Morning Report: Consumer sentiment falls to 2011 levels

Vital Statistics:

  Last Change
S&P futures 4,657 14.2
Oil (WTI) 80.22 -1.03
10 year government bond yield   1.55%
30 year fixed rate mortgage   3.17%

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


Volatility in the Treasury market is back to March and April of 2020. While this volatility isn’t as bad as the 2013 taper tantrum, we should still expect volatility in the interest rate market as the Fed begins its tapering process. FWIW, MBS spreads are still super-tight, which means the mortgage backed securities market is sanguine about the process. I have received some emails from NQM lenders saying that conditions in the NQM securitization market are deteriorating, and there is the possibility that this could start flowing through to other markets.

The Evergrande situation in China has the potential to affect financial markets outside of China. There is so much leverage in the system that financial distress gets transmitted quite quickly. Don’t forget in 2008, pain in the subprime market (which theoretically should have been contained in the hedge fund / investment bank community) ended up making it impossible for retailers to borrow money in the commercial paper market to fund inventory for the holiday shopping season. This is why I keep harping on this situation.


Mortgage delinquencies fell for the fifth straight quarter, according to the MBA. Delinquency rates fell by 59 basis points on a quarterly basis and 277 on an annual basis to 4.88% of all loans outstanding. “For the fifth consecutive quarter, the mortgage delinquency rate declined, commensurate with a decline in the U.S. unemployment rate over the same time period,” said Marina Walsh, CMB, MBA Vice President of Industry Analysis. “The improvement was driven entirely by a decline in later-stage delinquent loans – those loans that are 90 days or past due, but not in foreclosure. By the end of the third quarter, many borrowers were approaching the 18-month expiration point of their forbearance terms and were being placed in permanent home retention solutions, such as modifications and loan deferrals.”


Consumer sentiment fell again, according to the University of Michigan Consumer Sentiment Survey. This is the lowest level in a decade. The index hit 66.3, which goes back to 2011 levels. Consumers cited inflation as the prime reason, along with a belief that government policy will be unable to address it. FWIW, consumer sentiment surveys tend to mirror gasoline prices, but the inflation issue is something we haven’t dealt with for a long time.

On the issue of policy responses, the government has 3 options. First, they can hope that things eventually work out. That is Plan A, and is what the Biden Admin is pursuing. The second option is for the Fed to tighten, which will probably cause a recession since GDP growth is around 2%, and productivity is highly negative. The third option is price controls, which is probably going to be pursued as well. It will start with fire and brimstone speeches alleging profiteering and price gouging. Next year is an election year, so expect Plan C to be utilized.


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