Morning Report: Inflation returning? 3/16/16

Markets are lower this morning after inflation comes in a little hotter than expected. Bonds and MBS are down.

The consumer price index fell 0.2% month-over month, but the core index, which excludes food and energy, rose 0.3% and is up 2.3% year-over-year. This makes the FOMC statement (and the press conference that follows) more significant this afternoon. Remember, the decision will be out at 2:00 pm EST, so expect some volatility in bonds around that time.

Bonds sold off on the CPI number and the more dramatic move was in the 2-year, not the 10-year. The 2 year yield increased 3 basis points on the news to .99%. Movements in the 2-year signify the market’s expectations about what the Fed is up to. The 10 year is more driven by longer-range economic forecasts. The 10 year was up, sold off on the news and is now flat on the day.

Housing starts rose to an annualized pace of 1.178 million in February and January was revised upward to 1.12 million. Building Permits fell however to 1.17million from 1.2 million. The drop in permits was driven by multi-family construction as single-fam remains slow and steady.

Mortgage Applications fell 3.3% as purchases rose 0.3% and refis fell 5.6%. Refis now constitute 55% of the total number of loans, down about 9 percentage points over the last month.

The strong dollar is still making life tough for manufacturers. Industrial production fell 0.5% month-over-month, while manufacturing production rose 0.2%. Capacity Utilization fell to 76.7%.

Marco Rubio is out after losing his home state of Florida to Donald Trump. John Kasich won Ohio, which keeps him in the race and makes him the de facto “Establishment Candidate. Ted Cruz is still in and he is probably going to split the Trump vote, while Kasich solidifies the establishment vote. Policy-wise, Kasich and Hillary are almost identical. Trump is warning that there will be riots if he has the delegates (or is close) and loses a contested convention. The convention is 4 months away. A lot can happen.

On the Democratic side, Hillary did well, so we can stick a fork in the #FeelTheBern hashtag.

Morning Report: Homebuilder Sentiment Flat 3/15/16

Markets are lower this morning as the dollar rallies and commodities fall. Bonds and MBS are up.

The FOMC meeting begins today. The decision will come out at 2:00 pm EST tomorrow, along with the new economic and Fed Funds forecasts. Here is Tim Duy’s take on the state of play. His take: while you could make an argument to tighten, the Fed still considers the bigger risks to be to the downside. The doves are ascendant on the Board.

Retail Sales fell 0.1% in February, although declining gasoline prices had a lot to do with it. Ex-autos and gas, they were up 0.3%. The control group, which also strips out building products was flat. The downward revisions to January got everyone’s attention however as the initial 0.2% estimate was revised downward to -0.4%.

Inflation at the wholesale level remains well below the Fed’s target. The Producer Price Index fell 0.2% in February as well. Ex-food and energy, it was flat on a month-over-month basis and is up 1.2% YOY.

The Empire Manufacturing Index rebounded smartly to .62 after a heavily negative start to the year.

The NAHB Homebuilder Sentiment Index was unchanged at 58 in March. This is a 9 month low. A shortage of lots and labor continue to be the biggest headaches facing the sector. The builders have been able to drive the top line by raising prices, not by pushing volume. You can see below how the index has tracked versus housing starts. The divergence is as big as it has ever been.

Voters go to the polls in several states today, including Florida and Ohio, which are do-or-die races for Marco Rubio and John Kasich respectively. The Democratic side seems pretty much set at this point, unless Bernie Sanders pulls a free rabbit out of a hat.

Morning Report: FOMC week 3/14/16

Stocks are lower this morning as oil gets roughed up. Bonds and MBS are up.

There is no economic data this morning, however the rest of the week looks pretty active, with retail sales, inflation data, housing starts, and industrial production. Of course we have the FOMC meeting Tuesday and Wednesday as well.

Mohammed El-Arian lays out his prediction for the FOMC meeting this week. Bottom line: No move in rates, and an emphasis on data-dependency. They will mention overseas weakness, but won’t make the statement that it will affect the US economy all that much. They will be sanguine on overall US data without becoming too hawkish on wages and inflation. So, generally a dovish take on things.

