Morning Report: Incomes up, spending flat 9/30/16

Vital Statistics:

Last Change
S&P Futures 2150.0 1.0
Eurostoxx Index 340.9 -2.0
Oil (WTI) 47.9 0.0
US dollar index 86.6 0.4
10 Year Govt Bond Yield 1.55%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.47

Stocks are lower this morning as the markets fret about Deutsche Bank. Bonds and MBS are up on the risk-off trade.

Deutsche Bank, which is being fined by the US government for $14 billion is starting to see some hedge fund clients back away from it. While it probably doesn’t really pose any systemic risk (the US government isn’t about to bankrupt German’s biggest bank) it will cause a flight to safety, which will push down Treasury yields. If this snowballs, look for more easing out of the ECB, and potentially another excuse for the Fed to stand pat.

Personal Incomes rose 0.2% last month while personal spending was flat. The core personal consumption expenditure index (the Fed’s preferred inflation measure) rose 1.7% YOY, which is below the Fed’s 2% inflation target. Larry Summers says income inequality is depressing spending by about 3%.

The Chicago Purchasing Manager Index rose in September.

Consumer confidence improved in September.

Janet Yellen mused about the Fed buying corporate bonds and stocks in order to respond to a downturn after they have hoovered up all the government debt out there.

Seriously delinquent loans fell to 1.24% in August, the lowest level since April 2008. Pre-crisis it was below 1%.

Morning Report: Pending home sales fall on tight inventory 9/29/16

Vital Statistics:

Last Change
S&P Futures 2159.0 -4.0
Eurostoxx Index 344.3 2.0
Oil (WTI) 47.1 0.0
US dollar index 86.5 0.4
10 Year Govt Bond Yield 1.59%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.47

Stocks are lower this morning as oil rallies. Bonds and MBS are down small.

Initial Jobless Claims came in at 254k, which is at a 43 year low. When you take into account population growth, that number is astounding. The last time jobless claims were around these levels, we had just ended the draft for the Vietnam War.

The third revision for Q2 GDP came in at 1.4%, which was an increase from the second estimate of 1.1%. Non-residential fixed investment and consumption drove the upward revision. The Personal Consumption Expenditure Index (the Fed’s preferred measure of inflation) came in at 2%, spot on with their target. Gross Domestic Income fell 0.2%, which is a disappointment.

Consumer Comfort ticked up last week, according to the Bloomberg Consumer Comfort Index.

Pending Home Sales dropped 2.4% in August, according to the NAR. Lawrence Yun, NAR chief economist, says suffering supply levels have taken the wind out of the momentum the housing market experienced earlier this year. “Contract activity slackened throughout the country in August except for in the Northeast, where higher inventory totals are giving home shoppers greater options and better success signing a contract,” he said. “In most other areas, an increased number of prospective buyers appear to be either wavering at the steeper home prices pushed up by inventory shortages or disheartened by the competition for the miniscule number of affordable listings.”

Immigrants are much more educated today than they were a couple of decades ago. That is creating issues in the housing market. Traditionally, low-skilled immigrants were builders of housing. Today many are arriving with college degrees, and therefore they are much more likely to be buyers of housing. This partially explains why inventory is tight and why it is hard to find skilled labor.

Corporate profits fell 1.7% YOY in the second quarter. This is the third consecutive drop, which is a worrisome stat for the stock market, especially as the Fed begins to take away the punch bowl.

Separately, are rising incomes helping to alleviate the problem of affordability? The drop in GDI didn’t help. The ultimate issue will revolve around the long-term unemployed. Do they come back into the workforce or stay out? If they come back, wage inflation will be modest until that reservoir is used up. Ultimately that is better for the economy long-term. If they stay out, it will depress consumption and will probably start pushing up wages for those that do have jobs. Watch the quits rate on the JOLTS job openings. That will be the tell.

Morning Report: The hottest real estate markets are cooling off 9/28/16

Vital Statistics:

Last Change
S&P Futures 2153.5 1.0
Eurostoxx Index 343.1 3.0
Oil (WTI) 45.2 0.5
US dollar index 86.3 -0.2
10 Year Govt Bond Yield 1.56%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.47

Stocks are flat this morning on no real news. Bonds and MBS are flat as well.

