All Things in Moderation

Markets are lower on no real news. Bonds and MBS are up.

Home Prices rose .87% month-over-month and 4.56% year-over-year according to Case-Shiller. This is January data. The West and Southwest continues to outperform the Midwest and Northeast. A measure of housing market “healthiness” indicates the housing market is in the best shape since 2001.

It looks like we are close to an agreement to extend talks with Iran for 90 days and to outline the big steps needed to get a deal. The main sticking points seem to revolve around the actual mechanics of lifting the sanctions. The main thing to keep in mind is that one way or another, the sanctions will probably be lifted and a big new oil producer will begin dumping crude on world markets.

As we get closer to “liftoff,” which is Fed-speak for increasing interest rates, market professionals are worried about the possibility of more volatility in the bond markets. They point to one trading day in October, where the 10 year bond yield traded in a 40 basis point range intraday. A combination of automated trading and the unintended consequences of regulation have hampered liquidity in Treasury markets during periods of volatility.

Speaking of bond market volatility, the government will release the jobs report on Friday as scheduled, however the stock market will be closed and SIFMA is recommending a noon close in bonds. Suffice it to say that trading desks will be thinly staffed and we could see some volatility in rates. I don’t anticipate much of a reaction in the bond market unless payrolls fall off a cliff or we see a big uptick in wages.

Markets are lower this morning after the final revision to fourth quarter GDP came in lower than expected. Bonds and MBS are up.

The final revision to fourth quarter GDP came in at 2.2%, flat with the second revision and below the 2.4% street estimate. Personal Consumption was revised upward to 4.4% from 4.2%. The core Personal Consumption Expenditures Index (the preferred measure of inflation for the Fed) came in at 1.1%, well below their 2% target.

The University of Michigan Consumer Sentiment index rose to 93 in March.

At 1:30 Janet Yellen will be speaking in San Francisco about monetary policy. She probably won’t say anything market-moving, but just be aware.

Senate Minority Leader Harry Reid is retiring. NY Senator Chuck Schumer is the favorite to replace him. NV will almost undoubtedly swing Republican. Schumer is generally financial sector friendly, so that should help the business, for what it is worth. Democrats are worrying about 2016 and the fact that their war on Wall Street means banks are pulling back campaign contributions. Also, affordable housing advocates are getting sick and tired of tight credit.

Reinhart and Rogoff have another paper about high levels of government debt. It looks at how governments have handled these situations over the past two centuries. Governments will need to be creative in dealing with it, and the solutions will probably involve confiscatory taxes, default, and inflation.

Markets are higher this morning as oil picks up a bid. Bonds and MBS are flattish.

The FHFA House Price Index rose .3% in January, lower than expectations. Prices are up 5.1% year-over-year and are now within 3.5% of their peak levels, which corresponds to December 2005 levels.

New Home Sales rose in February to a 539k pace from an upward-revised 500k pace in January. New Home Sales are hitting post bubble highs, but are still about 40% of previous peak levels, which were hit about 10 years ago.

On Lennar’s first quarter earnings conference call, CEO Stuart Miller had this to say about new home sales: “Pent-up demand is derived from a now multi-year production deficit that is continuing to grow even at current production levels (emphasis mine) At the same time, volume growth has been constrained by overly conservative lending standards, a regulatory environment that discourages mortgage lending and a negative consumer bias overhang against homeownership….While the relationship between pent-up demand, rental rates and mortgage availability continues to direct the housing market, it’s becoming more apparent that the mortgage market is loosening incrementally with time and enabling more demand to be realized as household formation begins to return to more normalized levels. We have believed and we continue to believe that the downside in the housing market is very limited and the upside is very significant (emphasis mine). We believe that the market is downside supported by the many years of production deficits that have yielded a limited supply of both rental and for-sale housing in the country. Any pullback in the housing market would be short-lived as there’s a need for shelter across the country and there’s very little inventory, and almost no likelihood of mortgage foreclosures (emphasis mine) given the stringent underwriting standards of the past years.

Inflation is still pretty much nowhere to be found, as the consumer price index rose .2% in February. On a year over year basis, it is flat, while ex-food and energy it is up 1.7%. Certainly if the Fed wants an excuse not to hike rates in June, the lack of inflation is giving them one. Note the Fed prefers to use PCE inflation, not CPI.

