All Things in Moderation

Vital Statistics:

Stocks are lower this morning as September options and futures expire. Bonds and MBS are flat.

Retail Sales fell 0.2% last month, and prior months were revised downward. The control group which excludes autos, gas, and building materials fell 0.2% as well. August retail sales included some early hurricane effects, but overall it points to a lousy back-to-school shopping season. I wouldn’t be surprised to see strategists start to cheat down their Q3 GDP estimates. Separately, business inventories rose 0.2%.

Consumer confidence slipped slightly in August, but is still reasonably robust. Consumer confidence is often an inverse of gasoline prices, so this number should fall going forward as gas prices have been increasing.

Hurricane Harvey affected industrial production and manufacturing production, both of which fell in August. Industrial production fell 0.9%, while manufacturing production fell 0.3%. Utilities and mining (really energy production) drove the decrease. September should also come in depressed as well due to Irma. Capacity Utilization fell 0.8% to 76.1%. The national industrial numbers have been exhibiting a bit of volatility over the past few months. Interestingly, the regional Fed indices (like the Empire State Manufacturing Index, which improved to a strong 24.4 reading this morning) have not been confirming the overall weakness.

Bond yields have been rising over the past week as Hurricane Irma had less damage than expected. Inflation numbers have come in slightly strong as well, and Goldman has upped its probability of a rate hike to 60% in December. The Fed Funds futures echo that sentiment right now: over the past week or so, we have gone from a 40% chance of a hike to a 53% chance of a hike.

The FTC announced an investigation into Equifax’s security breach. This is pretty unusual for the agency to comment on ongoing investigations, which demonstrates how seriously the government is taking it. Elizabeth Warren introduced a bill to require credit reporting agencies to freeze a person’s credit for free and would restrict their ability to profitably use that data during the freeze. Chuck Schumer called the security breach “one of the most egregious cases of corporate malfeasance since Enron.” He further said that “the company’s chief executive and board of directors should step down unless they take five steps to correct their mishandling: notify affected consumers; provide free credit monitoring to them for at least 10 years, offer to freeze their credit for up to 10 years; remove forced arbitration clauses from their terms of use; and comply with fines or new standards that come out of investigations.” Here are some tips if you were affected.

North Korea fired a missile last night that flew over Japan before crashing in the Pacific. The missile had a long enough range to hit Guam. US Secretary of State Rex Tillerson called on China and Russia to do more to contain NK. China supplies most of North Korea’s oil and Russia is the biggest employer of their forced labor. Both Russia and China have veto power for any UN sanctions.

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Vital Statistics:

Stocks are down this morning after the Bank of England made no changes to monetary policy. Bonds and MBS are flat.

Inflation at the consumer level was a little hotter than expected, but still came in below the Fed’s target rate. The Consumer Price Index rose 0.4% MOM and 1.9% YOY. Ex-food and energy it rose 0.2% / 1.7%. Damage from Hurricanes Harvey and Irma are creating temporary shortages which is pushing up the price of gasoline as well as some foodstuffs. This should be out of the system by the holiday shopping period and won’t affect the Fed’s thinking.

Initial Jobless Claims fell to 284k last week, as Hurricane Harvey is still keeping jobless claims elevated. We will see a similar effect with Irma as well, though it should be less pronounced. Meanwhile, Target anticipates hiring 100,000 employees for the holiday season.

The government is taking a look at lenders who push veterans to do VA IRRRLs that offer a de minimus benefit to the veteran. They have already addressed part of the issue in the secondary market by creating a separate Ginnie Mae security for VA IRRRLs that replaced a loan less than 6 months old. The IRRRL is subject to abuse since the fee can be financed. It ends up adding thousands to the principal of the loan in exchange for a slightly lowered payment. In a response to Elizabeth Warren GNMA President Michael Bright said they have identified some companies which seem to “churn” VA loans and they have identified some patterns of behavior that they will try to curtail. GNMA didn’t identify which companies they were, but being accused of taking advantage of veterans will be a PR nightmare for some. Serial refinances were a problem with GNMA MBS as well, which depressed the prices of these securities. This drop in price directly translates into higher mortgage rates for unrelated loans, like FHA and non-IRRRL VA loans.

