All Things in Moderation

Stocks are lower this morning on no real news. Bonds and MBS are flat.

Mortgage Applications rose 1.4% last week. Purchases fell .4%, while refis rose 2.7%. The 30 year fixed rate mortgage finally fell six basis points after stubbornly resisting the moves in the bond market.

Later on today, we will get the FOMC minutes. While there were no changes to the economic forecasts, the markets will be looking to see if the circle of hawks is growing.

Job growth is mainly at the low end of the pay scale. But the wage growth is mainly at the high end. The US labor market is incredibly bifurcated at the moment. This is certainly what keeps Janet Yellen up at night, although the bigger question is whether the Fed can really do anything about it.

BlackRock chief investment strategist Russ Koesterich is saying that bonds have it right, stocks have it wrong with respect to the view of the economy. The higher debt levels will act as a drag on growth for the next decade or two. In other words, we are Japan, and Reinhart / Rogoff are right. This is of course heresy to Dr. Cowbell, who believes the solution to the economic morass is to borrow more (since rates are so low) and to spend it on infrastructure. Japan did exactly what Krugman wanted, and took their debt to GDP ratio to 2.2x and has had little to no economic growth for a generation. As a point of reference, our debt to GDP ratio just over 106%, however the Fed owns about a quarter of that (through QE) so it is really debt we owe ourselves.

Foreclosure starts and Delinquencies ticked up in June, according to Black Knight Financial Services (formerly known as Lender Processing Services or LPS). DQs increased to 5.7% from 5.62% in May, while foreclosure starts ticked up to 88.3k vs 86.3k a month before. On a year over year basis, foreclosures starts are down 19%. Inventory continues to be concentrated in the judicial states of NY, NJ, and FL. Short sale discounts continue to narrow, while the REO discount is flat.

Housing starts in July were at a seasonally-adjusted annual rate of 1.09 million, which is 15.7% above June and almost 22% above last year. Building Permits were 1.05 million, up 8.1% month-over-month and up 7.7% year-over-year. Multi-fam drove the increase, although single fam did increase as well. Multi-fam starts are notoriously volatile. We saw big increases in the Northeast, while the Midwest was flat. The South and West were up slightly. Can’t complain about the number, which was the highest in eight months. Still, “normalcy” is around 1.5 million units per year, which goes to show how depressed housing still is. We probably will not hit historical numbers until the first time homebuyer returns.

The Consumer Price Index rose .1% in July, which is up 2% year over year. Ex food and energy, it rose 1.9% year over year. This cheered the bond market.

The Despot reported earnings that beat estimates, with comp store sales up 5.8%. People are starting to spend money on home improvement. The stock is up about 4 bucks this morning.

What will the world’s finance chiefs be talking about this week at Jackson Hole? First, don’t look for any market-moving statements, but there is always the possibility. Second, the labor market and the issue of the economy’s speed limit. Is it possible to have unemployment continue to fall without increasing the labor force participation rate? Are the long-term unemployed now permanently unemployed? If so, the amount of improvement we can expect to see without causing inflation is limited. FWIW, the most dangerous words in economics and financial markets are “this time is different.” I am more sanguine than most.

Is the lock-in effect going to matter as rates rise? In other words, as rates rise, home buyers will experience an increase in their mortgage rates, which could prevent people from moving. If so, will this be a drag on mortgage production? Zillow convened a panel of experts who believe this effect will probably be muted. Unless we suddenly get a bout of hyperinflation, rates are probably moving up to 5% or so over the next few years. This is probably a gradual enough increase that it won’t affect things too much.

Markets are higher as European stocks rally. Bonds and MBS are down on decreasing pressure in Ukraine.

The National Association of Homebuilders Sentiment Index rose to 55, the highest level in seven months.

This week will have some important data, with housing starts and building permits tomorrow, and the FOMC minutes on Wednesday. The minutes will be especially interesting as “lift off” (the Fed’s euphemism for increasing rates) approaches. Finally, central bankers, finance ministers, and other officials will meet at Jackson Hole on Thursday. There will be the possibility of market moving quotes so be aware.

The labor market is improving, at least at the higher end. Skilled labor is tough to find, and we are finally seeing some job growth in professional services. Low skilled labor and the long term unemployed are still struggling. Separately, part time workers who want to work full time are presenting a problem for the Fed. Which means don’t focus on the unemployment rate, focus on wage growth when thinking about the Fed’s posture towards interest rates.

What has QM succeeded at doing? Raising compliance costs. Has it changed business practices? Nope.

Stocks and Bonds are up small on no real news. MBS are flat.

