All Things in Moderation

Vital Statistics:

Stocks are higher this morning on overseas strength after the ECB maintained interest rates. Bonds and MBS are up.

The Fed will release the minutes from its March meeting this afternoon at 2:00 pm. Given the magnitude of the shift in their Fed Funds forecasts, it should make interesting reading. There is a chance that it could be market-moving, especially since rates have moved back up.

Inflation at the consumer level rose 0.4% MOM in March, and increased 1.9% YOY. Ex-food and energy, it rose 0.1% MOM and increased 2.0% YOY. Energy prices are increasing again, so expect to see more upward pressure on prices. The 0.4% increase was the biggest in 14 months.

Job openings fell in February by about 500,000. Job openings had a big growth spurt in 2018 and now appear to be pulling back a little. Job openings fell in most sectors, with hotels and accomodation leading. Hiring fell in several sectors as well, including construction. The most important number – the quits rate – was stuck again at 2.3%. The quits rate is a leading indicator for wage growth, and is a number the Fed watches closely. Between the latest payroll numbers and this report, we can see evidence that the labor market is cooling a bit. That said, the number of job openings (7.1MM) are still larger than the number of unemployed (6.2MM).

The IMF cut its forecast for 2019 global growth from 3.5% to 3.3%, with the risks solidly to the downside. “The balance of risks remains skewed to the downside,” the IMF said. “Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.”

Mortgage Applications decreased 5.6% last week as purchases rose 1% and refis fell 11%. “Mortgage rates inched back up last week, but remain substantially lower than they were in the second half of last year,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “As quickly as refinance activity increased in recent weeks, it backed down again in response to the rise in rates. However, this spring’s lower borrowing costs, coupled with the strong job market, continue to push purchase application volume much higher. Purchase applications are now up more than 13 percent compared to last year at this time.”  Government loans (FHA / VA) increased their share of the market, and the average contract interest rate rose 4 basis points to 4.4%.

The CEOs of major banks head to the House for what promised to be a tongue-lashing from Democrats. Bank of America attempted to head off criticism by raising the minimum wage for its employees. There will almost certainly be kvetching about CEO pay, and the financial system will almost certainly be Enemy #1 for the Democrats running in 2020.

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Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are down small.

Factory Orders fell 0.5% in February, while January was revised downward to no change. Core Capital Goods Orders (which is a proxy for business capital expenditures) fell 0.1% after unusually strong readings in January and December.

Small Business Optimism increased in March, according to the NFIB Small Business Optimism Survey. Hiring indicators improved (companies added .5 workers on average), the earnings outlook brightened, and capital expenditures were steady. The only negative was an inventory build.

House flipping is back to pre-crisis levels. Profit margins are much higher however, which should provide a bit of a cushion if home price appreciation tails off. The type of property is generally older – a fix and flip – which is dominated by professionals, not neophytes. Those were the type who would purchase rights to buy a new construction condo and then hope to sell the right at a profit.

Margin compression and lower volumes has meant job losses in the nonbank mortgage sector. Nonbank lenders employed 320,000 people in February, which is a drop of about 20,000 jobs from August.

30+ day delinquencies fell to 4% in January, which is a drop from 4.9% in January of 2018. The foreclosures rate fell to 0.4% from 0.6%. Delinquency rates fell across the entire spectrum of buckets, and are at the lowest levels in 20 years. Interestingly, DQ rates for student loans and auto loans are up.

Good explainer on quantitative easing and why the Fed doesn’t want to return to pre-crisis levels for its balance sheet. Changes in the way banks manage their reserves, along with rising global demand for dollars has made a larger Fed balance sheet a necessity. The mechanics of rate setting involve setting the interest they pay on bank reserves, and in order to do that, they need a large level of reserves in the banking system. These reserves are the Fed’s liabilitites, and if the liabilities need to increase, the assets will have to move up in lockstep. Hence the need to maintain a bigger balance sheet.

Note that the equity value of the Fed’s balance sheet is largely unchanged, which means the Fed is vulnerable to a fast uptick in interest rates. This is because rising interest rates will negatively affect the value of its bond portfolio (bond values fall as rates rise). The Fed has about $3.9 billion in assets, supported by $39 billion in equity. In other words, a 1% drop in their asset portfolio would wipe out their equity. While that is a distinct possibility for their long-term bond holdings, it is highly unlikely for their short term bond holdings. That said, the Fed does operate with a 100:1 leverage ratio and historically that level has been deadly for institutions that don’t own a printing press.

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Vital Statistics:

Stocks are flattish this morning as the Trump Administration and China get closer to a trade deal. Bonds and MBS are up.

This week will be relatively data-light, although we will get inflation data on Wednesday and Thursday. Fed Head Jerome Powell will speak to Democrats at their annual retreat. I doubt there will be anything market-moving in Powell’s speech, but you never know.