It is hard to come up with a good reason to take away the punch bowl when investor sentiment is hitting 2 year lows. Of course the ultimate poll is the market, and not some survey. Where are investors doing well these days? Rental properties.

Note that the recent increase in US rates was driven at least partially by increases in Euro rates. That move seems to be unwinding (in other words, Euro rates are heading back down). This will probably help guide US rates lower as well, especially if we get a dovish statement on Wednesday.

Morgan Stanley is out with a call saying yields are going lower. Their forecast: 1.45% 10 year by the end of September. While the US economy is doing ok, the rest of the world is not. They think the next rate hike will be in December.

Why is the first time homebuyer sitting out? Freddie Mac attributes at least some of the reason to misconceptions about buying, specifically credit scores and down payments. Many young borrowers still believe you need 20% down and perfect credit to qualify for a mortgage. Freddie has launched their Real Estate Professionals Resource Center to give pros the lowdown on products that can get a young borrower into a home.

“Don’t be Drake” is Always Good Advice

From SBNation, a primer on March Madness for an NBA fan:

We’re halfway into the month of March, which means the NCAA Tournament is right around the corner. Most of the country is about 7 days into their 30-day NCAA basketball attention span, trying to figure out which mascot they think will win in a fight between a Badger and a Cyclone so they can finish their bracket before the deadline. NBA fans are no exception; you’re in the stretch run of your own season, watching the standings to see if your team is in the playoffs or the lottery. You don’t have time to research who the leading rebounder is for the Green Bay Phoenix, or if there is a Green Bay, or if their mascot is actually a phoenix.

(Now you’re interested. Go ahead and Google it, I’ll wait.)

(You didn’t know that was even a team, did you?)

(Neither did I until a week ago.)

So with that in mind, let’s set the table for you on what to expect this week.

This isn’t pretty basketball

If you’re a NBA fan, you’ve spent the last few months watching Steph Curry redefine the concept of shooting. You’ve spent the past 3-4 years watching the San Antonio Spurs create an offensive system that’s as much poetry as sport. You’ve had a decade of Lebron James doing things no 250 lb man should be able to do. This is not that game. NCAA basketball is trying to improve the offensive flow with a number of rule changes to the block/charge call & hand-checking, amongst other things. Early returns are positive, but it’s a work in progress and you’re likely to see a game with a foul every minute at least a couple times the first weekend. NCAA basketball is moving away from being Murderball, but you’re probably going to have some flashbacks to mid-90s Detroit Pistons/New York Knicks games.

The players aren’t great

You’re used to seeing the best basketball players in the world, so you gotta dial back your expectations a little. Most of these guys are going to be accountants & project managers in 2 years, not the 6th man for the Brooklyn Nets. There aren’t any transcendent players this season; Buddy Hield & Denzel Valentine are great NCAA players and will likely have solid NBA careers, but they’re not Kevin Durant or The Brow. A guy like Georges Niang is going to have his jersey in the rafters for the Iowa State Cyclones sooner than later, but it’s highly unlikely he makes a NBA squad next season. There will be at least a dozen guys who make a name for themselves this month and are never heard from again because that’s how it is when you’re in a league with 350 other D1 schools (I’m not exaggerating, there are 351 D1 schools technically eligible for March Madness.)

The scores will be low

There are a number of reasons for this; the shot clock is longer (30 seconds v. 24 for NBA), the games are shorter (40 minutes v. 48 for NBA), and the players are on average worse shooters (trust me). The Connecticut Huskies broke 100 points a couple days ago…it took them 4 OTs to hit it. Expect your bracket to be full of final scores in the 60s & 70s.

I’m painting a really rosy picture right now, I know. I can imagine you’re wondering why you should even bother turning on the games, and it’s a valid question. One answer is because you’re a degenerate gambler and the first week of the NCAA Tournament is basically Christmas in Las Vegas, but that’s not really what we’re getting at here. We’ve made it through the cons, here are the pros.