The Empire Manufacturing Survey weakened in August, but is still at reasonably strong levels. Industrial Production rose .4% and Manufacturing Production rose 1% in August. Capacity Utilization ticked up to 79.1%. All-in-all, reasonably strong numbers.

Inflation at the wholesale level remained muted in July, with the Producer Price Index rising .1% month-over-month and 1.7% year-over-year. Lower energy prices depressed the headline number – ex food and energy, we were up .2%, still well below what the Fed would like to see.

Consumer Confidence dipped in August, according to the University of Michigan.

Bloomberg has a good article on the contradictory indications in labor market. Initial Jobless Claims as a percent of the population are about .12% of the population, which is the lowest since the late 1960s. Yet the labor force participation rate is stuck at levels we haven’t seen since the 1970s. Separately, the JOLT job openings rose to 4.7 million, the highest since early 2001. So you have a situation where the numbers are saying one thing, yet common sense tells you the labor market is still very weak. As a result, the hawks have a much different view of what is going on than the doves. The best summation is from Edmund Phelps, a Columbia University Professor: “The difference of opinion is whether we’re in a state that’s about as good as it’s going to get or whether we’re in a very poor state, but with good policies and a bit of luck we’ll be able to do a lot better.” This is essentially the “speed limit” conundrum – has the Great Recession basically lowered the speed limit for the economy? If it has, then there really isn’t much more the Fed can do, and keeping rates at the zero bound is the wrong thing to do. On the other hand, liberal economists want the Fed to keep rates as low as possible for as long as possible, arguing that the Fed can easily deal with inflation if and when it ever comes up.

St. Louis Fed President James Bullard would like to see the Fed start hiking rates in Q1.

Markets are flattish on no real news. Bonds and MBS are higher.

Initial Jobless Claims rose to a six week high at 311,000. That said, initial jobless claims are pretty much back to boom-time levels. Consumer Comfort ticked up last week, according to Bloomberg.

Import prices fell .2% month-over-month and rose .8% on an annual basis. Oil drove the decrease. Ex food and fuels, import prices were flat.

The latest CoreLogic Market Pulse is out. Home prices increased 7.5% year-over year, while foreclosure inventory is down 35%. However, foreclosure inventory is still not far off peak levels in the judicial states of New Jersey and New York.

Stocks are higher this morning after a disappointing retail sales report means the Fed is not going to be increasing rates any time soon. Bonds and MBS are up.

Mortgage Applications fell 2.7% last week as purchases fell 1% and refis fell 4%. The average 30 year fixed rate mortgage was steady at 4.35% despite a 7 basis point rally in the 10 year. Refis were 54% of loans. We have seen mortgage rates and TBAs not follow the bond market rally lately. TBAs did follow bonds higher, so mortgage rates should have dropped. According to the Fed’s Senior Loan Officer Survey, credit standards are loosening on mortgages, which means more higher rate loans.

Retail Sales were flat in July, below the .2% Street forecast. Ex-autos and gas, they rose .1%, lower than the Street forecast of 0.4%. Soft retail sales are not a recipe for inflation, so the Fed will probably continue to be sanguine about inflationary risks to the economy. Note that we are in the middle of the back-to-school shopping season, which is second only to the holidays in importance and usually predicts whether holiday shopping will be strong or muted.

Note that the Fed is starting to think about the idea of secular stagnation – an idea that was in vogue during the Great Depression and is starting to come back. The idea is that a maturing economy begets a lack of investment ideas, which are necessary to fuel future growth. Fed Vice Chairman Stanley Fischer hinted at the possibility in a recent speech. The upshot: a mid-2015 tightening might be the earliest possibility, and the Fed is probably going to err on the side of being too loose. I continue to believe that the Fed isn’t going to move in a meaningful manner until we start seeing wage inflation of 4%. And we aren’t even remotely close to seeing that.

FHFA is seeking input from market participants on a single TBA for Fannie and Freddie loans. This is part of the move towards a common securitization platform, which is going to be a multi-year project. Expect Ginnie Is and Ginnie IIs to be merged as well, although Ginnie Is have been trading behind IIs for a while now, so it is kind of moot.

We have been hearing about how income inequality has been an issue in this country. It turns out that the income gap between the richest and poorest metropolitan regions is at a record as well. Places like Austin, TX are experiencing a boom, while rust belt cities continue to struggle. The high income areas, like Boston and San Jose are seeing the biggest price appreciation, and the most apartment construction. Which means these areas are seeing the most jobs in construction, which is a big employer of lower and middle income people. The places that need jobs the most – places like Akron OH, for example, are seeing little home price appreciation, and therefore little construction. Which means job growth remains depressed in these areas, and this accounts for the fact that housing starts remain mired at a level that is about 30% below what they should be.