Morning Report: Wages and interest rates

Vital Statistics:

 

Last Change
S&P futures 2851 -35
Oil (WTI) 62.46 0.8
10 year government bond yield 2.43%
30 year fixed rate mortgage 4.15%

 

Stocks are lower this morning after rhetoric between the US and China hardened over the weekend. Bonds and MBS are up.

 

The rhetoric over trade intensified over the weekend, with both China and the US blaming each other for the impasse. As promised, the US hiked tariffs on $200 billion worth of Chinese goods on Friday and blamed China for reneging on its deal. In response, China said it would never surrender, and has raised tariffs on about $60 billion worth of US goods starting on June 1. FWIW, the issue with China is not so much tariff-related, it is intellectual property related.

 

This week is relatively data-light, at least as far as market-moving data is concerned. We will get housing starts and the NAHB Housing Market Index, along with a lot of Fed-speak.

 

Uber priced its IPO on Friday at $45 a share, and the stock ended up opening at $42. It never broke above the IPO price for the entire day. The record for IPOs has been downright awful and they have gone from being an almost sure thing to a greatest fool tournament. Historically, bankers would underprice IPOs by about 10% – 20%, so that investors would get a nice bump on the first day. Of course this means the company left some money on the table, but everyone was generally happy with that arrangement. Today, all the value is extracted in the pre-IPO funding rounds, so by the time it hits the public stock exchanges the companies are fully valued (if not overvalued). I have to imagine the big institutional investors are going to start turning these things down.

 

The share of 43%+ DTI loans going to Fannie and Freddie has almost doubled over the past couple of years from 15% to 30%. This is triggering more debate over the “QM patch” that allows safe harbor for loans with DTIs over 43% as long as they are GSE loans. This provision is slated to expire in 2021, but affordable housing advocates are pushing for it to be extended. Interestingly, the Urban Institute says that while default rates for 45+ DTI loans were higher prior to the crisis, that is no longer the case. Urban Institute has an agenda to push, so counterintuitive findings like that might be the result of some statistical jiggery-pokery and further examination is warranted.

 

Neel Kashkari is making the argument that rates should stay low due to income inequality. This is not necessarily a new argument – Janet Yellen said she was willing to let the labor market “run hot” for a while to wring all of the slack out of the labor market. Historically, the Fed has shied away from political footballs like income inequality, fiscal policy, etc given the fact that the Fed handles banking regulation and the Fed Funds rate – tools that aren’t suited to tackle either issue. In fact, you could make the argument that loose monetary policy increases inequality due to the fact that it pushes up asset prices. Here is another issue: if low rates increase the cost of shelter more than it helps increase wages, it could in fact be a negative for those that rent. Note that he isn’t arguing that the Fed should cut rates, but he is in favor of waiting to see if inflation returns.

 

That said, wage growth has been strong over the past couple of years as the labor market has strengthened. If you compare the yield on the 10 year bond to wage growth, historically they have correlated reasonably well. Over the past couple of years, the 10 year yield has fallen while average hourly earnings have increased. Given that labor’s share of GDP is still around historical lows, wages have to rise further to reach historical averages.

 

wage growth versus interest rates

9 Responses

  1. UBER trading 17% below the IPO price on the second day of trading.

    What an awful, hideously mis-priced IPO.

    Liked by 1 person

  2. Boo hoo, broads don’t like the fact that men make better women than women do.

    https://hotair.com/archives/2019/05/13/poll-people-feel-transgender-athletes-womens-sports/

    Suck it up, cupcake!

    Like

    • The article is, of course, largely correct, but this is not:

      This is a question that revolves around the reason that we have separate competitions for men and women in the first place. We do it because women would be locked out of the top levels of most sports if we didn’t.

      Women are, not “would be”, locked of the top levels of most sports, and it is so simply because they are physically incapable of competing at the top levels of most sports. The reason we have separate competitions for men and women is because women would be locked out of virtually all levels of most sports if we didn’t. Grade school, high school, college, professional, recreational…it doesn’t matter. The only way women can compete with any level of success is against other women.

      Like

      • Cute wording “locked out” as if discrimination is really the reason why, not the fact that world-class female Olympic athletes are roughly on par with high school boys.

        It still fascinates me that LGBT self-esteem building exercises like this can suck up so much political oxygen.

        Liked by 1 person

        • Pre-puberty girls can play boys even in soccer and softball, I think. Post-puberty? Nah. At 5-8 years of age one of my twin granddaughters was always one of hte three fastest on her mixed gender soccer team. Now, at 10, the boys are getting faster and she is not. This pisses her off but she cannot do anything about it. The angle of her legs to her body is starting to change as she “grows” female hips, and the boys are starting to get a lot stronger.

          Female sprinters barely have feminine hips, regardless of the rest of their body shape. Leg angle is a thing.

          But testosterone is also a thing. No collision sports for women!

          At her peak, Serena Williams reckons she could have only cracked the top 700 men in the world. Of course she would have scared me to death at any age. I used to practice with a ranked woman player. It was brutal for me. So I am in no position to criticize. Still, if Serena thinks she would have barely made the top 700 at her peak, that says how bad I really was, I guess. Top 30 million?

          Like

        • I’ve been locked out of the PGA tour. Bastards.

          Liked by 1 person

        • But the LPGA is still an option!

          Like

      • Just make everything co-ed. Solves the discrimination problems.

        Liked by 1 person

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