Home prices rose 7.7% in August according to RedFin. The national median sales price was $293k, flat with July. Inventory continues to decline, falling 12.4% YOY, which was the biggest decrease in inventory over the past 2 years. Inventory stands at 2.8 months’ worth, which is well below the 6 months that represent a balanced market with respect to supply and demand. Median days on market fell by 5 days YOY to 39.

In the wake of their hacking attack, Equifax is waiving fees for people who want to put a lock on their credit report. Basically, this allows you to prevent potential lenders from pulling your credit, unless you specifically authorize it. This will help prevent identity theft, however it won’t be completely effective unless you do the same thing at the other two credit reporting agencies: Transunion and Experian. The stock is down 31% since announcing the hack.

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Vital Statistics:

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

Mortgage applications increased 10% last week as purchases rose 11% and refis rose 9%. This includes an adjustment for the Labor Day holiday. Rates hit a low of 2.03% last week on fears that Hurricane Irma would cause major damage. Rates have fallen almost 20 basis points since July, although much of that was given back early this week after Irma turned out to be much less destructive than originally feared.

Inflation at the wholesale level increased 0.2% in August and is up 2.4% YOY. Ex-food and energy, it rose 2% YOY, more or less right at the Fed’s target. Surging gasoline prices at the end of the month pushed up the PPI. Note that Hurricane Irma will cause higher food prices, so we may see a temporary spike in inflation over the next few months.

Vikram Pandit (who ran Citigroup back in the day) says that AI and automation will replace up to 30% of all banking jobs, primarily in the back office. For the mortgage business, I suspect we will see AI and automation help increase the capacity of personnel, but not necessarily replace them. Underwriting a mortgage is much more complicated than clearing a foreign exchange trade. Still, there is no doubt that technology is impacting the business.

Cryptocurrencies are all the rage these days, but J.P. Morgan CEO Jamie Dimon thinks they are a fraud on par with tulip bulbs. In fact, he said he would fire any employee trading bitcoin for “stupidity.” His view is that governments will not tolerate an extra-governmental medium of exchange that they cannot control. In fact, China recently shut down its Bitcoin exchanges. Bitcoin prices are up fourfold this year.

Donald Trump is beginning to work on selling tax reform by hosting 3 Democrats to dinner at the White House last night. He is targeting Democrats in states he won. All Democratic Senators except these 3 (Manchin, Heitkamp, and Donnelly) have signed a pledge that they will only support tax reform if (a) it doesn’t add to the deficit, (b) doesn’t increase the burden on the middle class, and (c) goes through the regular order process.

The gap between the homeowner’s and the appraiser’s perception of a house’s value decreased in August, according to Quicken’s Home Price Perception Index. In August, the difference was 1.35%, while in July it was 1.55%. Interestingly, out West, the appraised value is coming in higher than the homeowner’s perception, while in the Midwest and Northeast it is lower. I have to say I am surprised to see that appraisals ever come in higher than the homeowner’s perception, but it does happen. Note that their home value appraisal index (which only tracks appraisal prices) rose 0.2% in August and is up 2.6% YOY, well below the more popular home price indices like Case-Shiller or FHFA.

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Vital Statistics:

Stocks are higher this morning on overseas strength. Bonds and MBS are down.

Small Business optimism remained strong in August, according to the NFIB Small Business Optimism Index. Increases in capital spending and higher sales expectations drove the increase. The index now matches the 12 year high set earlier this year. Interestingly, small business cited “quality of labor” as their second biggest problem, behind higher taxes. 59% reported trying to hire, and of those 88% reported few or no qualified applicants. In fact, both manufacturing and construction reported low labor quality as their biggest problem. Compensation is on the rise, as a net 28% of small businesses reported increasing comp. So, even though we aren’t getting much in the way of legislation out of DC, the drop in new regulations are helping sentiment. A net 9% of firms reported an increase in average selling prices, which is good news to the Fed.

