All Things in Moderation

Stocks are lower this morning after the Bank of Japan declined to add further stimulus measures to the economy. Bonds and MBS are down.

First quarter GDP came in at 0.5%, lower than expected. Consumption and the core price index both rose. This is the advance estimate, so it will be revised twice over the next two months. Positive contributors to GDP included personal consumption, residential fixed investment, and state / local government spending. Negative contributors include inventory, non-residential fixed investment, and federal government spending. This is the lowest quarterly print in 2 years, although weakness in the oil patch does explain a good chunk of it.

The Fed maintained interest rates yesterday, and made few changes to the language of the FOMC statement. The most substantive change was that they removed the language regarding weakness in global financial markets. They noted the US economy slowed recently however the labor market continues to improve. Housing and capital expenditures continue to remain soft.  After a few headfakes immediately after the release, the bond market finally decided that the statement was good news and rallied a couple basis points. Stocks took the “glass half full” view and rallied as well. Here is Mohammed El-Arian’s take on the statement.

Initial Jobless Claims rose to 247k last week. The Bloomberg Consumer Comfort index rose to 43.4 from 42.9 last week as well.

Realtor.com lays out the hottest real estate markets this month. The West Coast and the Rust Belt lead the pack. Has the Rust Belt finally become too cheap to ignore?

Traffic down? Warm weather will help things.

Stocks are up this morning on overseas strength. Bonds and MBS are flat.

The S&P / Case-Shiller index of home prices rose .66% on a MOM basis and is up 5.38% YOY. Their take on the housing market: “Mortgage defaults are an important measure of the health of the housing market. Memories of the financial crisis are dominated by rising defaults as much as by falling home prices (see first chart). Today as well, the mortgage default rate continues to mirror the path of home prices. Currently, the default rate on first mortgages is about three-quarters of one percent, a touch lower than in 2004. Moreover, the figure has drifted down in the last two years. While financing is not an issue for home buyers, rising prices are a concern in many parts of the country. The visible supply of homes on the market is low at 4.8 months in the last report. Homeowners looking to sell their house and trade up to a larger house or a more desirable location are concerned with finding that new house. Additionally, the pace of new single family home construction and sales has not completely recovered from the recession.”

In other economic news, durable goods orders rose 0.8% in March, versus Street expectations of an increase of 1.9%. Capital Goods orders (a proxy for business capital investment) was flat. The Markit US Services PMI and the Markit US Composite PMI indices both improved in April. The Richmond Fed Manufacturing index fell, as did consumer confidence.

The FOMC begins their two day meeting today. Here is Mohammed El-Arian’s take on what to look for in the statement. Here is a more in-depth parsing of what the Fed may say and what it means.

What is going on this weekend aside from the NFL draft? Buffetapalooza or Woodstock for Capitalists. The Berkshire Hathaway shareholder meeting in Omaha, where you can play ukelele with the Fruit of the Loom guys listen to Warren wax poetically about value investing. This year, it will be streamed live.

We are starting to see weakness in the top end of the hottest real estate markets as supply surges and foreign demand begins to wane. Will it spread?

Did you know Trump and Hillary share the same address?

Stocks and bonds are flattish this morning on no real news.

Mortgage Applications rose 1.3% last week as purchases fell 0.5% and refis rose 2.6%.

Existing Home Sales rose 5.1% MOM to 5.33 million in March. The median home price rose 5.7% to $222,700. This puts the median house price to median income ratio at 3.9x, which is higher than its historical range in the 3.2x – 3.6x. There are 4.5 months’ worth of inventory, which was an uptick from the 4.4 months’ worth in February. Days on market fell to 47 however. Sales slowed at the $1 million + price points, which could be a reflection of the global economic slowdown. The number of first time homebuyers was steady at 30%. Historically, that number has been closer to 40%.

Given the weak housing starts data and the existing home sales data, we aren’t getting the breakout spring selling season that some had hoped for. We should get some important data points tomorrow when we get earnings results out of Pulte and Horton.

