Morning Report: LEI numbers illustrate the supply versus demand issue today

Vital Statistics:

S&P futures4,413-25.2
Oil (WTI)72.98-0.19
10 year government bond yield 1.44%
30 year fixed rate mortgage 3.07%

Stocks are lower this morning on overseas weakness. Bonds and MBS are down.

Home equity rose 29% in the second quarter to $2.9 trillion, according to CoreLogic. This works out to be a $51,500 gain per homeowner. The number of homes with negative equity (surprised they still exist anymore) fell to 1.2 million homes.

New Home Sales rose 1.5% MOM to a seasonally-adjusted annual rate of 740,000. This is down big (24%) compared to a year ago. This was above expectations, however.

The Conference Board Index for Leading Economic Indicators rose in August.

“The U.S. LEI rose sharply in August and remains on a rapidly rising trajectory,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “While the Delta variant—alongside rising
inflation fears—could create headwinds for labor markets and the consumer spending outlook in the near term, the trend in the LEI is consistent with robust economic growth in the reminder of the year. Real GDP growth for 2021 is expected to reach nearly 6.0 percent year-over-year, before easing to a still-robust 4.0 percent for 2022.”

This is interesting since the GDP forecasts are falling, at least if you look at the 2020 forecasts from the FOMC meeting this week. The Atlanta Fed’s GDP Now index has been trending downward for some time, and Street strategists have been taking down growth estimates. Given what we have heard out of FedEx and Nike, third quarter earnings will be soggy for a lot of companies. So what the heck is going on?

I think the issue is that the Conference Board’s LEI inputs are mainly measuring demand, and the issue for the economy right now is supply. Demand is strong for cars, however chip shortages have reduced inventories. Lots of people want to eat out at a restaurant, but restaurants are short-staffed.

Since GDP is a function of actual transactions, you need both supply and demand. For much of the post-bubble period demand was the issue. People lost a lot of their net worth in the housing market, and they used any extra cash to pay off debt. Since spending is the biggest portion of GDP, the policy levers were used to encourage spending. Today, the issue isn’t demand, it is supply. Unfortunately for DC politicians, they are still fighting the last war.

Ultimately the question becomes whether this is a short-term phenomenon or something longer term. If it is short term, it will work itself out and be forgotten in a year or two. If it is long term, then we will start seeing persistent inflation. And the lesson from the 1970s is that inflationary expectations are hard to control once they start.

Morning Report: The Fed signals that tapering will begin this year.

Vital Statistics:

S&P futures4,41127.2
Oil (WTI)72.020.19
10 year government bond yield 1.36%
30 year fixed rate mortgage 3.07%

Stocks are higher this morning after the Fed maintained interest rates. Bonds and MBS are down.

The FOMC statement was pretty much in line with expectations. The Fed noted that the economy had continued to strengthen, although some of the industries hit hardest by the disease have seen their recoveries slow down. The Fed is sanguine with letting inflation run hot in the near term, in order to bring the average up to their target. On the subject of tapering, here is what they had to say:

Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.

The economic projection for GDP was lowered from 7% to 5.9% for 2021, which was the biggest change in the projections. 2022 GDP was bumped up from 3.3% to 3.8%, while inflation and unemployment projections for 2021 were increased.

The dot plot showed the FOMC basically coming into agreement with the Fed Funds futures. A few additional members saw a rate hike in 2022, and we are now more or less seeing a 50 / 50 chance of a rate hike next year.

Overall, I think the takeaway is that the first reduction in asset purchases probably happens this year, and the Fed views this current deceleration in growth as a temporary blip that will add to growth next year.

Initial Jobless Claims ticked up to 351k last week as the Great Resignation continues. As we saw in FedEx’s numbers yesterday, labor shortages are taking a toll on profitability. FedEx’s woes probably translate to a whole host of other businesses too. Third quarter earnings may disappoint for a lot of companies.