Lennar is making a big bet on entry-level homebuyers, launching new communities with prices in the mid $100,000s. The homes range from 1200 – 2200 square feet and are on 40 foot lots. Prices range from $162,000 – $200,000.

Former Kansas City Fed Chief and restaurateur Herman Cain is currently being vetted by the Trump Administration for a Fed post. He has some allegations of sexual misconduct, and so far most Republicans are in wait and see mode during the process. Over the weekend, Larry Kudlow and Mick Mulvaney stressed that the two nominations were “on track.”

Donald Trump said the economy would “take off like a rocket ship” if the Fed cut rates. He also criticized the “quantitative tightening” – i.e. reducing the Fed’s balance sheet. His feelings about monetary policy are natural – there isn’t a politician alive who doesn’t prefer lower rates to higher rates, but his constant criticism is something new. That said, there is a partisan bent to monetary policy. Republicans fret about monetary policy being too loose when Democrats are in charge, and Democrats are less dovish when Republicans are in charge. Both sides want the economy to be weak when their rivals are in charge.

Did the Fed overshoot? It is hard to say, since this was really one of the first times the Fed started tightening without a real inflation problem. The point of tightening was advertised as a preventative move to prevent inflationary pressures from building, but the real reason was to get off the zero bound. 0% interest rates are an emergency measure, and emergency measures aren’t meant to be permanent. Interest rates at the zero bound also cause all sorts of distortions in the markets, and build risks into the system. Given that the economy was strengthening, the Fed took advantage of the opportunity to get back closer to normalcy. Would the economy be faster if the Fed wasn’t tightening? Probably. However some of that is going to be determined by global growth, and Europe is not doing well.

Monetary policy acts with about a year’s lag, so the June, September, and December hikes from last year still have yet to be felt. Nobody is predicting a recession, but the 2018 hikes are going to sap growth a little this year. I would be surprised if it slowed down the economy enough to prod the Fed to cut rates. Note that the NY Fed raised its Q2 growth estimate to 2% from 1.6%.

Finally, even if the Fed raises rates, overall long-term interest rates can stay low for a long, long time. Interest rates went below 4% during the Hoover Administration and didn’t get back above that level until the Kennedy Administration. So, it could be a long time before we ever see a 4% 10 year yield.

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Vital Statistics:

Stocks are higher this morning after the payroll number. Bonds and MBS are down small.

Jobs report data dump:

• Nonfarm payrolls up 196,000 (expectation 180,000)
• Average hourly earnings up 0.1% MOM / 3.2% YOY (expectation 0.3% / 3.4%)
• Labor force particpation rate 63%
• Unemployment rate 3.8%

Overall, it was a bit of a Goldilocks jobs report: enough strength to quell fears of a slowdown, but tame enough wage growth to keep the Fed from tightening more. January and February’s payroll numbers were revised upward by 14,000.

Trump will nominate Herman Cain for the Federal Reserve Board. While many find the idea of nominating a pizza chain executive strange, he did run the Kansas City Fed so he does have monetary policy experience. Certainly with Steve Moore and Herman Cain, there will be a different voice from the predominantly academic / salt water view on things.

The Senate confirmed Mark Calabria to run FHFA.

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Vital Statistics:

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

Mortgage Applications increased 18.6% last week as rates fell. The purchase index rose 3% while the refi index rose 39%. The refi share increased to 47% of total applications.  “There was a tremendous surge in overall applications activity, as mortgage rates fell for the fourth week in a row – with rates for some loan types reaching their lowest levels since January 2018. Refinance borrowers with larger loan balances continue to benefit, as we saw another sizeable increase in the average refinance loan size to $438,900 – a new survey record,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “We had expected factors such as the ongoing strong job market and favorable demographics to help lift purchase activity this year, and the further decline in rates is providing another tailwind. Purchase applications were almost 10 percent higher than a year ago.” Separately, Black Knight said that last week’s drop in rates increased the refinanceable mortgage pool by 50%.

The ISM non-manufacturing index slipped in March, although it is still quite strong. One of the comments from the report mentioned residential construction: “While we have a slowed down in residential service and install [area], we are still experiencing strength in the new commercial construction area.” (Construction) Another: “April is when our real busy season begins and it has arrived early this year, demand is quite strong.” (Real Estate, Rental & Leasing). Others mentioned that the labor market remains tight“Labor is tight and in short supply.” (Accommodation & Food Services)

Initial Jobless Claims fell to 202,000 last week, so despite the weak ADP print, the labor market still looks strong. For those keeping score at home, this was the lowest print in 50 years. To put that in perspective, the last time we had that few initial jobless claims, the population was 33% lower and we had a military draft.