We have a lot of Fed-Speak today, with Neel Kashkari, Janet Yellen, and James Bullard speaking this morning. Charles Evans, Loretta Mester, and Esther George speak this afternoon. There is the possibility that some of them could say something market-moving so be careful with your locks.

Mortgage Applications fell 0.7% last week as purchases rose 1% and refis fell 2%.

Durable Goods orders were flat month-over-month and down 1.3% YOY. Ex-transportation, they fell on a MOM and YOY basis. Capital Goods orders (a proxy for business capital investment) is also down for the year, although it was up on a MOM basis. July’s numbers were revised downward, so this report is nothing to write home about.

Despite the gloom in the corporate sector, consumer confidence rose and is at post-crisis highs. This is probably being driven by the stronger labor market. We aren’t seeing these numbers flow through to actual sales at the retailers though. The Back-To-School shopping season was a disappointment.

The hottest real estate markets are beginning to cool off, as high prices and low inventory are putting off buyers. Many of these markets have long surpassed their bubble peaks and are hitting new highs. Given that incomes have not recovered, these price levels may be unsupportable, especially as the Fed hikes interest rates and mortgages become more expensive.

The latest CoreLogic Market Pulse looks at some of the overvalued markets based on price to income ratios and price to rent ratios. Unsurprisingly, there are pockets of overvaluation in CA, NY, FL, and TX, while the Midwest remains undervalued. The chart is below:


The article also goes on to say that we aren’t in a housing bubble. This is true, as bubbles are largely psychological phenomenons where investors and lenders consider an asset “special” and believe it can only go up in price. The last residential real estate bubble (aside from the mid 00s) was in the 1920s. Residential real estate bubbles are rare and I doubt any of us will see another on in the US in our lives. That said, we have residential real estate bubbles in lots of countries overseas (especially China, Norway, and Canada), which will be a damper on global growth when they burst.

During the debates, Donald Trump went after the Fed, calling them “political” for not raising interest rates. Politicians have always jawboned the Fed, but this has to be the first time I have heard a politician complain that the Fed is keeping rates too low. Usually, politicians are calling for the Fed to not raise rates because they are worried about a recession. At least one economist thinks Janet Yellen would resign if Trump wins.

Open Thread: Your Take on the Debate 9/27/16

There was a debate last night.  International currency traders thought HRC won, 15 minutes in, and did not change their opinion going forward.  This was explained this morning by an executive at Forex.

Your thoughts?

Morning Report: Home prices rise 5% 9/27/16

Vital Statistics:

Last Change
S&P Futures 2142.2 2.0
Eurostoxx Index 338.6 -1.0
Oil (WTI) 44.8 0.5
US dollar index 86.4 -0.2
10 Year Govt Bond Yield 1.56%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.47

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

Donald Trump and Hillary Clinton had their first debate last night. Early polls are showing Hillary won, however the debates went up against Monday Night Football, so the sample is going to skew female. Major media outlets are declaring the winner based on their ideological leanings: Bloomberg says Hillary won, and the WSJ says that Trump won. Did the debate change anyone’s vote? We’ll see, but my suspicion is that people’s minds are more or less made up at this point.

Global bonds have been rallying, but the US 10 year hasn’t been following suit. The German Bund is now back at -15 basis points. Meanwhile, Blackrock is advising caution in Treasuries as the Fed starts hiking rates. Global central banks are selling Treasuries, which is putting pressure on yields.

Tim Duy says December is a good bet for another tightening, but next year’s voting members will skew more dovish than the current FOMC.

Home prices were flat month-over-month and are up 5% for the year, according to the Case-Shiller home price index. The real estate indices are beginning to show a slowdown in home price appreciation. Until we start seeing wage inflation, real estate prices will be stretched versus incomes. The labor market continues to send mixed signals.

