All Things in Moderation

Stocks are up this morning as commodities rally. Bonds and MBS are down.

Initial Jobless Claims fell to 253k from 266k the week before. This is the lowest reading since 1973. When you take into account population growth, the number is even more dramatic. Employers are hanging onto their workers, but they aren’t necessarily paying them more.

Inflation remains muted at the consumer level, with the Consumer Price Index rising 0.1% month over month. Ex-food and energy, it is up 0.9%. The core index, which excludes food and energy was up 0.1% MOM and 2.2% YOY. Real average weekly earnings were up 1.1%.

Consumer comfort increased slightly last week to 43.6 from 42.6 the week before.

Wells reported numbers this morning, with a decrease in profit on loan loss provisions. Mortgage loan origination volume and margins both fell on a QOQ and YOY basis. Originations fell 6% from Q4 and 10% YOY. Margins fell 15 bps QOQ and 25 bps YOY. Non-conforming mortgage growth was up 8% YOY. The stock is down a couple percent pre-open. Overall, lower net interest margins are hurting the banking business in general. Separately, the US government increased Well’s “systemically important” rating, which means they could be subject to higher capital requirements. JP Morgan, Citi, Morgan Stanley and Goldman are also in that club.

Bank of America also reported weaker-than expected earnings this morning. Losses in the energy patch are hurting them. The stock is down about a percent. The big legal fees and settlements should be in the rear view mirror now.

Hillary Clinton and Bernie Sanders are debating in New York over whether the financial industry should be drowned in boiling oil or just put before a firing squad.

Markets are higher this morning after equities rallied overnight. Bonds and MBS are down on the “risk-on” trade.

Mortgage applications increased 10% last week as purchases rose 8.4% and refis rose 11.3%. The average 30 year fixed rate mortgage rate fell from 3.86% to 3.82%. Refis dipped to 54.9% of all loans.

Retail Sales fell 0.3% in March which was lower than expected. The control group, which excludes autos, gas and building products rose 0.1%, which again was lower than expected. January and February were revised higher, however.

Inflation remains muted at the wholesale level, with the Producer Price Index falling 0.1% in March, again below estimates. On a year over year basis, the core rate is up 0.9%, well below the Fed’s inflation target of 2%.

Business inventories fell 0.1% in February, in line with expectations. January was revised downward as well.

JP Morgan reported better than expected earnings this morning. Mortgage Banking revenues increased 7.3% YOY, and charge-offs fell. It appears that units fell while average loan sizes increased.

Regulators have rejected the living wills submitted by 5 of the largest banks, which could ultimately force them to raise more capital and could subject them to being broken up. In spite of all of these TBTF banks, we do have the least concentrated banking system in the world. Most countries are dominated by 3 or 4 massive banks.

Confirming everyone’s suspicions, the government knew that Fannie and Fred were about to become profitable when they changed the rules and began to take everything the GSEs made. The government’s cover story was that the two GSEs were too weak and therefore all profits needed to be swept to protect taxpayers. Fannie stock rallied from 1.33 to 2.05 on the news.

Markets are higher despite a lousy start to the earnings season. Bonds and MBS are down.

Earnings season kicked off last night with Alcoa missing on revenues and revising down their forecast for aluminum demand. As if on cue, the IMF took down their global growth forecast for 2016 from 3.4% to 3.2%. Fastenal also missed this morning.

Import prices rose for the first time since June of last year. Energy prices increased and food prices decreased. On a year-over-year basis, import prices are down over 6.2%. We will get two more inflation indicators this week, with the Consumer Price Index and the Producer Price Index.

The NFIB Small Business Optimism index fell again to a two year low. The bright spot? Businesses are still adding employees, although there is a mismatch between the skills they want and the available labor pool. A net 22% of employers reported increasing wages. Capital expenditures are rising slightly, although it is tough to tell if that is merely maintenance capex or growth capex.

Completed foreclosures fell to 34k in February, according to Corelogic. This is a decline of 10% YOY. There are 434k homes in foreclosure, down 24% from a year ago. This is roughly where foreclosures were in late 2007. 1.25 million mortgages are seriously delinquent, which is down 20% from a year ago. Foreclosures remain an issue in the judicial states (especially in the Northeast) but aren’t an issue anywhere else. We are seeing delinquencies creep up in the energy states.

Another day, another settlement with the DOJ. Goldman settled with the DOJ for $5.1 billion.  I wonder how the fines stack up compared to the bailout money received.

Initial Jobless Claims fell to 267k last week, while consumer comfort dipped slightly.

Mortgage Applications rose 2.7% last week as purchases fell 2.4% and refis rose 6.8%.

We will get the FOMC minutes later today at 2:00 pm EST. Given the big move downward in rates over the past couple of weeks, look for a rebound in rates if the minutes aren’t sufficiently dovish.

Pessimism in the stock market is one of the reasons why it is levitating. Short interest is at an 8 month high. This represents future demand for stocks.

Another negative consequence of ZIRP: companies are more leveraged today than they were during the financial crisis. Many companies have used debt to buy back stock, which doesn’t improve asset quality. That said, the rates on this debt are much lower than they were 10 years ago, which will ease the pain somewhat.

Global bond yields continue to fall. The yield on the Bank of America Global Bond index is 1.3%.

With the latest bond market rally, the 10 year bond yield is a stone’s throw away from the 2013 “taper tantrum” when the Fed began its withdrawal of QE. Part of the reason for the bond rally is the flight to safety in Europe. The German Bund now yields under 10 basis points. Talk about a all-risk/no reward trade. Falling global bond yields are pulling US Treasury yields lower as investors sell European and Japanese bonds to buy US Treasuries. For the mortgage industry, it should mean more refi volume. Since the Fed hiked rates in December, the 10 year yield has fallen 58 basis points. Who’d a thunk?

Stocks are lower after the jobs report. Bonds and MBS are flat.

Jobs report data dump:

• Payrolls up 215k vs 205k expected
• Unemployment rate 5% up .1%
• Labor Force Participation rate 63%
• Average hourly earnings up 2.3% YOY
• Average hourly earnings flat at 34.4

Despite the drop in manufacturing employment, the ISM Manufacturing Index increased smartly in March, New Orders and production drove the increase, while employment fell. Prices rose as commodity and raw material prices increased. This level of manufacturing would be consistent with 2% GDP growth. A shortage of skilled labor continues to be a problem.

Construction spending fell 0.5% in February, while January was revised upward to an increase of 2.1%. Residential construction rose 0.9% and is up 10.5% YOY. We are almost back to the pre-bubble highs.

Consumer Sentiment ticked up in March, according to the University of Michigan to 91.