Home prices are falling in the markets that led the way off the bottom. MSAs like the Bay Area, Nashville, Austin, and Florida are experiencing declines as listings surge. On the other hand, the lagging markets are finally having their day. Unloved markets like Milwaukee WI and Rochester N

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Vital Statistics:

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

ADP reported that the private sector created 129,000 jobs in March. Education and health reported the biggest increase, while the financial sector and the construction sector cut jobs. The Street is looking for 170,000 new jobs in Friday’s employment situation report. The Street will look at the payroll number, but the more important one is the average hourly earnings number. The Street is forecasting a 0.3% MOM and 3.4% YOY gain.

Construction spending rose 1% in January, and is up 1% on an annual basis. Residential construction rose 1% on a MOM basis, but is down 3.6% YOY. Construction spending was probably affected at least somewhat by the partial government shutdown at the end of last year / beginning of this year.

The manufacturing sector continues to do well, with the ISM Manufacturing Index hitting 55.3 in March. New Orders, Production, and Employment were the drivers of the increase. I found this comment interesting: “Business remains very strong amid rumors of a slowdown, but forecasts do not indicate this. Electronics are at tight capacity from manufacturers, with no [change] in the near future.” (Transportation Equipment) The transportation sector touches most parts of the economy, so it has always been the equivalent of the canary in a coal mine. But overall, this report isn’t showing any signs of economic weakness.

Durable Goods orders however did show some weakness. Durable Goods orders fell 1.6% in February, however they were up slightly when you strip out the volatile transportation sector. Core Capital Goods (a proxy for business capital expenditures) fell slightly. January’s numbers were revised upward, so the report isn’t as bad as it initially appears.

Ron Wyden wants your unrealized capital gains to be taxed every year. This is more or less an Overton Window widening exercise and has a less than zero percent chance of gaining mainstream Democratic support, let alone Republican support. He would also increase the capital gains tax to 37%. It would be like the government assessing you every year on the increase Zillow reports for your home and sending you a bill for 37% of it. The final plan will probably exempt your primary residence, but still – it would force you to sell investments you may not want to sell in order to pay the tax.

Further, in the political space, Elizabeth Warren is taking a victory lap after Wells Fargo CEO Tim Sloan’s retirement. She is pushing for laws to make it easier for the government to prosecute corporate executives who don’t have firsthand knowledge of crimes their subordinates are doing.

That was quick: After a big open on Friday, Lyft is now trading below its IPO price. The big gains seem to be reaped pre-IPO anymore, when the company is revalued at each funding round. By the time it hits the IPO phase, it is priced for perfection. Remember, Blue Apron, which went public at $10 a share during the summer of 2017? It is now a drill bit.

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Vital Statistics:

Stocks are higher this morning as we kick off the second quarter. Bonds and MBS are down.

We have a lot of data this week, and some could be market-moving. The biggest report will be the employment situation report on Friday, however we will get durable goods, construction spending, and ISM data.

Retail Sales in February fell 0.4%, which was well below the Street expectations of a 0.4% gain. That said, January’s numbers were revised upward from 0.9% to 1.4%. Separately, personal incomes increased 0.2% in February, while personal expenditures rose 0.1%. Inflation remained below the Fed’s target with the PCE index down 0.1% on a MOM basis and up 1.4% on a yearly basis. Ex-food and energy, the PCE index was up 1.8%. For 2018, personal incomes rose 4.5%, while personal spending rose 4.4%.

New Home Sales came in at a seasonally adjusted level of 667,000, which beat the Street estimate of 615,000. This is up 4.3% from the revised January number and about flat on a YOY basis. New Home Sales is a notoriously volatile series, and the margin for error is generally huge. While new home sales have recovered from the bottom, we are still at 50% of peak levels, and when you take into account population growth, we are still well below what is needed.

Pending home sales slipped in February, according to NAR. Lawrence Yun, NAR chief economist, said February’s pending home sales decline is coming off a solid gain in the prior month. “In January, pending contracts were up close to 5 percent, so this month’s 1 percent drop is not a significant concern,” he said. “As a whole, these numbers indicate that a cyclical low in sales is in the past but activity is not matching the frenzied pace of last spring.”

Wells Fargo CEO Tim Sloan is out. The bank was unable to put its scandals behind it, and Democrats like Elizabeth Warren were calling for the Board to fire him. He decided to retire at age 58. “This was my decision based on what I thought and believe is the best for Wells Fargo, because there has just been too much focus on me,” Sloan said. “And it’s impacting our ability to move forward. I just care so much about this company and so much about our team that I could not keep myself in a position where I was becoming a distraction.”

Despite the action in the Federal Funds market and the dot plot, the Fed doesn’t seem to be ready to start cutting rates. Even dovish Minneapolis President Neel Kashkari is reluctant to ease monetary policy. For the most part, the Fed seems to view the recent economic weakness as influenced by the partial government shutdown and is anticipating a recovery.

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