All Things in Moderation

Stocks are higher after a strong GDP report. Bonds and MBS are flat

The second revision to Q3 GDP came in at +3.9%, an increase from the initial estimate of +3.5%. Personal consumption rose 2.2%. The core PCE index (which is the inflation measure the Fed prefers to use) came in at 1.4%, so inflation is still well below what the Fed would like to see. The big contributing factor to GDP was government spending, which increased 9.9%.

Home price appreciation seems to be flattening, however, as the FHFA home price index was flat on a month-over-month basis. Case-Shiller rose .34%, however. The CoreLogic home price index noted that price appreciation was slowing at the high end, however prices were still rising pretty quickly at the low end (9.4% vs. 4.5%).

Chart: Case-Shiller Home Price Index

Stocks are higher this morning on speculation that the ECB will take further measures to boost growth. Bonds and MBS are down.

This is a short week with the Thanksgiving holiday. Friday will be an early close in the bond market. We have a lot of data on Tuesday and Wednesday.

Economic growth moderated in October, according to the Chicago Fed. Production-related indicators were negative, while employment-related indicators were positive.

Even as the Fed ends QE, the demand for sovereign debt remains insatiable. J.P Morgan is forecasting demand for sovereign debt will exceed supply by $400 billion in 2015 as worldwide business confidence drops and inflation remains nowhere to be seen. This has been largely a European phenomenon, however the laws of relative value will affect US bonds as well. Note that US Treasuries yield more than the G7 average, by a lot. In fact, it has risen from flat to 77 basis points since the Fed announced it would end QE in mid-2013. We are approaching levels not seen since 2006. The upshot? Demand for European debt will keep a bid under Treasuries. In other words, the environment remains suitable for continuing low rates. Interesting that pretty much every strategist on the Street has gotten this one wrong.

Fun fact: Of the PIIGS, Italy, Ireland, and Spain yield less than the US. Only Portugal and Greece yield more. It makes you wonder if the Fed and the ECB have created a monster – a sovereign debt bubble.

Chart: Treasury spread to G7 debt. (in other words, the 10-year yield minus the average 10 year bond yield for the G7 countries).

Obama says that “Americans will want that new car smell and someone that doesn’t have as much mileage as me.” FWIW, Hillary will have quite the amount of mileage on her, as she will be pushing 70 in 2016. But she smells nice, I guess.

Markets are higher this morning after China cut interest rates. Bonds and MBS are flat.

Delinquencies dropped again to 5.44% of all loans, according to Black Knight Financial Services. They are still elevated, but have quite a bit from their high of around 10%. Prior to the the bust, a typical delinquency number was about 4.5%.

Foreclosure starts declined 10% in October, and are down 31% year-over-year. Foreclosure inventory is down 33% YOY and is at the lowest level since February 2008.

The CFPB is coming down on lenders who ask too many questions about disability income in the verification process.

Stocks are down on overseas economic weakness. Bonds and MBS are up.

Economic data dump: Initial Jobless claims came in below 300k for the 10th time this year. Lower energy prices are keeping a lid on inflation at the consumer level as the CPI came in flat. Philly Fed made a huge move upward – from 20.7 to 40.8. This is the highest reading in over 20 years. The Bloomberg Consumer Comfort Index rose to 38.5, while the Index of Leading Economic Indicators rose to 0.9%. All in all, some pretty good data this morning – surprising that bonds have taken all this in stride and are up so much.

Existing Home Sales rose to 5.26 million in October from an upward revised 5.18 million in September. They are up 2.5% on a year-over-year basis. The median home price was 208,300, which is up 5.5% from a year ago. All-cash sales increased to 27% from 24% in the prior month, but are down from 31% a year ago. Normalcy is around 20% cash sales. The first time homebuyer represented 29% of all sales. Normalcy is closer to 40%.

There was nothing earth-shattering in the FOMC minutes yesterday. Everyone agreed that QE had done its job and it was time to end it. They agreed to continue to re-invest maturing proceeds back into the market, and did not discuss suspending that or selling some of their portfolio. The staff economists tweaked their 2015 GDP estimates downward a bit. Since the October FOMC meetings don’t have a press conference of projection materials, they tend not to announce big changes. Bonds rallied on the minutes initially, but sold off to more or less end the day unch’d.

Mel Watt testified in front of the Senate Banking Committee yesterday. Elizabeth Warren laid into him about principal reductions on Fannie and Freddie loans. Mel said that reductions are still under consideration. Of course the FHFA Home Price Index (which represents homes with a conforming loan) is within 6% of the high, so if Mel continues to slow-walk principal mods, the problem eventually goes away on its own. They sound like they are bringing back the 3% down conforming loan for “targeted” borrowers.

Obama is scheduled to go on TV tonight to tout his new executive order on immigration. Something like 4 million will be given amnesty.

Markets are flattish this morning on no real news. Bonds and MBS are down.

Housing starts dipped slightly to 1.01 million units, which is about 67% of “normal” levels. Single Family starts rose from 668k to 696k, while multi-fam fell from 370 to 313. Multi-fam starts are notoriously volatile, so this number isn’t as bad as it initially appears, at least from a resi building perspective. Building Permits rose to 1.08 million however. As you can see from the chart below, we are a long way from “normalcy” in housing starts. When you correct for population, Compare the chart of housing starts from 1960, and then look at the chart when you divide starts by the population:

Chart 1: Housing starts (unadjusted)

Chart 2: Housing Starts (adjusted for population):

When you take into account population growth, we have only recently touched the worst level seen in the previous 50 years. You can see how much we really under-built over the past 6 years. This represents pent-up demand that will drive the economy for years.

Mortgage Applications rose 4.9% last week. Purchases rose 11.7% while refis rose .9%. This push towards the end of the year bodes well for 2015.

Later on today, we will get the minutes from the last FOMC meeting. Key things to look for: (1) a discussion of the speed limit for the economy, particularly when discussing the labor market. The leading indicators (initial jobless claims, job openings) are at boom time levels, while the lagging indicators are still average at best. Does the Fed believe that the labor force participation rate will increase as things get better, or will it stay depressed? If it stays depressed, that means there is less slack in the labor market than appears, and wages will start to increase quicker than people are thinking. It also means less consumption however, so in effect the “speed limit” of the economy is reduced. On the other hand, if the long-term unemployed return to the labor force, wage increases may be further off in the distance, but the economy will have higher growth potential. (2) Discussions about re-investing their maturing QE securities. At the moment, they are re-investing maturing MBS and Treasuries back into the market, which turns out to be a sizeable amount of money – around $17 billion a month or so.