Nobody is immortal

This NCAA season has no NBA D-League teams like last year’s Kentucky squad, there are a number of teams that could make it to the Final Four is larger than I’ve seen in years. Any of the #1 seeds could get popped early (alright, not in the 1st round, it isn’t that insane) or they could all make it to the end, it’s wide open.

There’s variety

Do you want to watch a team that runs the floor for 40 minutes? Watch Green Bay. Do you want a team that runs a full-court press? Watch the West Virginia Mountaineers. Do you like a team that owns the boards? The Baylor Bears are a good bet. Do you appreciate teams that value the ball? The Temple Owls turn the ball over less than anybody in the tournament. There’s something in this tournament for everybody, you just have to know where to look.

The results will be unpredictable

For all the NBA has going for it, when it comes to the playoffs the NBA is fairly predictable. Last year it wasn’t a surprise that the Cleveland Cavaliers made it to the finals, and it wasn’t particularly surprising that Golden State won the whole thing. This year feels like – barring Greg Popovich stuffing kryptonite in Steph Curry’s mouthpiece – one long coronation for the Warriors. In the NCAA, this year could be especially messy; there are a pack of 10-15 teams at the top who are all bunched up together and a bunch of teams being led by battle-tested seniors lurking in the middle seeds. There may not be a 15-seed making it to the Sweet Sixteen, but don’t be surprised to see a number of 10-13 seeds destroying brackets this year. Bask in the glow of not knowing who is the clear favorite, it’s part of the entertainment.

It’s…fun

If you’re a basketball purist and you think anything less than the Warriors is shit, you probably should just stick to the NBA. But if you have the capacity for normal human emotions and want to mainline 96 hours of basketball, this is the best weekend of the year. Pick a random team to root for – not Kentucky, don’t be Drake – and ride the roller coaster.

Morning Report: Markets yawn at the new ECB stimulus 2/10/16

Stocks are flat this morning after the ECB’s new stimulus plans earned a big yawn from the markets. Bonds and MBS are down.

The ECB cut interest rates again, and threw a kitchen sink worth of QE, lender subsidies, and other goodies.They will also start buying corporate debt. Not sure what the markets were looking for, but Euro rates are higher this morning with the German Bund yielding 32 basis points, up 8. This is what is dragging US rates higher. Buy the rumor, sell the fact, I guess.

Initial Jobless Claims came in at 259k, while the Bloomberg Consumer Comfort Index ticked up slightly to 43.8.

Americans have regained most of the wealth lost when the real estate bubble burst. Homeowners’ equity has more or less doubled since the lows of 2009. Since 2013, real estate has outperformed ther S&P 500 by 16 percentage points.

Morning Report: Consumers are becoming less bullish on home price appreciation 3/9/16

Stocks are higher this morning as commodities rally and the market anticipates more stimulus from the European Central Bank tomorrow. Bonds and MBS are down small.

Mortgage Applications edged up 0.2% last week as purchases increased 4.2% and refis fell 2.3%. The 30 year fixed rate mortgage rose 6 basis points. We saw a big move up in ARM rates from 3.02% to 3.2%. In an environment where the yield curve is flattening, switching from an ARM to a 30 year fixed is the trade to make.

Wholesale sales fell 1.3% last month while inventories built up 0.3%. The inventory-to-sales ratio is 1.35 month’s worth, which is the highest since April of 2009. This is a negative sign for the economy going forward, as inventory build adds to GDP, and a buildup essentially “borrows” growth from future quarters. While this number doesn’t carry the same weight it did 20 years ago, it still matters.

Marco Rubio had a tough day yesterday. John Kasich is looking more and more like he could be the “establishment candidate.” Bernie Sanders beat Hillary in Michigan, as anti-trade populism resonates deeply in the hard-hit rust belt.

