All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	4,425	-5.2
Oil (WTI)	67.44	-0.65
10 year government bond yield		1.37%
30 year fixed rate mortgage		3.09%

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

 

Inflation at the consumer level rose 0.5% MOM and 5.4% on a YOY basis. Ex-food and energy, it increased 0.4% MOM and 4.3% YOY. While the Fed doesn’t really use the CPI to guide its policy decisions, it does still indicate that inflation is back, at least temporarily. I would take the YOY numbers with a grain of salt since last year’s prices were distorted by COVID lockdowns.

 

Productivity rose 2.3% in the second quarter, according to BLS. Prior estimates were revised downward. Productivity is critical to creating non-inflationary growth. Part of the reason for the 1970s inflation was due to a collapse in productivity. Unit labor costs rose 1%. Productivity will be a key factor in the Fed’s assessment of the economy going forward. If productivity is high, then the Fed has a little more breathing room in how it reacts. If productivity is low, then inflation can be more persistent. The big takeaway is that inflation has increased, COVID is distorting the numbers somewhat, and we will have a better idea of how persistent it is by the end of the year.

 

Small Business Optimism declined in June, according to the NFIB. “Small business owners are losing confidence in the strength of the economy and expect a slowdown in job creation,” said NFIB Chief Economist Bill Dunkelberg. “As owners look for qualified workers, they are also reporting that supply chain disruptions are having an impact on their businesses. Ultimately, owners could sell more if they could acquire more supplies and inventories from their supply chains.”

Supply chain bottlenecks are also partially behind the increase in inflation. Presumably, these will reverse as we put COVID behind us. That said, the decline in small business optimism, especially about the future, calls into question the whole massive rebound in the second half of 2021 scenario.

 

Mortgage Applications rose 3% last week as purchases rose 2% and refis rose 3%. Refi applications returned to levels last seen in February. “Mortgage applications rebounded last week, including an increase in purchase applications for the first time in nearly a month,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Rates slightly rose but remained below 3 percent, driven by an end-of-week increase in the 10-year Treasury yield following the positive July jobs report.”

 

Despite the drop in the 10 year, mortgage rates have been slow to follow. This is a function of MBS spreads widening in anticipation of the end of the Fed’s MBS purchases. Current coupon spreads right now are about 70 basis points (this is the difference in yield between the 10 year bond and the typical MBS). During the taper tantrum of 2013, that spread increased to 150 basis points. Mortgage REIT earnings were dented in the second quarter due to spread widening, and that shows up in stagnant mortgage rates in a context of declining 10 year yields. This adjustment will play out over the next year, and LOs should get used to being disappointed when they see the 10 year yield down on CNBC and see no difference when they run a scenario.

 

The share of loans in forbearance fell to 3.4% last week, according to the MBA. “Forbearance exits increased as August began and new forbearance requests declined, resulting in the largest decrease in the share of loans in forbearance in three weeks,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “1.7 million homeowners remain in forbearance, 13% of whom were current on their payments as of August 1. Of those who exited forbearance last week, more than 10.5% were current. Forbearance has surely provided both insurance and assurance for many of these homeowners who worried about ongoing hardships, and it is positive to see so many continue to be able to make their payments while in forbearance.”

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