Job openings totaled 6.17 million in July, according the JOLTs report. The quits rate, which is a leading indicator of increasing wages, was steady at 2.2%, and has been in a tight 2.1% to 2.2% range. The Fed watches this indicator closely.

Delinquencies continue to fall, driven by job growth and home price appreciation, according to CoreLogic. 30 day + DQs were 4.5% in June, down from 5.3% a year ago. The foreclosure rate was 0.7%, the lowest level in 10 years. The foreclosure rate varied between 0.1% in Denver and 2.2% in New York – Newark – Jersey City MSA.

Trump is planning on hitting the road to pitch tax reform. He was criticized for not doing more to sell the repeal of Obamacare, so he is trying not to repeat that mistake. Congress has yet to determine the particulars over what individual and corporate rates will be, but the purpose of these rallies is to make the case that we need tax reform to improve our competitiveness. Business friendly groups are also going to spend money on ads pushing for reform.

Banks with exposure to Florida are breathing easier after the damage from Irma turned out to be lower than expected. CoreLogic estimated that uninsured flood losses from Harvey could turn out to be $18-$27 billion.

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Vital Statistics:

Stocks are lower as markets fret over the possible damage due to Hurricane Irma. Bonds and MBS are flat.

Donald Trump cut a deal with Democrats to fund the government until December and increase aid for Harvey and Irma. Republicans were caught off guard here, however the optics of making a stand on a completely symbolic hill like the debt ceiling during a couple of major hurricanes would have been awful. Trump and Schumer are reportedly planning a bill to repeal the debt ceiling altogether.

Credit reporting agency Equifax suffered a cyberattack which potentially gave social security numbers, addresses and drivers license numbers for 143 million people. The company has set up a website https://www.equifaxsecurity2017.com/  where people can see if their data was stolen. Banks generally eat the charges for fraud, so something of this size could potentially hit bank earnings if the fraud is big enough. The stock is down 16% on the open this morning.

Initial Jobless Claims jumped to 298k last week due to the effects of Hurricane Harvey. This number is probably understated as many areas in Texas were unable to report.

Productivity rose by 1.5%, which beat the 1.3% estimate. The employment cost index came in at 0.2%, below the 0.3% estimate. As long as inflation stays low, wage growth will be low as well.

Trump has some vacancies to fill at the Fed. Janet Yellen’s term expires in February, while the Deputy Fed Chairman Stanley Fischer recently resigned as well for personal reasons. Frontrunner Gary Cohn is supposedly losing favor, partially because the sense is a Goldman banker would have difficulty attracting Democrat votes. Chances are looking better that Trump renominates Yellen for another term. Former Fed Governor Kevin Warsh is also a good possibility. Warsh is slightly more hawkish than Yellen, which means he would pursue higher rates at a faster pace than Yellen, at least at the margin.

The latest Fed funds futures prediction has a 63% of no move in December now. They are predicting no move in September as well.

Homeowners in Florida and Texas should read the fine print on their policies. These storms could trigger “hurricane deductibles” that allow insurers to push more of the damage costs to homeowners. These became widespread after Hurricane Katrina in 2005, but haven’t been used. These allow insurers to increase the size of the deductible in certain coastal states if a hurricane occurs. These deductibles are usually a percentage of the policy, as opposed to a flat dollar amount. They generally run in the 1% to 2% range. Sandy did not trigger these due to the fact it was a tropical storm when it hit the East Coast. Bottom line, someone who was expecting a deductible of $1,000 might find themselves with a $5,000 or $10,000 deductible.