Consumers are becoming a touch less bullish on future home price appreciation, according to the latest Fannie Mae National Housing Survey. They anticipate that home prices will appreciate 1.7% next year, as opposed to 2.2% last month. We are certainly seeing some signs of softness in the oil states as well as the high end. Their view on the economy is about the most negative it has been since the big equity sell-off in August. 56% believe the economy is on the wrong track, and only 37% believe the economy is on the right track. This statistic explains the appeal of Sanders and Trump these days, two candidates who would ordinarily get zero traction.

Global financial markets are forecasting that the age of ZIRP will be with us for 10 years or more. Sound far-fetched? Japan has been at 0% interest rates for over 20 years. Interest rate cycles are long. While the US may not be in the sort of deflationary trap that Europe and Japan are in, relative value trading will help keep a lid on rates going forward. In fact, the US may be more at risk of future asset bubbles than deflation.

With rates so low, consumers are happy to rack up the credit card debt. The average credit card debt level for a US consumer is $7,879, closing in on the unsustainable levels we saw early in the Great Recession.

Morning Report: Conflicting signals in the labor market 3/8/16

Stocks are lower this morning on bad export numbers out of China. Bonds and MBS are up.

The US Labor Market Conditions Index fell in February, This is a relatively new index created of 19 different labor market indicators. Not sure what caused the recent drop in the index, as most of the big indicators are positive. Perhaps the disappointing wage growth in the last jobs report is causing it. Certainly the labor market does not seem to be the worst in four years..

Consumer credit rose by $10.5 billion in January, the lowest in a year. Lower levels of credit card debt drove the deceleration.

Small Business Optimism hit a 2 year low, according to the NFIB. Worryingly, job creation fell for the first time in quite a while, as small businesses shed about .12 workers per firm. The difficulty in finding qualified workers also fell in importance, although it is still elevated. Washington remains the biggest impediment, with taxes and red tape occupying the #1 and #2 concerns for small business. The report summed it up this way: “Overall, a “ho hum” outcome, confirming that the small business sector is not headed up with any strength, just treading water waiting for a good reason to invest in the future.”

The big drop in interest rates has bumped up the refinanceable population to 6.7 million borrowers from 5.2 million last month, according to Black Knight Financial Services.   An additional 15 basis point drop in rates would add another 2.1 million borrowers. This data is based on mid-February numbers, with a FHLMC 30 year rate of 3.65%. Just another reason why 2016 might be a little better than expected.

Foreclosure activity continues to fall, according to CoreLogic. Foreclosure inventory is down 21.7% to 456,000 homes, and completed foreclosures fell 16% in January. Serious delinquencies also fell to 1.2 million mortgages, the lowest since 2007. Foreclosure activity is making the home price recovery more durable: “The improvement in distressed properties continues across the country in every state which is contributing to the lack of stock of available homes and resulting price escalation in many markets,” said Anand Nallathambi, president and CEO of CoreLogic. “So far the trend toward lower delinquency and foreclosures has been immune from shocks from such things as the collapse in oil prices attesting to the durability of the housing recovery.”

A Modest Gun Regulation Proposal

A state could require that all guns sold in the state be tested for ballistics and that the ballistics files be kept in a central registry, along with the names and addresses of the seller and purchaser.  The state would nominate the NRA as its trustee to hold the registry, which would be private, and could only be opened for comparison analysis on a warrant issued to a police agency that has obtained ballistics from a crime scene it wishes to match to the registry.

 

This would grow into an effective crime clue generating tool over time, without infringing on any citizen’s 2d A rights.

 

It would reach peak effectiveness when every state adopted the plan and all the unregistered Saturday Night Specials that are on the streets of Baltimore, Chicago, NewOrleans, Philly, etc.,  break down and are replaced by registered guns whose ballistics have been tested.

 

This would not stop crazy shooters or even ordinary criminals.  It would make it easier to track them down after the fact.

 

I think it is a modest proposal, that keeps government out of handling the records, that puts an organization that can be trusted to keep privacy absent a warrant in charge of maintaining the registry.  But it would eventually be useful in catching criminals, and perhaps would cause some persons to think twice before shooting.  Or not.