The Markit US Manufacturing PMI rose in March to 55.3 versus 55.1. Manufacturing continues to rebound, although it doesn’t employ as many people as it used to. Meanwhile one study shows that up to half of all jobs can be automated over the next 10 – 20 years.

The Richmond Fed Manufacturing Index fell to -8 from 0 last month.

Markets are higher this morning on no real news. Bonds and MBS are up.

Slow news day.

There is no economic data this morning and much of the Street will be exiting early ahead of yet another snowstorm.

Now that we no longer can rely on housing equity extraction to fund consumption, the correlation coefficient between spending and wages is higher than ever.  One more reason why the Fed will probably not begin raising rates too aggressively until we start seeing real wage growth. As of now, we are seeing about 2% annual wage growth versus slightly below 2% inflation. So real wages are in fact growing, just not by much.

Mortgage lenders are more optimistic about 2015 than mortgage consumers, according to the Fannie Mae quarterly survey of lender sentiment.

Stocks and bonds are lower after yesterday’s furious post-FOMC rally. MBS are flattish.

Initial Jobless Claims rose to 291k from 290k last week. Consumer comfort fell to 51.5 from 54, according to the Bloomberg Consumer Comfort Index. In other economic indicators, the Philly Fed Index was largely flat at 5, while the Index of Leading Economic Indicators was flat at .2%.

The Fed did indeed remove the word “patient” from the FOMC statement. However, they noted that growth moderated, which is unsurprising given the weather in the Northeast. They did take down their economic projections for unemployment, GDP, and inflation. 2015. GDP is now forecasted to be in the 2.3% – 2.7% range, which was revised lower from their 2.6% – 3.0% forecast at the December 2014 meeting. Unemployment was taken down to 5.0% – 5.2% from 5.2% to 5.3% in December, and inflation was taken down to 0.6% to 0.8% from 1.0% to 1.6%.

The dot graph was what got the markets all excited. The Fed is forecasting a flatter trajectory to higher rates than they were in December. In the march dot graph, it looks like the median projection by the members is 50 basis points for a year end Fed Funds rate.

It looks like the 2016 and the 2017 forecasts are slightly lower as well. These dot graphs are what got the market going (although a major bond rally in Europe yesterday probably contributed to the move). Note the makeup of the FOMC is different now than it was in December, and decidedly more dovish. The flatter trajectory for higher rates clearly calmed the markets. The Fed made no change in its plan to shrink its balance sheet. For the time being, they will continue to re-invest maturing proceeds back into Treasuries and MBS.

Stuart Miller, Chief Executive Officer of Lennar Corporation, said, “Despite severe weather conditions which constrained production and sales in parts of the country, the housing market continued its slow and steady recovery. Early signals from this year’s spring selling season indicate that the housing market is improving, and disappointing single family starts and permits numbers should rebound shortly. The sizable production deficit of the past years continues to drive demand improvement in spite of the constrained mortgage market.” 

Lennar will hold a conference call this morning around 11:00 am. The stock is up about a buck and quarter (or about 2.5%)

Stocks are lower this morning as we await the Fed’s decision at 2:00 pm. Bonds and MBS are higher as worldwide sovereigns mount a ferocious rally. Oil continues its slide, down $1.20 a barrel to $42.26.

While the Street will undoubtedly focus on the removal of the word “patient” from the FOMC statement, Janet Yellen will probably stress that this change in language merely opens the door for a June rate hike, and does not mean they have already decided to do so. The Fed will remain data-dependent and will probably want to see some sort of rebound from the weather-driven weakness of Q1. It is interesting to see the US exit ZIRP when countries like Sweden are implementing NIRP, where the Riksbank cut rates to -0.25%.

Mortgage Applications fell 3.9% last week. Purchases fell 1.5% while refis fell 5.2%. This was the week after the jobs report where interest rates spiked to 2.24% and then slowly came back.

Macroeconomic bellwether FedEx reported better than expected numbers this morning, however it took down 2015 numbers based on dollar strength. This will probably become a bit of a trend as we enter pre-announcement season and the big multinationals take down their full year forecasts. Earnings season is only two weeks away.