Morning Report – Consumer Sentiment is at boom time levels. 2/27/15

Stocks are lower this morning after GDP came in a little better than expectations. Bonds and MBS are up small.

The second revision to fourth quarter GDP came in at 2.2%, a bit higher than the estimate of 2%, but a big drop from the Q3 reading of 5%. Personal consumption rose to 4.2%, a strong reading that bodes well for growth going forward. Government spending was down, driven by a 12.4% drop in defense spending. Business inventories were revised downward as well. Private capital expenditures slowed their rate of growth as well.

Pending Home Sales rose 1.7% in January, lower than expected, but better than the upward-revised 1.5% drop in December. They are up 6.5% year over year. Supply remains tight, however all-cash sales as a percent are dropping, which indicates the professionals may be exiting, leaving room for “real” home buyers to enter. The big question remains regarding inventory: will it simply jack up prices, or will it attract new building? The answer may be “both.”

In other economic data, the ISM Milwaukee Index came in at 50.32, a disappointment, while the Chicago Purchasing Manager index fell sharply from 59.4 to 45.8. The University of Michigan Consumer Sentiment index rose to 95.4. These consumer confidence indices are driven by gasoline prices for the most part, but the numbers are encouraging nonetheless. We are back to boom-time levels. This is being confirmed by the strong personal consumption numbers this morning.

Why is Germany worried about government spending when it is getting paid to borrow? Switzerland, Sweden, and Denmark are imposing negative interest rates on bank deposits. Separately, are these ultra-low rates creating issues that will blow up later? We are in uncharted territory, and while everyone hopes that the world’s central banks can stimulate the global economy without causing another crisis, that is no sure bet. The stock market seems blithely oblivious to this possibility, however and that is another issue. I am wondering if this will all come to a head in time for the 2016 elections. Monetary policy acts with a lag, and if the Fed starts tightening in June, the effects will start kicking in by summer of 2016.

We are starting to see more evidence of improvement in the labor market with small business, which has been the engine of job creation historically. We are actually beginning to see the unwind of a strange dichotomy. The stock market had been flying over the past few years, yet things have been pretty gloomy for the economy overall. To the average American, it didn’t feel like the stock market was at record levels – it didn’t feel like 2005 or 1999. The reason for this was that the big S&P 500 names had lots of international exposure, which was driving earnings and the indices. Not only that, they could borrow at exceptionally low rates, while smaller business was subject to tighter credit. As Europe weakens and the US dollar increases, the international divisions are having a rougher go of it, while US domestic focused small business is benefiting from a turnaround in the US economy.

Morning Report – The McMansion is back 2/26/15

Markets are flat this morning on no real news. Global bonds continue to rally, but Treasuries are not really participating.
Inflation remains largely muted, with the Consumer Price Index falling .7% in January. Ex-food and energy, it rose .2, a little higher than expectations. On a year over year basis, inflation ex food and energy increased 1.6%.
Durable Goods orders rose 2.8% in January, rebounding smartly after a very weak December. Capital Goods (a proxy for business capital expenditures) rose .6%.
Initial Jobless Claims rose to 313k last week from 282k the week before. The Bloomberg Consumer Comfort Index fell from 44.6 to 42.7 last week.
Home Prices rose .8% in December, according to the FHFA. Home Prices are now about 4% from peak levels. The report has been expanded to include all sorts of additional data. The growth continues to be on the West Coast, while the Northeast lags.
Delinquencies and foreclosure rates dropped in Q4, according to the MBA. For the most part, we are back at pre-2007 (or pre-crisis) levels. Judicial states still have 3x the foreclosure rate as non-judicial states.
The McMansion is back. The median square footage of new homes topped 2,400 square feet last year. Builders are chasing the affluent because the first time homebuyer is still largely out of the market. That said, some builders, like D.R. Horton, are introducing new brands that are in the first time homebuyer price points.

How much slack is there really in the labor market? Are wages rising because of a shortage of labor in some areas? If so, then that means (a) the speed limit of the economy is lower, because more people working = higher output, and (b) the Fed will have to move earlier than they may want to in order to quell inflation. If these discouraged workers return to the labor force, downward pressure on wages will continue, however in the long run, output will be higher. This issue was discussed in the June 2014 FOMC minutes, but it hasn’t been brought up since.

