All Things in Moderation

Vital Statistics:

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

Initial jobless claims fell to 1.9 million last week. Separately, Challenger and Gray reported that 397,000 job cuts were announced last month.

Homebuilder Hovnanian reported a 22% increase in revenues for the second quarter. The cancellation rate ticked up slightly, but it looks like the homebuilders are seeing a recovery already. We should hear from Lennar and KB Home in a week or two.

Productivity was revised upward in the first quarter to -0.9% and unit labor costs were revised upward to 5.1%.

It looks like June rental payments are falling a touch, after holding up reasonably well in April and May. According to a survey, 37% of all New York City renters don’t have the money to pay June rent.

Another sign the recovery is upon us: Investors are starting to pick at bank stocks. “There’s optimism things will be better a year from now. And because banks have trailed just about everything else in the market they’re being dragged up,” said Rick Meckler, partner at Cherry Lane Investments, in New Vernon, New Jersey.

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Vital Statistics:

Stocks are flattish this morning as riots continued overnight. Bonds and MBS are flat as well.

The share of loans in forbearance rose slightly to 8.46%, according to the MBA. “MBA’s survey continues to indicate that fewer homeowners are seeking forbearance as more states across the country reopen their economies and prospects begin to improve,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The share of loans in forbearance increased by only 10 basis points over the week of May 24. Policy support for households, including expanded unemployment insurance benefits and other transfers, have helped many stay on their feet during this crisis. With 11.82 percent of Ginnie Mae loans currently in forbearance, FHA and VA borrowers are struggling the most.”

For what its worth, housing seems to be picking up more or less right where it left off. Homebuilder Taylor Morrison said that home sales picked up significantly in May, and traffic was 3 times higher than it was in early April, the height of the pandemic. Note that Toll Brothers said that deposit activity (which is a leading indicator of signed contracts) was up on a YOY basis in May.

Despite COVID, construction spending did exceed last year’s numbers by 3%, which is impressive in of itself. Residential construction was up 6.3% on a YOY basis.

Home prices rose 5.4% YOY in April, according to CoreLogic. Inventory remains tight, especially for entry-level homes, which fell 25%.

The Congressional Budget Office says it will take 10 years for the economy to reach the levels it was forecasting in January. FWIW, I am skeptical that a 3 month lockdown will reverberate for a decade.

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Vital Statistics:

Stocks are flattish this morning despite riots in major cities across the US. Bonds and MBS are flat.

Trump will be meeting with the Attorney General this morning to figure out how to respond to the violence in many US cities.

The big economic news will be the jobs report on Friday. The Street is looking for a 7.7 million drop in jobs, an unemployment rate of 20% and a 7% increase in average hourly earnings. More and more states are re-opening so hopefully this will be the last jobs report with negative payroll growth.

Construction spending fell 2.9% in April, which was a little bit better than expected. The ISM Manufacturing Index fell to 43, which again was a little bit better than expected.

Personal Income rose 10.5% in April, largely due to the CARES Act. Personal consumption expenditures fell as people were unable to go to the stores. This caused a big jump in the savings rate, up to 33% from 10%, which ironically shows how big Keynsian spending plans often don’t have the desired effect.

The riots are certainly not going to help the jobs situation of course. Much will depend on how long they last. If they peter out over the next few days then we probably won’t see a major effect.

I can’t escape the idea that the riots and COVID have set in place the circumstances for a massive exodus from the big cities, similar to what we saw in the late 60s. During the 60s, manufacturing jobs fled the cities to the suburbs as many employees no longer wanted to work there. This time, I could see white collar jobs fleeing. When people can largely work from home, why pay top dollar for office space in the cities? And if the jobs relocate, why spend ten grand a month for a 1200 square foot apartment? I could see this turning out to be the catalyst for a massive expansion of the suburbs and exurbs,  which will be good for the homebuilders. Realtor.com noted that Connecticut has seen something like a 75% increase in people moving out of NYC.

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