Fannie Mae is offering forbearance up to 12 months in some situations. Borrowers affected by Harvey or Irma are encouraged to contact their servicer to see if they are eligible for some relief. Details are here: http://www.fanniemae.com/portal/about-fm/hurricane-relief.html

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Vital Statistics:

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

There isn’t a much in the way of market-moving economic data this week, but we will have a bit of Fed-speak. Despite the weak-ish jobs report on Friday, the Fed Funds futures are handicapping a bigger chance of a hike in December. We are now at at 43% chance of a rate hike versus 38% last week.

Historically, September has been a bad month for stocks. Here are some of the things that could upset the apple cart. Geopolitical risk is probably the biggest, followed by a government shutdown. The Fed is out of the picture. Note that the dividend yield on the S&P 500 is higher than Treasuries.

Factory orders fell 3.3% in July, more or less in line with expectations. The drop was expected due to a big order from Boeing in June.

Fed governor Lael Brainard said the Fed should slow rate hikes if inflation remains below 2%, where it has been for the past 5 years. Brainard is one of the doves on the FOMC, and the one who probably most resembles Janet Yellen’s thinking.

Home prices rose 0.9% MOM and are up 6.7% YOY, according to the CoreLogic Home Price Index. Home prices rose the most in the Pacific Northwest and the mountain states. About a third of the MSAs CoreLogic covers are overvalued. 28% were considered undervalued.

The Trump Administration is backing off threats to shut down the government over funding the border wall. Given the continuing rebuilding efforts in Houston and the potential for Hurricane Irma to hit Florida, a government shutdown over the debt ceiling isn’t going to happen. Trump also said he will rescind the Obama Administration’s executive order on immigration in 6 months, which gives Congress time to handle this legislatively. Funding for the wall in exchange for some protection for the Dreamers is probably the deal that will get done.

Speaking of hurricanes, CoreLogic estimates that about 70% of the flood damage in Houston was uninsured.

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Vital Statistics:

Stocks are higher despite a mediocre jobs report. Bonds and MBS are up.

Jobs report data dump:

• Payrolls up 156,000
• Unemployment rate 4.4%
• Hourly earnings up 0.1% MOM / 2.5% YOY
• Labor force participation rate 62.9%
• 2 month payroll revision down 41,000

Another month where the ADP number was way off of what BLS reported. For the markets, it is a Goldilocks report which is strong enough to keep the recovery going and weak enough to keep the Fed from tightening too aggressively. Construction, professional business services, and manufacturing were the biggest contributors to job growth. Manufacturing job growth was the highest in 5 years, which is encouraging.  2.5% annual wage growth is nothing to write home about, however with inflation around 1.5% or so, it is probably the best we can hope for at the moment. The Fed funds futures moved a touch more towards the Fed standing pat in December and September.

The strong manufacturing job growth was echoed in the latest ISM Manufacturing Survey, which improved in July. New Orders and Production drove the big increase, although employment was close behind. The reading of 58.8 is usually associated with 4.9% GDP growth. Given that strength, wage growth should be accelerating.

Construction spending fell in July by 0.6% and is up only 1.8% YOY. Residential construction improved however, which we need to see to alleviate the tight inventory issue.

Gasoline prices are up 25% in some places after Harvey affected about 10% of the US’s refining capacity. Higher gas prices have invariably tilted towards lower growth and a drop in the consumer confidence indices. Expect to see some hand-wringing over the mindset of the consumer going forward.

Bond strategists are flummoxed to explain the bond market’s rally over the past few months. At the beginning of the year, most were thinking the 10 year would yield closer to 3%, however yields have dropped by about 40 basis points instead. With GDP growth around 3%, you should expect to see investors dump Treasuries, but it hasn’t happened. IMO the Trump reflation trade was always a bit of a stretch, and pre-election yields were closer to reality than post-election yields. Still, there are a lot of bears that are having a tough year right now.

Almost half of all homes in the US have regained their bubble peaks, according to Zillow. The leading MSAs are Denver and Dallas, while the ones who still lag the most include Las Vegas and Riverside.

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