The Fed’s plans may also be moot given the Evergrande situation in China. Evergrande is a distressed property developer in China that has something like $300 billion in liabilities. While the government so far hasn’t made moves to bail out the company, the reverberations may still impact the Chinese real estate market, especially residential real estate.

As we saw in Japan in the late 80s, and the US during the bubble, burst residential real estate bubbles are something that develop a life of their own, and it is hard to manage the fallout. I read somewhere that real estate accounts for 29% of China’s GDP, compared to about 6% in the US, and real estate assets account for 40% of Chinese household assets. When that bubble bursts, it will be ugly.

Morning Report: Existing Home Sales fall

Vital Statistics:

S&P futures4,36723.2
Oil (WTI)71.621.19
10 year government bond yield 1.33%
30 year fixed rate mortgage 3.07%

Stocks are higher this morning as fears over an Evergrande contagion fade. Bonds and MBS are flat.

The Fed decision is due at 2:00 pm today. No changes in interest rates are expected, although there is the possibility we could see an announcement regarding decreased asset purchases (tapering). We will also get a press conference and new projections.

FedEx reported earnings this morning which came in lower than expected. Check this statement out in the press release:

First quarter operating results were negatively affected by an estimated $450 million year over year increase in costs due to a constrained labor market which impacted labor availability, resulting in network inefficiencies, higher wage rates, and increased purchased transportation expenses. This was partially offset by higher package and freight yields, increased international export express shipments and a favorable net fuel impact. In addition, while commercial ground and U.S. domestic express package volume increased year over year, continued supply chain disruptions have slowed U.S. domestic parcel demand compared to the company’s earlier forecast.

The stock is down 7% this morning. I wonder if this is going to be a theme when companies start reporting third quarter numbers in about a month.

Mortgage applications rose 4.9% last week as refis increased 7% and purchases rose 2%. “There was a resurgence in mortgage applications the week after Labor Day, with activity overall at its highest level in over a month, and purchase applications jumping to a high last seen in April 2021,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Housing demand is strong heading into the fall, despite fast-rising home prices and low inventory. The inventory situation is improving, with more new homes under construction and more homeowners listing their home for sale. Despite this week’s increase, purchase applications were still 13 percent lower than the same week a year ago.”

Existing home sales fell 2% in August, according to the National Association of Realtors. Existing home sales came in at an annualized pace of 5.9 million, which was down on both a month-over-month and year-over-year basis. “Sales slipped a bit in August as prices rose nationwide,” said Lawrence Yun, NAR’s chief economist. “Although there was a decline in home purchases, potential buyers are out and about searching, but much more measured about their financial limits, and simply waiting for more inventory.”

The median home price rose 15% to $356,700, as inventory remains an issue. Speaking of inventory, we had a 2.6 month supply of unsold homes, which is well below a balanced market, which has about 6 months’ worth. First time homebuyers slipped to 29% which is another indication that people are getting priced out of the market.

Morning Report: Housing starts rise

Vital Statistics:

S&P futures4,37320.2
Oil (WTI)70.670.35
10 year government bond yield 1.32%
30 year fixed rate mortgage 3.07%

Stocks are rebounding after yesterday’s Evergrande-related sell off. Bonds and MBS are flat.

The FOMC meeting begins this morning. The decision will be released tomorrow at 2:00 pm.

While no change in rates are expected at this week’s FOMC meeting, the consensus seems to be that Jerome Powell will give the market the official heads up that the bank will start reducing bond and MBS purchases. Given the Evergrande issue, the Fed has to make sure that it doesn’t freak the markets out too much. If the dot plot shows rates rising in late 2022, then that could be a problem. So far, the Fed Fund futures have a better-than 50% chance of a rate hike by the end of 2022.

Housing starts rose to 1.62 million in August, which came in above expectations. This is up 3.9% compared to July and is 17% above a year ago. Starts increased in the Northeast, South and Midwest, but declined in the West. Building Permits also rose to 1.73 million. This is up 6% on a MOM basis and 13% on a YOY basis.

