All Things in Moderation

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.

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.

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.

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.