Morning Report: Markets rally on soothing comments out of China 4/10/18

Vital Statistics:

Last Change
S&P futures 2647 28.75
Eurostoxx index 376.97 1.67
Oil (WTI) 64.76 1.34
10 Year Government Bond Yield 2.79%
30 Year fixed rate mortgage 4.41%

Stocks are up big after Chinese President Xi Jinping made a speech that emphasized dialogue and opening up the Chinese markets. Bonds and MBS are flat.

In a speech to the Boao Forum, Chinese President Xi Jinping warned against returning to a “Cold War mentality” and pledged to make progress on imports, foreign ownership limits, and intellectual property. This have always been the sticking points with the Chinese, and while they may just be empty words, they are being taken optimistically this morning.

Inflation at the wholesale level increased in March, as the PPI came in a little higher than expected. The headline number rose 0.3%, while the core rate rose 0.4%. Higher metals prices (in response to tariff announcements) drove the increase.

Small Business Optimism remains in the top 5% historically, according to the NFIB. Lower taxes are driving the increase in sentiment. Improved earnings were the second best reading in 30 years. Biggest problem: Quality of Labor. In fact, 21% of all respondents considered the inability to find qualified labor their biggest headache. A net 33% reported increasing compensation, the highest number since 2000. Perhaps we might start seeing a bit of a move in wage inflation, however the biggest predictor of wage inflation – the quits rate – hasn’t gone anywhere in years. We’ll get an update on the quits rate Friday.

The CFPB has initiated no enforcement actions since Mick Mulvaney took over, according to consumer advocates. Prior CFPB Chairman Richard Cordray preferred to “regulate by enforcement action” which is the more aggressive approach to take with banks. Mick Mulvaney, in a memo to his staff, promised to end the Bureau’s pattern of “pushing the envelope” and “looking for excuses” to bring lawsuits. The enforcement action is one of two ways for the Bureau to regulate – the other is via supervisory means – in other words confidential discussions with the banks involved. Richard Cordray preferred to use only the enforcement action, which the industry disliked. The best analogy would be driving down an expressway with no speed limit signs. The only way to find out if you are going over the limit is when you (or someone else) gets a ticket. Regulators generally loathe to put out “bright lines” for fear that the industry will go right up to the line, and then figure out how to game it. Mulvaney is backing off from that approach.

That said, as any compliance officer can tell you, the CFPB is the not only agency to worry about. The individual states also have jurisdiction and can do much of what the CFPB did. New Jersey (one of the most creditor-unfriendly states out there) has just set up its own version of the CFPB, nominating ex-DiBlasio attorney Paul Rodriguez to run the Director of Consumer Affairs. “Rodriguez’s selection highlights the Administration’s efforts to fill the void left by the Trump Administration’s pullback of the Consumer Financial Protection Bureau (CFPB), fulfilling one of Governor Murphy’s promises to create a “state-level CFPB” in New Jersey.”

Perhaps due to the increased regulatory scrutiny in DC (and elsewhere) big banks are getting back in the subprime business, although they are doing it indirectly. Big bank loans to non-bank financial firms in the business of subprime auto, etc are up sixfold since 2010. For example, Exeter, which does sub-600 FICO auto loans is owned by Blackstone and has a line of credit from Wells and Citi.

Delinquencies remain elevated in areas hit hard by the hurricanes, but early stage delinquencies are back to normal levels, according to CoreLogic. The 30+ DQ rate came in at 4.9% in January, down 0.2% YOY. The foreclosure rate fell to 0.6% from 0.8% a year ago.

Homebuyer sentiment rebounded in March, according to the Fannie Mae Home Purchase Sentiment Index. Of course people may want to buy, but there isn’t much around in the way of inventory. Overall, people are reasonably optimistic on the economic front as well.

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