Banks are beginning to consider “blue-lining” or refusing to lend to flood-prone areas. Since we have national flood insurance, and government-guaranteed loans I suspect this is more for show than anything else. The term itself (reminiscent of redlining) kind of gives away the game. That said, there is a no-bid risk for VA loans, so that could conceivably be a factor.

Morning Report: FOMC week.

Vital Statistics:

  Last Change
S&P futures 4,341 -80.2
Oil (WTI) 70.17 -1.75
10 year government bond yield   1.32%
30 year fixed rate mortgage   3.07%

Stocks are lower this morning on fears of a hard landing in China. Bonds and MBS are up.


The big event this week will be the FOMC meeting on Tuesday and Wednesday. The markets don’t see any changes in the Fed Funds rate, however we could see some further language about reducing bond purchases. Aside from the FOMC announcement, we will get housing starts and new home sales.


The NAHB Housing Market Index improved a point in September to 76. This is a sentiment indicator for homebuilders.


Fears are increasing that the Chinese government is going to let property developer Evergrande fail. Evergrande is the most indebted property developer in the world, with something like $300 billion in liabilities. “Everyone is looking at Evergrande and saying ‘has the time come for a major default in that area, and then the potential for contagion into the broader property sector?’” said Edward Park, chief investment officer at Brooks Macdonald. “It’s an imminent risk now rather than being a theoretical risk as it has been for the past few years.”

The consensus so far seems to be that Evergrande won’t be a “Lehman-type moment,” in reference to the 2008 decision to let Lehman fail, which supposedly caused the 2009 financial crisis. The hope is that a collapse in Evergrande would be limited to the real estate sector and not impact financial sector (and therefore the overall economy) too much.

I suspect this is probably not going to happen. People who insist that Lehman and “subprime” blew up the economy in 2009 have it backwards. The issue was not the financial sector – that was the symptom. The issue was a real estate bubble – which was the disease. Real estate is such a leveraged product that if real estate prices fall by a meaningful amount, equity can be wiped out in a hurry. Real estate bubbles are therefore the Hurricane Katrinas of banking and the contagion spreads fast. When real estate bubbles burst, they throw shrapnel everywhere.

Managing a burst real estate bubble can be done – Japan did it. While there were a few developer and bank failures over the course of the decades that followed, Japan managed to prevent the economy from entering a Great Depression style tailspin. What was the cost? Little-to-no GDP growth from 1989 onward, and a debt-to-GDP ratio of 2.4x.

What does this mean for the US? I suspect the punch line is that we will see a flight to the US dollar and US Treasuries, and that will prevent rates from rising too much. If the Chinese economy hits a hard landing, they will try and export their way out of it, so import prices will fall and that should keep inflation from getting out of hand.

Morning Report: Retail sales rise

Vital Statistics:

  Last Change
S&P futures 4,460 -3.2
Oil (WTI) 72.27 -0.45
10 year government bond yield   1.37%
30 year fixed rate mortgage   3.07%

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


Initial Jobless Claims came in at 332k last week, which was above expectations. It is still a mystery why we are seeing such elevated numbers in the tightest job market I can remember.


Retail sales rose 0.7% in August, when the Street was looking for a 0.8% decline. Ex-vehicles and gasoline, they rose 2%, which was well above expectations. August and September are the back-to-school shopping months and this bodes well for the holiday shopping season at the end of the year.

The retail sales number is great news for those who were looking for an acceleration into the end of the year. Consumption is 70% of the US economy. Still, the labor market remains a headwind, especially if it lasts longer. Consumers may be willing to spend, but if the goods aren’t there to begin with then the sales won’t happen.

Consumer sentiment fell slightly in the preliminary reading from the University of Michigan.


Home sales fell in August, according to Redfin. Prices still increased 16%, however. “When it comes to home prices in this market, what goes up stays up,” said Redfin Chief Economist Daryl Fairweather. “That’s especially true in the Sun Belt; home prices are up more than 20% from last year in Austin and Phoenix. Even with these steep increases, homes in these areas are still relatively affordable, so these and other hot migration destinations are going to continue to attract homebuyers from the coasts. As workers change jobs en masse and enhanced unemployment benefits come to an end, we could see even more households relocate for affordability in the coming months.”