Morning Report: New Home Sales fall 9/26/16

Vital Statistics:

Last Change
S&P Futures 2149.0 -9.0
Eurostoxx Index 340.6 -5.0
Oil (WTI) 45.0 0.5
US dollar index 86.4 -0.2
10 Year Govt Bond Yield 1.60%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.49

Markets are lower this morning on no real news. Bonds and MBS are down

Home prices rose 0.5% MOM and are up 5.8% YOY, according to the FHFA House Price Index. Home price appreciation is the highest in the West and Mountain states, while the Northeast and Middle Atlantic are bringing up the rear.

Existing Home Sales fell 0.9% in August as tight inventory depressed transactions. The median home price was just over $240,000 which was a 5.1% YOY increase. Housing inventory was down to just over 2 million homes, which is a 4.6 month supply. First time homebuyers accounted for 31% of sales. Strong job growth and low mortgage rates are pumping up demand, but builders remain reticent.

The Index of Leading Economic Indicators fell 0.2% last month, lower than expectations.

New Home Sales came in at an annualized rate of 609k, a little better than expected, but below last month’s 659k pace. The median sales price of new houses sold in August 2016 was $284,000; the average sales price was $353,600. The seasonally adjusted estimate of new houses for sale at the end of August was 235,000. This represents a supply of 4.6 months at the current sales rate.

Central Banks are dumping Treasuries, which is putting pressure on bonds, even thought the latest economic data is on the weak side. US investors (especially bond funds) are on the other side of the trade. This is also a warning to investors to take a look at their bond funds and determine how much interest rate risk they are bearing.

Minneapolis Fed Head Neel Kashkari did a Twitter Q&A about monetary policy. He is worried more about deflation than inflation and doesn’t see a bubble in housing.

Tonight, candidates Hillary Clinton and Donald Trump will have their first debate. The latest poll numbers show a dead heat, and a Trump lead when third party candidates are included. Note that the debate will be up against Monday night football, so all the post-debate polls will skew female which will be more favorable for Hillary than Trump.

Unfit for the Presidency

“I do solemnly swear that I will faithfully execute the Office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States.” – Oath of office of the President of the United States

Donald Trump’s fitness for office has been a much discussed topic during this campaign season. Democrats, not surprisingly, dismisses him as entirely unfit to be President. A bit more surprising, at least on the surface, is the sizable contingent of non-D’s, conservatives and libertarians alike, who make equally strong pronouncements about Trump’s lack of fitness for the office. To be honest, I count myself among those who do. Notably, however, there has been an almost complete lack of any discussion about his opponent’s fitness for office. Why is that?

It seems that simply because HRC is a standard politician, acting well within the bounds of behavior and ideology that are standard for her party, and she has maintained a long-standing presence and a good deal of experience on the American political scene, that she is deemed to be suitable to hold the office, even by those who think she is entirely wrong from a policy perspective. She is wrong, they say, but wrong within the normal bounds of American politics. I think that notion is worth challenging. Specifically, I’d like to propose that, as a progressive, HRC is ideologically unfit to be the president.

Now, by ideologically unfit to be president, I do not mean simply that her policy preferences make her unfit. I do not think that she is unfit because she is pro-abortion, or because she favors raising the national minimum wage, or any of the other policy stances on which I hold an opposing view. What I mean is that her progressive ideology prevents her from honestly taking the oath of office. If she were to profess that as president she will protect and defend the Constitution of the United States, she would be professing a lie. Simply put, progressivism as an ideology is not compatible with the US Constitution.

This really shouldn’t be a matter of too much controversy. In a campaign speech in 1912 proclaiming the virtues of progressivism, the original American progressive, Woodrow Wilson, laid out the basic conflict between progressive ideology and our founding document. Using the strained metaphor of government as a “living thing”, he asserted that government cannot be constrained by fixed rules, as a machine is constrained by Newtonian laws of physics. It is ever changing and must “evolve” according to its environment, just as organic life evolves. (Wilson was apparently under the strange impression that the evolution of living things takes place outside of the laws of Newtonian physics.).

