All Things in Moderation

Vital Statistics:

Stocks are lower as investors return from a 3 day weekend. Bonds and MBS are flat.

We don’t have much in the way of economic data this week – the highlight will be existing home sales on Thursday and the FOMC minutes on Wednesday. Other than that, it should be a quiet week.

Industrial Production in January fell by 0.6%, while manufacturing production fell by 0.9%. Capacity Utilization fell to 78.2%, down from 78.8% the prior month. Volatile vehicle production largely accounted for the decrease. Note that December’s numbers were strong, which means the average for the two months was a modest gain.

Due to the government shutdown, Q4 GDP numbers have been delayed until Feb 28. Right now, the consensus seems to be for a high 1% / low 2% print – a definite slowdown from Q3, which would put 2018 annual growth around 2.8%. These forecasts are from Merrill, Goldman, and the NY / Atlanta Fed. Holiday retail sales disappointed, and some of the industrial data showed a slowdown as 2018 ended.

Mortgage delinquencies dropped to an 18 year low, according to the MBA. Fourth quarter DQs fell to 4.06%, which is down from 5.17% a year ago. The foreclosure rate ticked up to .25%. “The overall national mortgage delinquency rate in the fourth quarter was at its lowest level since the first quarter of 2000,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “What’s even more noteworthy, the delinquency rate dropped from the previous quarter and on a year-over-year basis across all loan types and stages of delinquency. With the unemployment rate near a 50-year low, wage growth trending higher and household debt levels relative to disposable incomes at a 35-year low, homeowners are in great shape, and mortgage performance is quite strong.”

HomeStreet Bank is greatly reducing its footprint in the mortgage business, and has retained Keefe, Bruyette to sell its retail mortgage operations. MountainView will auction off the MSR portfolio. HomeStreet will not exit mortgages entirely, but it will move to more of a traditional mortgage business built around its bank branches. Interestingly, the divestiture comes after pressure from an activist investor. Banks have historically been pretty immune from shareholder pressure – hostile takeovers in the banking sector are rare events. it will be interesting to see if this starts a trend of shareholder activism in the sector. One of the best trades ever was holding onto the pieces of AT&T when it was broken up by the government in the 1980s. With so many banking giants, I wonder what would happen if, say, Bank of America decided to spin off Merrill Lynch and its mortgage business. Could the 3 parts be worth more than the sum? As the banking sector deals with its first secular bond bear market in 40 years, it may turn out that the strategies that worked in the bull market (consolidation) won’t work in a rising interest rate environment. Note that the Elizabeth Warrens of the world would likely push in this direction as well, which makes it conceivable we could see a return of venerable names like Salomon Brothers or Smith Barney, Chemical Bank, or Manufacturers Hanover.

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