All Things in Moderation

Vital Statistics:

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

The number of loans in forbearance ticked up slightly last week, according to the MBA. 2.6 million homeowners (or 5.23% of mortgages) are in forbearance plans right now. “A small increase in new forbearance requests, coupled with exits decreasing to match a survey low, led to the overall share of loans in forbearance increasing for the first time in five weeks,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The largest rise in the forbearance share was for portfolio and PLS loans, due to increases for both Ginnie Mae buyouts and other portfolio/PLS loans.”

Home prices rose 0.9% MOM and 10% YOY in January, according to CoreLogic. First-time homebuyers are being particularly affected by this, as there is a dearth of entry-level homes on the market, and rapid price appreciation is negating the positive effect of low interest rates.

The Fed meets this month, and will almost surely discuss the rapid increase in interest rates at the long end of the curve. One policy prescription could be a re-introduction of Operation Twist, where the Fed sells short-dated paper and buys long-term bonds as a way to flatten the yield curve. This would have the effect of pushing down long-term rates.

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Vital Statistics:

Stocks are higher this morning after central banks assure markets that they will remain supportive of the markets for a long time.

The bond markets are beginning to price in a rate hike in 2022 and a couple more in 2023. That was part of the reason for the huge sell-off in bonds last week. The Fed’s December dot plot showed only one member projecting a rate hike in 2022 and only a few projecting increases in 2023.

Remember, the FOMC is a voting body, and according to that graph, we would see no hikes through 2023. The Fed will run a new dot plot at the March 16-17 meeting, which will also introduce a forecast for 2024. That will be a reality check for the bond market, and I would be surprised if the Fed started forecasting rate hikes in 2023. Simply put, the data doesn’t support it.

The upcoming week will be dominated by the jobs report on Friday. We will also have quite a bit of Fed-Speak.

Rocket was up 10% on Friday after earnings. This is surprising given how the market has had a “meh” reaction to everyone else’s numbers. I think a couple things were going on here. First, the company announced a $1.11 special dividend that will get paid in March. The company doesn’t pay a quarterly dividend or anything yet.

The second thing was that Rocket forecast Q1 origination volume of about $100B. This is only a small drop from the fourth quarter, and is almost double Q1 of 2020. This is despite the huge jump in rates. I think that is what got investor’s attention.

Rocket’s CFO claimed on the earnings call that the Fed is buying 95% of all new conforming production. I found that stat surprising.

Construction spending rose 1.7% MOM and 5.8% YOY in January. Residential construction was up 2.5% MOM and 21% YOY. This was better than expectations.

Manufacturing improved in February, according to the ISM. The big takeaway from the report is that the supply chain is depleted and commodity prices are up. Part of this is COVID-19 related, while some is due to the Texas ice storm. Either way, commodity price inflation seems to be driven by technical factors and inventory depletion is similar. During COVID, businesses basically lived off of their inventory in place, which wasn’t being replenished as quickly as normal.

The inventory depletion will take years to correct, at least according to logistics REIT Prologis. This will probably accelerate growth in the second half of 2021 as manufacturing activity will satisfy that pent-up demand. Will that be inflationary? I doubt it. There is an old saying in commodities markets: “The cure for high prices is high prices.” In other words, high prices encourage more production, which lowers prices again.

IMO we are not going to see inflation unless we get wage inflation. Friday’s jobs report may indeed show inflation, but that will be due to lower-wage workers in the restaurants and retail losing their jobs as these businesses close. The loss of the lower tier workers will push up the average. Once these businesses re-open we will see a reversal. The Fed has been trying to create inflation for year, and was unable to do it in 2019 when the economy was picture-perfect and unemployment was in the mid 3s. I don’t see it happening during a pandemic-driven economic slowdown.

Filed under: Economy, Morning Report | 46 Comments »