All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,377	16.8
Oil (WTI)	75.01	-0.25
10 year government bond yield		1.37%
30 year fixed rate mortgage		3.14%

Stocks are higher this mornings as the banks report big increases in profits. Bonds and MBS are up.

Jerome Powell will testify in front of the House Financial Services Committee at noon today. Here are his prepared remarks. On the labor market, he laid out the disconnect between job openings and a high number of idle workers:

Conditions in the labor market have continued to improve, but there is still a long way to go. Labor demand appears to be very strong; job openings are at a record high, hiring is robust, and many workers are leaving their current jobs to search for better ones. Indeed, employers added 1.7 million workers from April through June. However, the unemployment rate remained elevated in June at 5.9 percent, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year. Job gains should be strong in coming months as public health conditions continue to improve and as some of the other pandemic-related factors currently weighing them down diminish.

Inflation at the consumer level rose 0.9% MOM and 5.4% YOY. Ex-food and energy, the index rose 0.9% MOM and 4.5% YOY. The producer price index (which measures inflation at the wholesale level) rose 1% MOM and 7.3% YOY. While the YOY increases are big numbers, they really deserve an asterisk next to them because the lockdowns of a year ago are distorting the numbers. The Fed is dismissing these increases as “transitory” and believes they will fall again as the supply chain shortages disappear. If you look at the chart below, you will see that inflation is much less volatile than it was from the 1950s through the 1980s. Much of this is due to things like just-in-time inventory management, globalization, and the transition from a manufacturing to an IP-based economy.

Mortgage applications rose 16% last week as purchases increased 8% and refis increased 20%. Note that last week had an adjustment for the 4th of July holiday. “Overall applications climbed last week, driven heavily by increased refinancing as rates dipped again,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Treasury yields have trended lower over the past month as investors remained concerned about the COVID-19 variant and slowing economic growth.” Conforming rates fell 6 basis points last week to 3.09%.

Small Business optimism decreased in May, according to the NFIB. The labor shortage is the biggest problem right now. Rising inflation is beginning to worry small business owners, especially with the perception that the COVID-19 rebound is getting played out. Owners expecting better business conditions over the next six months declined 11 points to a net negative 26%. A net 40% reported increasing average selling prices. The construction sector and the professional sector are the most negative, while manufacturing and agriculture are the most optimistic.

JP Morgan reported better than expected quarterly earnings of $3.78 per share, which was a big increase from the $1.38 it reported a year ago. Earnings were impacted by a $3 billion (or about $0.75 per share) reserve release. These are reversals from provisions for loan losses taken out last year. Simply put, consumers largely did not default on credit card debt during the COVID-19 crisis, so JPM reversed these non-cash charges.

Mortgage banking revenue fell 22% QOQ and 40% YOY as margins compressed. This is interesting given that volumes were flat QOQ and up 64% compared to a year ago. Total originations came in at 39.6 billion.

Wells reported quarterly earnings of $1.38 compared to a loss of $1.01 a year ago. Originations rose 3% QOQ and fell 10% YOY to $53.2 billion. Gain on sale fell compared to Q1, but increased compared to a year ago. Overall mortgage banking income improved as mortgage servicing right valuations rose.

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