 

 

 

Morning Report: Mixed jobs report 3/4/16

Stocks are flattish after the jobs report. Bonds and MBS are down.

Jobs report data dump:

  • Nonfarm payrolls +242k
  • Unemployment rate 4.9%
  • Average hourly earnings -0.1%
  • Labor force participation rate 62.9%
  • Average weekly hours 34.4

Overall, an okay report: payrolls were better than expected, but hourly earnings disappoint. The increase in the labor force participation rate is a good thing to see. While it will depress wage growth at least initially, it will make for a stronger economy down the road. FWIW, there may be measurement issues regarding the wage measure that will supposedly be unwound in the next report.

Bonds sold off on the jobs report, with the 10 year and the 2 year bond yields up 3 basis points. I doubt this report will change any minds with regard to the March FOMC meeting, which most people seem to think will have no move in rates and hawkish language.

More evidence of wage inflation: Costco is upping the lower end of their wage scale from $11.50 to $13.00. They announced it on their earnings conference call last night. This will hit their earnings per share by about 1.3% over the next year. Competition for workers is becoming more intense as unemployment stays below 5%.

Texas Independence Day

In 1824, Stephen Austin drafted the Mexican Constitution, which framed the most liberal representative governmental system the world had known until then. Other Texans and Tejanos were instrumental in its passage. See:

http://www.tamu.edu/faculty/ccbn/dewitt/constit1824.htm
But the United States of Mexico was short lived as a democratic republic. Santa Ana seized dictatorial power by military coup in 1833 after he had been elected President. Soon Texas had no reason to stay in and every reason to get out of the Mexican Union.

The leading Tejano signatory to the 1824 Constitution was also a signatory to the 1836 Texas Declaration of Independence.

The Texas Declaration of Independence was produced, literally, overnight, from March 1 to March 2, 1836. Its urgency was paramount, because while it was being prepared, the Alamo in San Antonio was under seige by Santa Anna’s Army of Mexico.

As seen from the transcription below, the document parallels somewhat that of the United States, signed almost sixty years earlier. It contains statements on the function and responsibility of government, followed by a list of grievances. Finally, it concludes by declaring Texas a free and independent republic.

The full text follows:

 

When a government has ceased to protect the lives, liberty and property of the people, from whom its legitimate powers are derived, and for the advancement of whose happiness it was instituted, and so far from being a guarantee for the enjoyment of those inestimable and inalienable rights, becomes an instrument in the hands of evil rulers for their oppression.

When the Federal Republican Constitution of their country, which they have sworn to support, no longer has a substantial existence, and the whole nature of their government has been forcibly changed, without their consent, from a restricted federative republic, composed of sovereign states, to a consolidated central military despotism, in which every interest is disregarded but that of the army and the priesthood, both the eternal enemies of civil liberty, the everready minions of power, and the usual instruments of tyrants.

When, long after the spirit of the constitution has departed, moderation is at length so far lost by those in power, that even the semblance of freedom is removed, and the forms themselves of the constitution discontinued, and so far from their petitions and remonstrances being regarded, the agents who bear them are thrown into dungeons, and mercenary armies sent forth to force a new government upon them at the point of the bayonet.

When, in consequence of such acts of malfeasance and abdication on the part of the government, anarchy prevails, and civil society is dissolved into its original elements. In such a crisis, the first law of nature, the right of self-preservation, the inherent and inalienable rights of the people to appeal to first principles, and take their political affairs into their own hands in extreme cases, enjoins it as a right towards themselves, and a sacred obligation to their posterity, to abolish such government, and create another in its stead, calculated to rescue them from impending dangers, and to secure their future welfare and happiness.

Nations, as well as individuals, are amenable for their acts to the public opinion of mankind. A statement of a part of our grievances is therefore submitted to an impartial world, in justification of the hazardous but unavoidable step now taken, of severing our political connection with the Mexican people, and assuming an independent attitude among the nations of the earth.

