when space is scarce, the tendency is that the richest people around will be the ones who are able to bid for it.

    There are lots of things you can try to do to reallocate some scarce square footage away from the richest people and to some other folks. But as long as you have the scarcity, you’re going to have yourself some haves and some have-nots. To make real progress you need to reduce scarcity, and that means making it easier to add buildings, not harder.”

    http://www.vox.com/2014/6/4/5778696/measure-b-san-francisco-will-reduce-affordability

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    • ScottC's avatar
      ScottC, on June 4, 2014 at 12:29 pm said:

      jnc;

      On occasion, Vox & Matthew Yglesias can grasp basic economics:

      Maybe next we can get them to discuss San Fran rent control.

      As an aside, re-reading that piece, it never ceases to amaze me what a caricature the NYT is. They can’t even write a piece pointing out the unintended economic effects of rent control without framing the problems in terms of class struggle. “Things got a little bit out of hand, Jenny. It just greed and those son-of-a-bitch millionaires! I would never hurt you, you know that.”

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  3. Let the mutherfuker burn!'s avatar
    I'm Now Kevin's Biatch, on June 4, 2014 at 12:23 pm said:

    Then why vote for her?

    If you’re a pro-coal D, er, why?

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  4. Let the mutherfuker burn!'s avatar
    I'm Now Kevin's Biatch, on June 4, 2014 at 1:29 pm said:

    I love you baby! Why do you make me hit you like that?

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  5. Let the mutherfuker burn!'s avatar
    I'm Now Kevin's Biatch, on June 4, 2014 at 2:09 pm said:

    Smart take.

    Has anybody who served with Beegdahl defended him?

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  6. jnc4p's avatar
    jnc4p, on June 4, 2014 at 3:47 pm said:

    Usefull Vox piece showing how the EPA’s proported “flexibility” for the states in the new carbon rules is actually an exercise in micromanagement and lobbying.

    http://www.vox.com/2014/6/4/5779052/how-to-figure-out-which-states-get-hit-hardest-by-obamas-climate-rule

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    • markinaustin's avatar
      markinaustin, on June 5, 2014 at 7:55 am said:

      I would have carried permission slips on a tear off pad fifty four years ago if this had been a requirement. An I-message should suffice now. In fact, this would boost smart phone sales to 100% saturation among college age males.

      I, (your name here), permit MARKINAUSTIN to engage with me in the following sex acts
      (list here in Latin, Spanish, clinical English, or Anglo-Saxon)

      on the (list here available dates and possible one hour time frames, or with reference to external events such as hell freezing over)

      NO WARRANTY OF MERCHANTABILITY OR FITNESS FOR THE INTENDED PURPOSE IS GIVEN, EXPRESS OR IMPLIED. I AM “WHERE IS, AS IS”. You, on the other hand, must submit your finger nails for inspection prior to first use.

      I am above the age of consent, of sound mind, and not encumbered according to the laws in effect in Texas on the date of execution of this document. I have executed this of my own free will.

      (Signature) (Date)

      State of Texas
      County of

      Sworn to and subscribed before me this day of , .

      _______________________ (STAMP)
      Notary Public State of Texas

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    • ScottC's avatar
      ScottC, on June 5, 2014 at 8:29 am said:

      McWing:

      I always preferred written permission.

      If I read the law correctly, the only reason the state can mandate this is because universities have become slaves to government spending. “If you want taxpayer money, you must implement these totally insane policies”. Another example of the nefarious nature of government “aid”. The government is like a drug pusher. Get people hooked and then threaten to cut off the supply if they don’t get on their knees and perform.

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    • markinaustin's avatar
      markinaustin, on June 5, 2014 at 9:02 am said:

      The problem of withdrawn consent remains.

      I am pretty much appalled by the stats on campus sexual assaults. This is a real problem and one that can be addressed from many directions. Permission slips is not one of the brighter ideas, however.

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  8. Let the mutherfuker burn!'s avatar
    I'm Now Kevin's Biatch, on June 5, 2014 at 8:54 am said:

    One hour. In her dreams.

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