Wilson’s progressivism was particularly opposed to the constitutional notion of the separation of powers as a means of protecting citizens from abuses of power. He disparaged the idea, fundamental to the Constitution, of “checks and balances”.

The trouble with the theory is that government is not a machine, but a living thing. It falls, not under the theory of the universe, but under the theory of organic life. It is accountable to Darwin, not to Newton. It is modified by its environment, necessitated by its tasks, shaped to its functions by the sheer pressure of life. No living thing can have its organs offset against each other, as checks, and live.

Instead, Wilson argued, the various power centers of government must be centers of “quick cooperation” in pursuit of “their amicable community of purpose”, responding to “the commands of instinct or intelligence”. The source of this “purpose” and the “commands of instinct and intelligence” guiding government power was not identified, but the implication was clear. The various branches of government ought not be checking the power of the others, but rather should be acting in concert to achieve government directed “progress”. To the extent that there are to be any “checks and balances”, they are checks against the lack of “quick cooperation” in implementing progressive policy.

Wilson did not hide the fact that this represented a unique approach to the constitution and to government, saying:

All that progressives ask or desire is permission—in an era when “development,” “evolution,” is the scientific word—to interpret the Constitution according to the Darwinian principle; all they ask is recognition of the fact that a nation is a living thing and not a machine.

Thus was born the radical notion of a “living” constitution, which changes not by the process explicitly laid out in the Constitution itself, but rather by an assumed-to-be natural process of simple re-interpretation, required by the presumed needs of the day as determined by the government itself. Or, in other words, a completely unconstitutional approach to the Constitution, one in which the only limit to the power of the federal government is the willingness of those in power to claim that circumstances require that power to be exercised. And one that has gained traction in undermining the Constitution ever since.

This disdain for the restraints that the constitution places on the federal government, and hence on the ability of the federal government to effect progressive goals, as well as disdain for the constitutional method by which the Constitution can explicitly “evolve”, has grounded progressive politics since Wilson. It was the basis for FDR’s radical New Deal legislation and his subsequent strong-arming of SCOTUS into allowing it. It is the basis on which progressives have come to appoint judges to the federal courts, making a litmus test out of a willingness to adopt the “living constitution” theory of interpretation, changing the Constitution not by popular acclimation but instead simply by judges declaring that it says what they want it to say. It is the basis for much of Obama’s executive actions as president, the perfect example of which is his immigration policy on amnesty and deportations, which he explicitly acknowledged in 2011 that he did not have the constitutional authority to implement, but he later went and did it anyway.

This is the legacy of progressivism that HRC has inherited and the ideology which she seeks to further as the president. And it is inherently in conflict with the Constitution. To be clear, this is not an argument that progressive ideology is deficient (although I think it is). This is not an argument that progressive goals pursued at the federal level would be to the detriment of the nation (although I think, on the whole, they have been and would be). It is simply an argument that progressivism, whether good or bad for the nation, is not compatible with the Constitution as it actually exists. Which means any progressive who would take the office of the Presidency must, of necessity, lie when taking that oath.

I think that anyone who cannot sincerely and honestly promise to protect and defend the Constitution of the United States as president, or worse anyone whose ideological goals requires them to actually subvert or ignore the Constitution, is quite simply not fit to hold the office. Hillary Clinton is just such a person.*

*So, BTW, is Donald Trump, which is exactly what makes this election so painful for anyone who actually cares about American constitutional government.

Morning Report: Markets rally on the Fed 9/22/16

Vital Statistics:

Last Change
S&P Futures 2163.0 7.0
Eurostoxx Index 347.6 5.0
Oil (WTI) 46.0 0.7
US dollar index 86.1 -0.2
10 Year Govt Bond Yield 1.65%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.56

Markets are higher after the Fed maintained interest rates yesterday. Bonds and MBS are up.

The Fed kept interest rates unchanged yesterday, and released new economic projections. Most members expect the Fed to hike another 25 basis points this year according to the dot plot. They tweaked their economic projections slightly, taking down their GDP forecast for 2016 and inching up their unemployment forecast. Longer term projections were unchanged. Three members dissented, wanting to hike rates in September.