The Mexican government, by its colonization laws, invited and induced the Anglo-American population of Texas to colonize its wilderness under the pledged faith of a written constitution, that they should continue to enjoy that constitutional liberty and republican government to which they had been habituated in the land of their birth, the United States of America.

In this expectation they have been cruelly disappointed, inasmuch as the Mexican nation has acquiesced in the late changes made in the government by General Antonio Lopez de Santa Anna, who having overturned the constitution of his country, now offers us the cruel alternative, either to abandon our homes, acquired by so many privations, or submit to the most intolerable of all tyranny, the combined despotism of the sword and the priesthood.

It has sacrificed our welfare to the state of Coahuila, by which our interests have been continually depressed through a jealous and partial course of legislation, carried on at a far distant seat of government, by a hostile majority, in an unknown tongue, and this too, notwithstanding we have petitioned in the humblest terms for the establishment of a separate state government, and have, in accordance with the provisions of the national constitution, presented to the general Congress a republican constitution, which was, without just cause, contemptuously rejected.

It incarcerated in a dungeon, for a long time, one of our citizens, for no other cause but a zealous endeavor to procure the acceptance of our constitution, and the establishment of a state government.

It has failed and refused to secure, on a firm basis, the right of trial by jury, that palladium of civil liberty, and only safe guarantee for the life, liberty, and property of the citizen.

It has failed to establish any public system of education, although possessed of almost boundless resources, (the public domain,) and although it is an axiom in political science, that unless a people are educated and enlightened, it is idle to expect the continuance of civil liberty, or the capacity for self government.

It has suffered the military commandants, stationed among us, to exercise arbitrary acts of oppression and tyrrany, thus trampling upon the most sacred rights of the citizens, and rendering the military superior to the civil power.

It has dissolved, by force of arms, the state Congress of Coahuila and Texas, and obliged our representatives to fly for their lives from the seat of government, thus depriving us of the fundamental political right of representation.

It has demanded the surrender of a number of our citizens, and ordered military detachments to seize and carry them into the Interior for trial, in contempt of the civil authorities, and in defiance of the laws and the constitution.

It has made piratical attacks upon our commerce, by commissioning foreign desperadoes, and authorizing them to seize our vessels, and convey the property of our citizens to far distant ports for confiscation.

It denies us the right of worshipping the Almighty according to the dictates of our own conscience, by the support of a national religion, calculated to promote the temporal interest of its human functionaries, rather than the glory of the true and living God.

It has demanded us to deliver up our arms, which are essential to our defence, the rightful property of freemen, and formidable only to tyrannical governments.

It has invaded our country both by sea and by land, with intent to lay waste our territory, and drive us from our homes; and has now a large mercenary army advancing, to carry on against us a war of extermination.

It has, through its emissaries, incited the merciless savage, with the tomahawk and scalping knife, to massacre the inhabitants of our defenseless frontiers.

It hath been, during the whole time of our connection with it, the contemptible sport and victim of successive military revolutions, and hath continually exhibited every characteristic of a weak, corrupt, and tyrranical government.

These, and other grievances, were patiently borne by the people of Texas, untill they reached that point at which forbearance ceases to be a virtue. We then took up arms in defence of the national constitution. We appealed to our Mexican brethren for assistance. Our appeal has been made in vain. Though months have elapsed, no sympathetic response has yet been heard from the Interior. We are, therefore, forced to the melancholy conclusion, that the Mexican people have acquiesced in the destruction of their liberty, and the substitution therfor of a military government; that they are unfit to be free, and incapable of self government.

The necessity of self-preservation, therefore, now decrees our eternal political separation.

We, therefore, the delegates with plenary powers of the people of Texas, in solemn convention assembled, appealing to a candid world for the necessities of our condition, do hereby resolve and declare, that our political connection with the Mexican nation has forever ended, and that the people of Texas do now constitute a free, Sovereign, and independent republic, and are fully invested with all the rights and attributes which properly belong to independent nations; and, conscious of the rectitude of our intentions, we fearlessly and confidently commit the issue to the decision of the Supreme arbiter of the destinies of nations.