Morning Report – New Home Sales still depressed 2/25/15

Markets are down small this morning as we go into Day 2 of Janet Yellen’s Humphrey-Hawkins testimony. Bonds and MBS are flat.

New Home Sales fell to 481k from 482k in December. We are still at something like 34% of peak levels during the bubble, which is a historically recessionary level. Toll Brothers was somewhat bullish, and it seems like the spring selling season is improving, but tight inventory remains an issue. Given that builders have pushed price hikes about as far as they can go, in order to boost revenues, they will need to push through more units.

Chart: New Home Sales 1963 – Present

Mortgage Applications fell 3.5% last week. Purchases were up 4.6% while refis fell 7.5%. Rates jumped a lot for jumbos – from 3.92% to 4.09%, while the 30 year FRM forse from 3.93% to 3.99%. The 10 year picked up 6 basis points in yield last week as well. Mortgage rates did not follow Treasuries down during the plunge of late January, and therefore had held steady as rates went back up. It looks like we are back to mortgage rates moving with Treasuries. Not sure what is going on in jumbos, though – that is a big move.

Janet Yellen’s prepared remarks pretty much revealed nothing new. “Patient” still means 2 FOMC meetings. She came out strongly against the “audit the Fed” movement, pointing to 1970s inflation as the result of Congressional meddling in monetary policy. Elizabeth Warren laid into her like a prosecutor on cross over of matters, even getting Yellen to roll her eyes at one point. There was talk about possible regulatory relief for small community banks. For the most part, it was a non-event. Day 2 continues today in front of the House.

Mortgage REIT Annaly Capital reported better than expected earnings yesterday. It looks like they made few adjustments to their portfolio.  Their conference call is later today. Annaly is a big player in the TBA market, which is the starting points for loan pricing.

Big Box Home Improvement Retailer Lowe’s reported good numbers this morning as home improvement continues to drive sales. Can’t afford a new home? How about a new kitchen?

Retailer TJ Maxx is raising wages to $9.00 to compete with WalMart in attracting and retaining the best talent. While we are still nowhere near seeing anything that could be considered “wage inflation,” it appears we could be laying the ground work for it. Wage inflation and new home construction are the last pieces to the puzzle for the US economy.

Morning Report – Janet Yellen testifies 2/24/15

Markets are flat this morning after the EU and Greece agreed to a 4 month extension of their rescue package. Bonds and MBS are down small.

Janet Yellen is set to testify in front of the Senate this morning. Watch for volatility in rates. The prepared remarks are here. Initial reaction of bonds is negative.

Home prices rose .87% month-over-month and 4.5% year over year, according to Case-Shiller. We continue to approach normalcy, but housing starts / new home construction remain at recessionary levels. The Great Millennial Develeraging continues…

The Home Despot reported good earnings this moring, and the stock is up smartly. They boosted their quarterly dividend by 26% and authorized an $18 billion buyback. Sale store sales increased 7.9%. The conference call is going on right now, and it appears that the strike in the West Coast ports has not become an issue yet. Also, they are not seeing upward wage pressure as their wages are “above market.”

McMansion builder Toll Brothers beat numbers this morning, and took up guidance for 2015. ASPs are forecast to increase to $742,500 higher than the previous guidance of $735,000. Deliveries will increase as well to 5,600 units from 5,500 units. They will hold a conference call at 11:00 am EST.

Morning Report – Existing Home Sales fall 2/23/15

Markets are lower this morning in spite of a loan extension for Greece. Bonds and MBS are up small.

Existing home sales fell to a 4.82 million unit pace in January from an upward-revised 5.07 million pace in December, according to the National Association of Realtors. Inventory is still tight at 4.7 months (6.5 is more or less a balanced market), but it is up from 4.4 months in December. The median home price is $199,600, an increase of 6.2% year over year. All cash transactions were 27%, down from 33% a year ago, and distressed sales were 11%, down from 15% a year ago.