In her press conference, Janet Yellen was careful to say the Fed was confident in the economy: “Our decision does not reflect a lack of confidence in the economy, Conditions in the labor market have strengthened and we expect that to continue, and while inflation remains low we expect it to rise to our 2 percent objective over time.” She also guided that the default path was for one more rate hike this year, assuming no major changes in the economy: “I would expect to see (a rate increase this year) if we continue on the current course of labor market improvement, and there are no major risks that develop and we stay on the current course.”

Bonds rallied on the Fed’s announcement, and that is carrying over this morning as markets rally worldwide.

FWIW, Bill Gross isn’t buying that the Fed is “data dependent.” He thinks they are “market dependent.”

In other economic news this morning, initial Jobless Claims fell to 252k last week.

The Chicago Fed National Activity Index fell to -.55 last month, which confirms the slowdown we have seen in other indicators. The 3 month moving average is slightly negative, which means the economy is growing, albeit below trend.

Delinquencies and foreclosures continued to fall in August, according to Black Knight Financial Services. The rally in bonds from Brexit caused prepayments to spike, with prepayment speeds hitting a 3 year high. 4.24% of all homes are delinquent and just over 1% are in foreclosure.

Morning Report: Fed Day 9/21/16

Vital Statistics:

Last Change
S&P Futures 2137.0 7.0
Eurostoxx Index 342.9 2.0
Oil (WTI) 44.8 0.8
US dollar index 86.7 -0.2
10 Year Govt Bond Yield 1.69%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.56

Stocks are up this morning after stocks rallied overnight on moves from the Bank of Japan. Bonds and MBS are flat.

The Japanese Central Bank is embarking on a new version of QE: attempting to hold the yield of the 10 year bond precisely at 0%. The BOJ holds something like 40% of all Japanese Government bonds, and between the other players that must hold Japanese government bonds (banks for capital and insurance companies) the central bank has essentially cornered the market in bonds, and can therefore set just about any price it wants.

The FOMC decision will be out around 2:00 pm today. Bonds could get volatile around then so be careful if you have locks to deal with. The Fed Funds futures have a low 20% chance of a rate hike at today’s meeting. Note that this meeting will introduce new economic forecasts and rate forecasts, so there will be a lot that can move markets. Janet Yellen will have a press conference at 2:30 PM EST following the decision.

Mortgage applications fell 7.3% last week as purchases fell 7% and refis fell 8%.

Housing starts and building permits fell last week due to lousy weather in the South. Housing starts came in at a 1.14 million annual rate. Single family starts rose while multi-fam (which is much more volatile than SFR) fell.

KB Home and Lennar both reported earnings that beat estimates, although the orders numbers disappointed. Gross margins fell as land prices increased. Lennar reported weakness in some Texas markets due to the slowdown in the energy patch.

Housing inventory fell for the fifth straight quarter, according to Trulia. Affordability continues to fall as the percentage of income to buy a home continues to rise. Starter homes now require 38.5% of the typical borrower’s income, up from 36.8% in the third quarter last year. Historically, 36% has been a level where the GSEs begin to get concerned. Starter homes represent 23% of the available inventory, which is out of whack with the historical average of about 40%. The high end represents the majority of the inventory out there (which is where we are starting to see softness in pricing). We are starting to see increases in inventory in some of the West Coast markets where supply is the tightest, especially places like San Francisco and San Diego.


Wells Fargo CEO Joe Stumpf went to Washington yesterday and got scolded by the usual suspects. Although the area affected was retail lending and not mortgages, I am sure the effects will be felt in mortgage banking as well.

As banks get hammered and tied up in red tape, house flippers who need money fast are turning to crowdfunders. One flipper raised $1 million in 12 hours on crowdfunding sites RealtyShares, LendingHome, PeerStreet and Patch of Land. He is paying 14% for 2.5 year money. You are even seeing builders use this market as banks back away.

Charles Grassley, [R] of IA, Adopts my Anti-trust Mantra

Of course, considering who are the players, it is no wonder why.



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