All Things in Moderation

Vital Statistics:

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

Inflation at the consumer level continues to be well-contained. The consumer price index was flat month-over-month and is up 0.8% year-over year. Ex-food and energy it was up 0.1% MOM and 2.2% YOY. The biggest contributors to inflation were health care costs (up 4% YOY) and housing (up 2.4% YOY).

Housing starts were 1.211 million annualized in July, coming in higher than expected. The driver was multi-fam, which can be extremely volatile. Single fam continues to plug along. Building permits were more subdued, coming in at 1.15 million. Same situation in permits: multi-fam permits rose while single fam declined.

Industrial production increased 0.7% in July versus expectations of a 0.3% increase. Manufacturing production increased 0.5%. Capacity utilization increased to 75.9%. So some signs of life in the manufacturing sector after a dismal Spring and early summer.

An idea that is percolating at the Federal Reserve is the idea that this low productivity / low growth economy is a new normal, which implies a lower neutral interest rate. This in part explains why the Fed has been so reluctant to raise rates despite unemployment being at levels historically associated with full employment. One idea is that the Fed should either raise its inflation target or begin targeting nominal GDP. The big question is whether the PhD standard, which has pushed interest rates to the floor, is part of the reason why productivity and growth are so low. By creating a bubble in sovereign debt, you have a misallocation of resources (by definition – that is what bubbles are) and that could account for our disappointing growth and productivity. Certainly business capital expenditures remain low and focused on saving labor costs.

Meanwhile, William Dudley thinks the market may be too complacent about a September rate hike. The market has been calling the Fed’s bluff for over a year now.

Freddie Mac thinks 2016 could be the best year for mortgage origination since 2012, with total origination topping $2 trillion. The unexpected gift of lower rates is the reason why. For 2017, they are forecasting a drop back to $1.7 trillion as home price appreciation falters and interest rates rise, although rising rates shouldn’t be too bad given they are forecasting 2017 GDP growth to be below 2%. They anticipate the mortgage rate to increase 10 basis points to 3.7%.

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Vital Statistics:

Markets are higher this morning as emerging markets rally. Bonds and MBS are down

We will get a lot of data this week with housing starts and the FOMC minutes on Wednesday. The minutes are probably the most likely event to affect bonds. Earnings season is largely over except for the retailers.

The Empire State Manufacturing Survey fell in August, according to the NY Fed. New orders were flat. Employment contracted.The 6 month outlook dimmed as well.

Foreign investors are beginning to wade into TBAs again as sovereign debt yields continue to offer nothing. Ginnie Mae TBAs stand to benefit the most, which means FHA and VA pricing should improve relative to Fannie Mae pricing. The next event to watch from the Fed will be their own TBA purchasing. The Fed is still re-investing maturing proceeds of their MBS portfolio back into the market. Part of policy normalization will involve ending this practice.

Friday’s weak retail sales data caused some strategists to take down their Q3 GDP numbers from the mid 2% to the low 2% range.

Homebuilder sentiment improved in August to 60 from 58. We are entering the seasonal slowdown for the builders, which coincides with football season.

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Vital Statistics:

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Vital Statistics:

Markets are flattish this morning on no real news. Bonds and MBS are flat as well.

Slow news day (again)

Initial Jobless claims dipped ever so slightly to 266k last week.

Import prices rose 0.1% month-over-month, but are down 3.7% on an annual basis. Inflation remains in a deep freeze.

Housing has historically been the vehicle people use to build wealth. For most people, it is their biggest assets. Home prices have been rising since bottoming in 2012, but aspiring homeowners have been shut out as the homeownership rate hits levels not seen since the 1970s. For young Millennials with student loan debt and difficult job prospects, home price increases have made the dream of homeownership further out of reach. Meanwhile, rental inflation (driven by the same scarcity issues that are driving home price appreciation) mean that rent accounts for a bigger and bigger percentage of disposable income.

The homeownership rate fell to 62.9% in the second quarter, which is a 51 year low. You can see the big jump in homeownership that started in the mid 90s has been reversed. That jump in homeownership was a function of Bill Clinton’s social engineering via the housing market and the development of a securitization market. Tight credit post-financial crisis remains an issue as well, as the US taxpayer bears the credit risk for 90% of all origination. If a loan doesn’t fit into the government / conforming box, it likely isn’t getting done.

That said, this does represent pent-up demand that will be unleashed at some point, and with housing starts still well below historical averages, could provide a massive boost to the economy once it turns around. Don’t forget the Millennial generation is bigger than the baby boomers. Amidst the gloom however, is evidence that the Millennials are finally buying.