Janet Yellen will make her semiannual trek to the Hill to discuss monetary policy in front of Congress. The prepared remarks will undoubtedly be closely parsed, and the sense on the Street is that Yellen wants to lower expectations somewhat for a June rate hike. Aside from that, HH is generally a waste of time for market watchers. These are generally for the benefit of politicians who like to use it as a platform to pontificate on issues important to them.  The left will try to get her to agree with their views on inequality and the minimum wage, while the right will probably go after the long-term risks of ZIRP. It will be interesting to see if someone asks about the “audit the Fed” movement. She testifies in front of the Senate tomorrow at 10:00 am EST, and in front of the House on Wed.

A deal in the servicing field this morning: New Residential is buying subprime servicer Home Loan Servicing Solutions for $1.3 billion. HLSS has been examining strategic alternatives since last November, and the stock is up smartly. The servicing sector as a whole has gotten slammed from the Ocwen mess and the drop in interest rates.

Speaking of servicing, Ocwen is trying to sell a 9.8 billion servicing portfolio to Nationstar.

If the US economy is improving (and all evidence says it is), why are banks still piling into Treasuries?  There are a couple of reasons. First, is Basel III. They were required by the regulators to increase their holdings of Treasuries. Second, if you look at the Bloomberg total return index on US Treasuries over the past year, they returned 8.8% in 2014. That includes periodic interest and capital gains. Compare that to the typical rate on a business development loan, or a line of credit paying LIBOR + 200 or something. Treasuries are working. And given the yields in European bonds, and the strength of the dollar, there is an underlying foreign demand for Treasuries. Yes, at some point Treasuries will become an awful bet, but that won’t happen until inflation kicks in and that isn’t happening at the moment.

Chart: Bloomberg 10 year Treasury total return index:

Morning Report – Wal Mart wage hike bodes well for wages in general 2/20/15

Markets are lower this morning as the EU / Greek kabuki dance continues. Bonds and MBS are up.

The Markit US Manufacturing PMI Index rose to 54.3 in Feb from 53.9 in January. Good reading, given the fact that the Northeast got slammed with snow all month.

Greece is set to run out of cash as early as next month, so the talks with the EU are increasingly important. Remember, this is all a kabuki dance. Greek voters want to stay in the Euro, and German voters want Greece to stay in the Euro. They will get a deal done, although bonds will be buffeted by the day-to-day headlines.

Megan McArdle on why Wal-Mart raised wages. It was not due to labor activists – it was a business decision to try and minimize turnover and motivate employees. This is good news for wage growth in general, as companies may be forced to raise wages to compete. The great stagnation might be ending.

Morning Report – WMT is NOT rolling back wages 2/19/15

Markets are flattish after Germany rejected a loan extension request from Greece. Bonds and MBS are flattish as well.

Initial Jobless Claims fell to 283k last week, which is a good number given the drop in oil prices. Eventually layoffs will start in the energy patch.

The Bloomberg Consumer Comfort Index rose to 44.6 last week, while the Philly Fed fell and the Index of Leading Economic Indicators ticked down from .5% to .2%.

WalMart reported Q4 earnings that beat analyst expectations. The biggest news out of it, is that WMT is increasing starting wages to $9.00 / hour in April and by Feb next year, all current associates will be making at least $10 an hour, If this is due to market pressures, then that is great news for the economy. If it was due to political pressure (though no one is taking credit so far) then it tells you less. The raise will be part of a larger program to streamline scheduling and other operational issues, and should cost about 20 cents a share over the next year.

The minutes of the Jan FOMC meeting were considered more dovish than expected. Bonds rallied hard on the announcement, as it appears some members are beginning to get cold feet about raising rates this June. Janet Yellen and Ben Bernanke are students of the Great Depression and are probably going to err on the side of waiting too long versus tightening too early.