Chinese developer Evergrande is on the brink of default, with something like $300 billion in debt. We have known forever that China has a real estate bubble, similar to what the US went through in the 1920s and Japan went through in the 1980s. If this is indeed the end of the Great Chinese Real Estate Bull Market then the country is probably due for a Great Depression style event. IMO, this is a byproduct of decades of rapid growth. Eventually, more and more marginal projects get built and the debt crisis creates a collapse.

As far as the banking system goes, I don’t think that the US banking system has much exposure here. We can pretty much guarantee that any bailout for Chinese banks won’t extend to foreign banks, but I suspect this might be an overseas hedge fund event. I don’t see any sort of reverberation into the US markets, however I do think that this event will be bullish for US bonds. When financial markets hit credit-related stress, the first asset everyone wants is US Treasuries. We saw good demand in the 30 year auction earlier this month, and that could portend strong demand going forward.


Morning Report: Inflation moderates

Vital Statistics:

  Last Change
S&P futures 4,475 13.2
Oil (WTI) 71.09 0.65
10 year government bond yield   1.33%
30 year fixed rate mortgage   3.07%

Stocks are higher this morning after inflation data came in lower than expected. Bonds and MBS are flat.


Prices at the consumer level rose 0.3% MOM and 5.3% on a YOY basis. This monthly increase was the lowest since January. Ex-food and energy, they rose 0.1% MOM and 4% YOY. Higher energy prices have been the big driver for the index, however food has also been a big factor as well. Interestingly, owners equivalent rent (which is a function of housing prices) rose only 0.3% MOM and 2.6% YOY. While this number is an artificial construct, it should generally correlate with housing prices. According to just about every real estate index, prices are rising in the high teens percent.


Small business sentiment increased 0.4% in August, according to the NFIB Small Business Sentiment Index. “As the economy moves into the fourth quarter, small business owners are losing confidence in the strength of future business conditions,” said NFIB Chief Economist Bill Dunkelberg. “The biggest problems facing small employers right now is finding enough labor to meet their demand and for many, managing supply chain disruptions.”


Biden is expected to nominate Mike Calhoun to run FHFA. It sounds like the left is not happy with him due to his Wall Street contacts. Supposedly he is in support of he utility model for Fannie Mae and Freddie Mac.


The share of mortgages in forbearance fell 15 basis points to 3.08% last week. “The share of loans in forbearance decreased by 15 basis points last week, as forbearance exits jumped to their fastest pace since March. The fast pace of exits outweighed the slight increase in new forbearance requests and re-entries,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “Servicer call volume jumped last week as summer came to an end and many borrowers reached the end of their forbearance terms. We anticipate a similarly fast pace of exits in the weeks ahead, which should lead to increased call volume and a further decline in the forbearance share.”


The housing market is beginning to cool off, according to Redfin. Redfin agents reported that 59% of all sales involved bidding wars last month. “Sellers are still pricing their homes very high, but a lot of buyers have had enough and are no longer willing to pay the huge premiums they were six months ago. Instead of 25 to 30 offers on turnkey homes, we’re now seeing five to seven,” said Nicole Dege, a Redfin real estate agent in Orlando, FL, where the bidding-war rate dropped to 57.5% in August from 78.9% in July. “Buyers are getting a bit more selective. I have one seller who recently put his four-bedroom single-family pool house on the market, but the roof was shot. He had to lower his asking price to $423,000 from $427,000 and agree to spend around $7,000 to replace the roof in order to attract bidders. Six months ago, he would have easily been able to sell that home as-is without dropping the price.”

Morning Report: GDP growth estimates falling

Vital Statistics:

  Last Change
S&P futures 4,481 28.2
Oil (WTI) 70.59 0.95
10 year government bond yield   1.33%
30 year fixed rate mortgage   3.07%

Stocks are higher this morning as commodities continue to rally. Bonds and MBS are flat.