The weakness in housing starts remains a conundrum, given the demand for housing. Builders have pointed to a shortage of labor, but as Goldman Sachs points out, you aren’t seeing increases in wages in the construction sector, at least not yet. Interestingly, the average age of a construction worker is the highest ever, as young people are not entering the sector. The other issue: regulations, and lots of them. You would think that government would be interested in seeing more housing construction, because that is the difference between 2% and 3% GDP growth, but the only discussion of housing these days revolves around how hard to slug the originators.

Hillary Clinton and Donald Trump won convincingly in NY last night.

Housing starts fell 9% MOM in March to an annualized rate of 1.09 million, a highly disappointing number. Both SFR and multi-fam fell. This is the lowest level since October. Building Permits also fell around 8%, hitting a 1 year low. It is astounding that we have such a deficit of housing in this country, and are building 25% fewer homes than we did before the bubble, Housing (or lack thereof) has been the reason why this recovery has been so weak. Take a look at the chart below, which shows housing starts from 1959. Typically you see V-shaped recoveries in housing starts, however this time you haven’t. Granted some of that was due to oversupply from the bubble years, but that excess inventory got worked off years ago. Is the problem a lack of skilled labor? Credit? Regulation? Probably all three.

While housing starts remain depressed, builder confidence is still strong, with the NAHB Housing Market Index (a measure of homebuilder sentiment) holding steady at 58 in April. The builders continue to report big increases in average selling prices, although gross margins are lagging. This means input prices (raw land, sticks and bricks, and labor) are rising faster than prices. Given that incomes aren’t rising in the mid-high single digits the way ASPs have been, we have to be hitting the ceiling. Note we will get earnings from Pulte and D.R. Horton on Thursday.

There are signs of weakness building in the labor market – temporary employees are typically the canary in the coal mine, and temp hiring is falling. Historically, that has been an early warning sign of a recession. Separately, the Federal Reserve’s Labor Market Conditions Index, which is a meta-index of leading and lagging indicators has been turning downward. Could 2015 have been the peak of the labor market recovery?

Certainly things are not going swimmingly in the financial sector: Goldman reported a 60% drop in earnings as revenues fell. The bright side? The multi-billion fines from the government may finally be in the rear view mirror. I wonder if you tally up all the bailout money and compare it to the revenues the government has received in paybacks, fines, and Fannie Mae profits how profitable was the Great Recession for the government.

Markets are lower this morning as commodity prices fall. Bonds and MBS are up.

The Empire Manufacturing Index increased in April to the highest level in over a year. The bad news is that industrial production, manufacturing production and capacity utilization all fell in March. Some of that is going to be due to low oil prices, however global demand continues to fall. Economists are looking for weak Q1 GDP numbers, possibly below 1%.

Consumer Sentiment dipped in April, as increasing gasoline prices rose. Most consumers think the economy is getting worse. This was borne out in the Fannie Mae Housing sentiment index where consumers are the most pessimistic about the economy in two years.

Citigroup posted better than expected earnings this morning based on cost cutting. They launched a new round of layoffs, with up to 2,000 people being let go. Cost-cutting is the theme of banking right now, as Goldman is also calling for the deepest cuts in years.

We are starting to see weakness at the very high end of the real estate market. A combination of fevered building of luxury urban properties and waning overseas demand has created a glut of property in places like Miami, where prices are sliding 6% – 8%. The top 10% of condos saw a 15% price decline. Ever since the bust, luxury has been the only place that has been consistently working for builders.

Economists are becoming less convinced we will see 2 more rate hikes this year. Given the fragile global economy and the complete absence of inflation, the risks of hiking are growing larger. Until you see wage inflation, it is hard to imagine any real inflation pushing through to consumers. Even then, the Fed has said they want to let the labor economy “run hot” for a while, which probably means they will accept moderate wage inflation for some period in order to get the labor force participation rate back up.