Freddie Mac took down its numbers for Q1 GDP to 2.5% from 3%, raised 2015 origination forecasts to $1.3 trillion from $1.2 trillion, cut the forecast 30 year fixed rate mortgage rate to 3.9% from 4.2% and is predicting 3.9% home price appreciation. Forecasts for home sales (5.6 million) and housing starts (1.18 million) are unchanged. Affordability is still a tale of two Americas, with the NYC / DC / South Florida / West Coast being unaffordable, and the rest of the country being affordable.

Morning Report – On the Waterfront 2/18/15

Markets are lower as Greece seeks to limit some of the reforms being demanded from other Euro area members as a condition to extending the country’s 240 billion euro rescue package past February. Bonds and MBS are up small.

Mortgage Applications fell 13.2% last week as purchases fell 7.1% and refis fell 16%. It looks like mortgage rates didn’t move tremendously, at least according to the Bankrate 30 year fixed rate mortgage numbers. Mortgage rates had lagged the move downward in the 10 year, so it is unsurprising they are lagged the move back up. It appears they are beginning to move up with bond yields this week, however.

Housing starts fell 2% in January to an annualized pace of 1.065 million units. Building permits fell .7% to an annualized pace of 1.053 million.

Inflation remains muted at the wholesale level, with the Producer Price Index falling .8% month-over-month. Stripping out food and energy, it fell .1%, month over month, and increased 1.6% year over year.

Industrial Production rose .2% in January, and capacity utilization fell from 79.7% to 79.4%.

Speaking of inflation, there is a labor dispute between the longshoremen and the ports on the West Coast. We are starting to see some stirrings from labor unions, which could mean we are finally seeing the start of wage inflation. That said, the two labor unions involved are in industries which are in the middle of dramatic change. Ports are becoming more and more automated, and quite frankly do not need as many workers as they used to. The longshoreman are simply trying to delay the inevitable and are fighting over work rules that require two people supervise an automated crane. The steelworkers decided to pick a fight just as oil prices are falling and a labor surplus in the oil patch is being generated. Neither side has much in the way of negotiating leverage. That said, it will be interesting to see if they win.

Another data point for the energy patch: Buffett sold all of his Exxon Mobil and ConocoPhillips.

The minutes from the last Fed meeting should be released around 2:00 pm EST, so there is a chance for some bond market volatility around that time.

While it seems like Democrats and Republicans are in a death match struggle over the direction of this country and the days of genteel civility are in the past, here is some perspective. Turkey’s President Recep Tayyip Erdogan has filed a lawsuit against the head of Turkey’s central bank, Erdem Basci, charging him with mismanaging the country’s interest rate policy and not lowering rates as demanded by the government. He faces two years in jail.

Morning Report – the week ahead 2/17/15

Stocks are lower this morning as Greek talks break down. Bonds and MBS are up small.

The Empire Manufacturing Index fell in Feb and came in slightly light. There is almost certainly some weather-related noise in that report.

The NAHB Housing Market Index fell to 55 in February from 57 in January. The index increased in the Northeast and fell in the Midwest. The South and West were more or less unchanged.

We have a lot of data this week with housing starts tomorrow, industrial production / capacity utilization, and finally the FOMC minutes. The minutes should be the big event for the week. The focus will be on handicapping a June rate hike.

Speaking of rate hikes, wage inflation continues to be the missing piece of the puzzle for the economy. That said, Big Labor is waking up, with refinery strikes and a longshoreman’s strike on the West Coast. Strike activity is still well below where it was in the 70s and 80s, but it could be the start of wage inflation.

One in three FHA borrowers could save money by refinancing today. Of course many will find the savings to small to make it worthwhile, but the drop in annual MIP is a big deal. Certainly MBS investors think so as Ginnie Mae TBAs continue to underperform Fannie Mae TBAs.

Finally, I appeared on Capital Markets Today and did a deep dive into the economy and housing. You can listen to the podcast here.

Preliminary Injunction Against DAPA – USDC SD TX

Some excerpts from the 123 bloody paged opinion:
This case examines complex issues relating to immigration which necessarily involve questions of federalism, separation of powers, and the ability and advisability, if any, of the Judiciary to hear and resolve such a dispute.