The upcoming week will contain some important economic data with the consumer price index, industrial production, retail sales, and consumer sentiment. We won’t have any Fed-speak this week as we are in the quiet period ahead of next week’s FOMC meeting.


Foreclosure activity picked up after the Federal Government’s foreclosure moratorium expired at the end of August. “As expected, foreclosure activity increased as the government’s foreclosure moratorium expired, but this doesn’t mean we should expect to see a flood of distressed properties coming to market,” said Rick Sharga, Executive Vice President at RealtyTrac, an ATTOM company. “We’ll continue to see foreclosure activity increase over the next three months as loans that were in default prior to the moratorium re-enter the foreclosure pipeline, and states begin to catch up on months of foreclosure filings that simply haven’t been processed during the pandemic. But it’s likely that foreclosures will remain below normal levels at least through the end of the year.”

Professional investors hoping for a 2008-style foreclosure deluge of distressed merchandise will be disappointed. Unlike 2008, hope prices are appreciating at close to a 20% clip. Very few (if any) of these properties will be underwater, and therefore will be “money good” for the lender. Given the housing shortage, there will be plenty of buyers and any foreclosure discount will be minimal.


Mortgage bankers expect profit margins to decline according to Fannie Mae’s third quarter Lender Sentiment Survey.

“Mortgage lenders appear to have adopted a more neutral posture, reporting to us via the MLSS mixed expectations for purchase and refinance mortgage demand over the next three months,” said Fannie Mae Vice President and Deputy Chief Economist Mark Palim. “In the third quarter, more lenders than not reported expectations that purchase mortgage demand will continue to grow, though the total share expecting such growth fell substantially compared to the previous quarter. Meanwhile, a plurality of mortgage lenders expects refinance activity to continue to wane from the highs of the past year and a half – even so, their outlook on likely refi volumes was improved compared to the prior quarter. Of the lenders who expect purchase mortgage demand to decrease in the coming months, high home prices and a limited supply of homes for sale were the primary reasons given – these were also among the top reasons provided by the 63% of consumers who believe it’s a ‘bad time to buy a home’, according to our latest Home Purchase Sentiment Index® result.”

“On net, mortgage lenders’ profitability outlook improved slightly from last quarter, although more lenders than not continue to expect profit margins to decline in the months ahead,” Palim continued. “The primary-secondary spread, an indicator of potential profitability, remains wider than the previous decade’s average – a positive sign for lenders – though in August it was at its narrowest since February and 53 basis points below the peak seen in August 2020. While lenders continue to overwhelmingly cite increased competition as their primary concern regarding future profitability, the share citing personnel costs for their diminished profit margin outlook increased significantly, suggesting that mortgage lenders’ ability to efficiently manage their workforces will be critical to their bottom lines as competitive pressures remain intense.”


The meta-story for 2021 was that a rapidly accelerating economy into the end of the year was going to force interest rates higher. Instead, it seems like the big second-half rebound is not materializing. According to the Atlanta Fed’s GDP Now index, growth is expected to come in at 3.7% for the quarter ending September 30. As recently as three weeks ago, the index was predicting 6% growth.

Morning Report: Big increase in wholesale prices

Vital Statistics:

  Last Change
S&P futures 4,501 18.2
Oil (WTI) 69.79 1.65
10 year government bond yield   1.32%
30 year fixed rate mortgage   3.07%

Stocks are higher this morning on overseas strength. Bonds and MBS are up small.


Inflation at the wholesale level rose 0.7% MOM and 8.3% YOY, according to the Producer Price Index. Ex-food and energy it rose 0.6% MOM and 7.3% YOY. Foods (especially meat products) were a big contributor to the increase, as was transportation and warehousing. Building products (and lumber) pulled down the numbers. It is important to keep in mind that the annual numbers are being affected by COVID lockdowns of a year ago, so there is going to be some exaggeration in the numbers.

The 8.3% increase in prices is the highest reading going back to 2010.