Interesting observation, and spot-on: Negative interest rates have made bond investing similar to commodity investing. As Warren Buffett would say that with commodities you are simply betting on what someone else might pay for them at some future moment. Commodities cost money to hold (because storage isn’t free) and now bonds with negative yields exhibit the same characteristics. The only way to make money in bonds has been to find a greater fool to sell to. If this causes volatility to spike (which in theory it should), then that will have major effects on mortgage rates and pipeline hedging.

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Vital Statistics:

Markets are flattish this morning on no real news. Bonds and MBS are flat

Small Business Optimism ticked up last month according to the NFIB. Sentiment remains well below its historical average. The interesting thing is that the inability to find quality workers rose to the #3 problem facing small business after taxes and government regulation. While small business is interested in hiring, they still have very little appetite for capital expenditures. Inflation at the small business level remains nowhere to be found, as small business cut prices on average last month.

The lack of capital investment ties into another economic number this morning: productivity (or lack thereof). Nonfarm productivity fell .5% in the second quarter, making it the third negative quarter in a row. The Street was looking for a positive .5% reading so the number was a big miss. Productivity is also negative on a year-over-year basis.

Unit Labor costs rose 2% which was a little higher than expected. Comp costs were up 1.5% and productivity losses added another 50 bps.

Productivity growth is what increases standards of living, which is why a lack of it makes people feel like the recovery is so weak. Part of the explanation is found in the NFIB report – no capital expenditures. Productivity is tough to measure these days, with so much free technology. You know GoToMeeting increases productivity, yet it won’t show up in the output numbers because no one pays for it. Same thing with Skype, LinkedIn, etc. While academia suspects there is a problem with the way we measure productivity, no one has found a good way to correct for it.

Completed foreclosures came in at 38,000 in June, a 4% increase from May and a 5% drop year over year. The national foreclosures inventory stands at 375k homes, which is down 26% from a year ago. The number of mortgages seriously delinquent fell 21% YOY to 2.8%, or about 1.1 million homes. The big judicial states like New York and New Jersey lead the pack in foreclosure inventory.

FHFA says that Fannie Mae and Freddie Mac could require as much as $126 billion in the next housing crisis. Separately, Fannie’s home purchase sentiment index hit a new high, albeit it is a relatively new index.

Wells is saying that the expiration of HARP at the end of the year. Does this mean a dramatic drop in prepay speeds? Not necessarily, in that HARP will probably be replaced with a high LTV refi program.

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Vital Statistics:

Markets are higher after a stronger than expected jobs report. Bonds and MBS are down.

Jobs report data dump:

• Nonfarm payrolls +255,000
• Unemployment rate 4.9%
• Labor Force Participation rate 62.8%
• Average hourly earnings +0.3% (2.6% YOY)

Overall, a good report. Not sure it moves the needle with the Fed in September, but it looks like May’s super-weak report was an aberration. The underemployment rate increased however, which suggests that the long-term unemployed may be coming back to the market, but they have to settle for part time jobs.

Bonds sold off on the report, with the 10 year yield up about 4 basis points, and the 2 year up 6.

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Vital Statistics:

Stocks are higher this morning after the Bank of England cut rates and instituted QE. Bonds and MBS are up.

In response to Brexit, the Bank of England cut rates and introduced a bond-buying program for corporate and sovereign debt. This is causing global sovereigns to rally, and the German Bund is now trading at -7 basis points again. The US 10-year seems to correlate the most with the German Bund lately, so if it continues to rally, look for lower rates in the US.

Job cuts increased in July to 45,346, which is up 19% from last month, but is down 57% from a year ago. Military discharges and continued cuts in the energy sector drove the increase. Texas and California bore the brunt of the job cuts.

Initial Jobless Claims ticked up to 269k last week, however we have been below 300k for months, which is a very low level.

The Bloomberg Consumer Comfort index ticked up slightly last week to 43 from 42.9.

Factory Orders fell 1.5% from a downward-revised -1.2% in May. The manufacturing sector continues to exhibit a slowdown.

The ISM Services Index ticked down to 55.5 from 56.5 last month. The ISM Services index has been much stronger than the manufacturing index.

Nationstar reported better than expected earnings in the second quarter, although they took a big hit on their servicing portfolio. That said, while others are running from the servicing business, Nationstar is doubling down, and looks to build their business, with the addition of Seneca and USAA as clients. USAA had used Dovenmuhle in the past. Originations were up 24% QOQ and consumer direct accounted for 60% of the volume. Nationstar was up 12% for the day and is the highest in 9 months.

Mortgage REIT Annaly Capital reported a drop in book value per share as volatility hurt results. Given the widening of MBS spreads at the end of the second quarter, this is to be expected, although peer American Capital Agency did report a small increase. Annaly just completed its acquisition of Hatteras. Aside from the Fed, mortgage REITs are some of the biggest purchasers of mortgage backed securities, and can move around TBAs which influences mortgage rates, so it pays to keep tabs on how they are doing.

Separately, Fannie Mae reported a drop in net income.

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