Regardless of the fact that the Executive Branch has made public statements to the contrary, there are no executive orders or other presidential proclamations or communique that exist regarding DAPA. The DAPA Memorandum issued by Secretary Johnson is the focus in this suit.

Secretary Johnson supported the implementation of DAPA with two main justifications.  …limited resources …humanitarian concerns.

As Defendants concede, a direct and genuine injury to a State?s own proprietary interests may give rise to standing. Doc. No. 38 at 23; see also, e. g, Clinton v. City of N. Y., 524 US. 417, 430-31 (1998) (negative effects on the borrowing power, financial strength, and fiscal planning of a government entity are sufficient injuries to establish standing); Sch. Dist. of City of Pontiac, 584 F.3d 253, 261 (6th Cir. 2009) (school districts had standing based on their allegation that they must spend state and local funds to comply with federal law). Defendants in this case argue, however, that the projected costs to Plaintiffs drivers license programs are self-inflicted because the DHS Directive does not directly require states to provide any state benefits to deferred action recipients, and because states can adjust their benefit programs to avoid incurring these costs. Doc. No. 38 at 21-22. This assertion,
however, evaluates the DHS Directive in a vacuum. Further, this claim is, at best, disingenuous.  Although the terms of DAPA do not compel states to provide any benefits to deferred action recipients, it is clear that the DHS Directive will nonetheless affect state programs. Specifically,
in the wake of the Ninth Circuit’s decision in Arizona Dream Act Coalition v. Brewer, it is apparent that the federal government will compel compliance by all states regarding the issuance of drivers licenses to recipients of deferred action. 757 F.3d 1053 (9th Cir. 2014).

Also, it is not a defense to the Plaintiffs’ assertion of standing to argue that it is not the DAPA program causing the harm, but rather the Justice Department’s enforcement of the program.

…standing under Massachusetts v. E.P.A….

If the Court were to grant the requested relief, it would not change the presence of these individuals in this country, nor would it relieve the States of their obligations to pay for any associated costs. Thus, an injunction against DAPA would not redress the damages described above.

Three important factors separate those cases from the present one…Because of this announced policy of non-enforcement, the Plaintiffs’ claims are completely different from those based on mere ineffective enforcement. This
is abdication by any meaningful measure…Conversely, in the present case, Texas has shown that it will suffer millions of dollars in direct damages caused by the implementation of DAPA…Finally, … the above-cited cases pre-date the REAL ID Act of 2005.

To establish the second element necessary for abdication standing, the States assert that the Government has abandoned its duty to enforce the law. This assertion cannot be disputed…standing under a theory of abdication requires only that the Government declines to enforce the law. Here, it has.

… it is clear that Plaintiffs satisfy the standing requirements as prescribed by the APA.

Having concluded that at least one Plaintiff, the State of Texas, has standing, the Court now addresses the merits of the States’ claims regarding the DAPA program.

Absent abdication, decisions to not take enforcement action are rarely reviewable under the APA.

As there is no statute that authorizes the DHS to implement the DAPA program, there is certainly no statute that precludes judicial review under Section 701(a).

the Court finds that, in this case, to the extent that the DAPA Directive can be characterized as “non~enforcement”, it is actually affirmative action rather than inaction.  …the very statutes under which Defendants claim discretionary authority actually compel the opposite result. In particular, detailed and mandatory commands within the INA provisions applicable to Defendants’ action in this case circumscribe discretion.
After 123 pages of discussing “standing” under 3 theories and reviewability under APA, the trial court granted the Preliminary Injunction.
I do wonder about the discretion – abdication distinction.  I also wonder if a “non-enforcement” directive so sweeping and so rigidly constructed can avoid the strictures of APA.  I initially thought that DAPA and DACA before it were within the limits of executive authority and I still do as a constitutional matter, in a vacuum,  but as an Administrative Procedure Act violation, I can see this as an overreach based on the facts as recited in the Opinion.  Scott has pointed to the theory of abdication without calling it that, and I had not realized how iron bound the denial of individual discretion in DAPA was until I read all the footnotes in this case.  JNC – if you wade through the 123 pages I think you will be struck by the court’s stream of consciousness attempt to address the matter[s].
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