Morning Report: European companies get paid to borrow 9/7/16

Vital Statistics:

Last Change
S&P Futures 2183.0 -2.0
Eurostoxx Index 350.1 0.7
Oil (WTI) 44.9 0.1
US dollar index 85.7 0.1
10 Year Govt Bond Yield 1.52%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.5

Markets are flattish on no real news. Bonds and MBS are up small.

Mortgage Applications rose 1% last week as purchases and refis rose the same amount.

Job openings hit a record 5.9 million in July, according to the JOLTS data. The quits rate, which is the best indicator of economic strength inched up to 2.1% which was the typical level pre-recession. Note the JOLTS data is older than the more recent employment data, however it continues to indicate either strength in the labor market, or a mismatch of skills. Job openings in construction are about the same level as the go-go years of 2005 – 2007.

Same store sales increased 0.8% last month, which was the strongest showing since May. This is the back-to-school shopping season, which is the second most important period for retailers.

There is no doubt that the latest economic data has pointed towards a deceleration of growth. The ISM report from yesterday was the worst in 6 years. Still some strategists see the chance of a September move – Goldman’s Jan Hatzius just took down his probability of a Sep hike from 55% to 40% (still pretty high). Given the non-existent inflationary picture, it is hard to make a case that the Fed needs to hike rates now.

Second quarter originations were the highest since 2013, right before the “taper tantrum” killed the refi market, according to Black Knight Financial Services. Total first lien originations were 512 billion, of which 58% were refis.

Distressed sales are falling as a percent of home sales, and the discounts appear to be narrowing slightly. The biggest discounts are still in the judicial states where foreclosures sit and depreciate during the elongated timelines. Compare New York’s 40% with Texas’s 14%.

Aside from raising the Fed Funds rate, the next shoe to drop with the Fed will be dealing with the assets it purchased during quantitative easing. Pre-2008, the Fed’s balance sheet stood at something like $800 billion in assets. Today, it is about $4.5 trillion. The Fed intends to eventually return its balance sheet to pre-2008 levels. Ben Bernanke argues that the Fed should maintain its balance sheet at current levels for the long term.

File under “things that will astonish people some day:” In Europe, you are starting to see negative yields in the corporate bond sector. Yesterday, Germany’s Henkel and French pharma giant Sanofi sold 1.5 billion euros of 0% corporate bonds above par. Astonishing that people would pay to take credit risk and interest rate risk, but there you go.  With the ECB buying corporate bonds as well as sovereigns maybe the thought is that they will flip them to the ECB a couple of basis points higher? I don’t know. IMO, this is the equivalent of buying eToys at 40x revenues of iVillage at 2x pageviews in the hopes that the daytraders will ramp them so you can exit.

40 Responses

  1. I assume the Fed’s assets are financial instruments, not commodities or real estate. So what happens when they slow sell $3-4T in financial assets? It would have to be REALLY SLOW not to depress the financial markets, wouldn’t it?

    Also, again, Wiscy has a D.



    • The Fed’s instruments are largely Treasuries and government guaranteed mortgages. The way they would wind them down would be to let the portfolio run off instead of continuing to use the proceeds from maturing bonds to buy new ones…

      And re Wisconsin, LSU’s offense just had a bad day… Everyone knows Big 10 can’t compete with the SEC..


  2. “Also, again, Wiscy has a D.”

    Trying to interpret this. Has something interesting happened?


  3. Just visited the PL comments. It’s all “Trump is Hitler”, all the time. And everybody who likes Trump is a Nazi/brownshirt. Trump’s busy having the brown shirts made as we speak. Yada yada yada. Jeeze, people are boringly cliche.


  4. Newsweek, demonstrating a unique understanding of the word “fact”:

    Nguyen’s campaign highlights an often-ignored fact: Not all people who menstruate are women.


    • I for one do not think we spend enough time as a society talking about trannies.

      Or racism.


      • yes, two very under-explored topics these days…


      • which one of you is the scrounger? just so when we’re thrown in to re-education camps, i’ll know. I wonder if they will be segregated by gender. that’s a lot of camps.


      • ““Low-income students struggle with having the necessary funding for food, let alone tampons.””

        Maybe they should go somewhere other than Brown if they are starving themselves to pay the tuition.

        Ivy Leaguer as victim is a hard sell.


        • Brown’s tuition is $50,224 per year, so comes it at $200k for 4 years, presumable. $300k+ for a Ph.D. Brown can afford to provide free tampons in addition to the other perks and bennies I’m sure are all around campus. Modern colleges are part educational institution and part full-time resort living, after all.

          There seems to be no difference between in-state tuition and out-of-state tuition for Brown.


  5. Anyone else here watch Hannibal? I’m mostly through the first season and am impressed by how well it’s been done.


  6. Trying for contender of the top spot for BS pundit ideas that no actual person would support:

    “Let’s pay our ex-presidents more from the public fisc (their annual pension is now about $200,000) and expect more from them. In exchange for receiving the higher pension money, they could be required to file annual financial disclosure forms, just as they did while president. We can’t stop ex-presidents from vacuuming up huge speaking fees, including from questionable sources, but we can force them to do it in sunlight, whose glare could be chastening.”

    How about paying them nothing instead?


    • We could just require them to file annual financial disclosure forms without paying them anything else. This isn’t the 1800s. No former American president is remotely at risk of dying in penury, none of them leave the Whitehouse “flat broke”, Hillary’s protestations at the time not withstanding.


  7. The way I’m reading this is that HRC and her cohorts spoke in a coded way about drones so as to avoid revealing any classified information.

    LAUER: Were some of the e-mails sent or received by you referring to our drone program, our covert drone program?
    CLINTON: Yes, because — of course, there were no discussions of any of the covert actions in process being determined about whether or not to go forward. But every part of our government had to deal with questions, and the secretary of state’s office was first and foremost. So there are ways of talking about the drone program…
    LAUER: And you said you thought your communications on that were fairly routine?
    CLINTON: Well, let me say, the FBI just released their report about their investigation, they discussed drone matters in the unclassified section of their report.
    LAUER: But Director Comey also said this after reviewing all the information. He said there is evidence to support a conclusion that any reasonable person in Secretary Clinton’s position should have known that an unclassified system was no place for that conversation.
    CLINTON: Well, Matt, I just respectfully point to the hundreds of experienced foreign policy experts, diplomats, defense officials who were communicating information on the unclassified system because it was necessary to answer questions and to be able publicly to go as far as we could, which was not acknowledging the program.
    But I would be in Pakistan, as I was on several occasions. There might very well have been a strike. I would be asked in a public setting, in an interview, about it. It was known to have happened. We had to have an answer that did not move into classified area. And I think we handled that appropriately.”


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