The Biden Administration is going to demand that all Federal workers and contractors get vaccinated, and is going to insist that all companies with 100 or more employees require vaccination. The net result of this will probably be to exacerbate the labor shortage even more.


United Wholesale is launching an appraisal management company-free program, which will handle appraisals in-house. Not sure how their current hundred or so AMC will like this.


HUD is looking at strategies to reduce regulatory barriers to affordable housing. My guess is that their strategy will be nothing new – it will be to sue local governments to eliminate single-family zoning. “The research makes clear that there is bipartisan support for state and local reform to improve housing affordability,” said HUD Secretary Marcia Fudge. HUD and the Administration will remain hard at work to build inclusive, equitable communities through affordable housing.”



Morning Report: Record job openings

Vital Statistics:

  Last Change
S&P futures 4,511 4-2.2
Oil (WTI) 68.64 -0.65
10 year government bond yield   1.34%
30 year fixed rate mortgage   3.07%

Stocks are lower this morning after the European Central Bank said it would start reducing asset purchases. Bonds and MBS are flat.


Initial Jobless Claims came in at 310k which was a touch below expectations. Separately, the JOLTS report showed 10.9 million job openings, which is a record. Check out the chart below of the JOLTs data going back 20 years:


I suspect the market response to the huge number of unfilled jobs will be to increase investment in labor-saving technology. If the issue simply that expanded government benefits are driving the labor shortage, then it should reverse pretty rapidly once the extended benefits expire. If the government is keeping these expanded benefits in hopes of driving up wages, I suspect it will backfire, and any bump in wages will be temporary. The fatal flaw in that analysis is that workers don’t just compete with each other – they compete with technology which only gets better and cheaper.


Mortgage credit availability expanded last month, according to the MBA. “This expansion was heavily driven by the addition of refinance loan programs at a time when the 30-year fixed rate has been above 3% for the past month, and refinance activity has trended lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Of note, jumbo credit availability increased 9% to its highest level since March 2020, as more non-QM jumbo and agency-eligible high balance loan programs were offered. In the conforming space, more lenders offered GSE refinance programs catered for lower-income borrowers to help reduce their rates and payments. There was also a slight expansion in government credit, as more investors offered streamline refinance options for FHA and VA loans.”


Mortgage applications fell 1.9% last week as purchases declined 0.2% and refis fell 3%. “Mortgage application volume fell last week to its lowest level since mid-July, as mortgage rates have stayed just above 3% for several weeks. Refinance volume has been moderating, while purchase volume continues to be lower than expected given the lack of homes on the market,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “Economic data has sent mixed signals, with slower job growth but a further drop in the unemployment rate in August. We expect that further improvements will lead to a tapering of Fed MBS purchases by the end of the year, which should put some upward pressure on mortgage rates.”  


Economic growth “downshifted slightly” in August according to the latest Fed Beige Book. The decline was primarily due to decreased dining and travel, however supply chain shortages also played a part. The report discusses the labor market:

All Districts continued to report rising employment overall, though the characterization of the pace of job creation ranged from slight to strong. Demand for workers continued to strengthen, but all Districts noted extensive labor shortages that were constraining employment and, in many cases, impeding business activity. Contributing to these shortages were increased turnover, early retirements (especially in health care), childcare needs, challenges in negotiating job offers, and enhanced unemployment benefits. Some Districts noted that return-to-work schedules were pushed back due to the increase in the Delta variant. With persistent and extensive labor shortages, a number of Districts reported an acceleration in wages, and most characterized wage growth as strong—including all of the midwestern and western regions. Several Districts noted particularly brisk wage gains among lower-wage workers. Employers were reported to be using more frequent raises, bonuses, training, and flexible work arrangements to attract and retain workers.

Rapid home price appreciation has led to an increase in tappable home equity to $9.1 trillion, according to Black Knight. The average mortgage holder has $173k in tappable equity, an increase of $20,000 from the first quarter. What does this mean for originators? Debt consolidation refinances are a powerful tool for people with high interest credit card debt. Loan officers should be pitching these to their borrowers.

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