Morning Report: Janet Yellen gets more dovish 6/21/16

Posted on June 21, 2016 by Brent Nyitray

Markets are up this morning as the market frets about Brexit and Janet Yellen speaks. Bonds and MBS are up small.

The latest polls for Brexit are mixed, and the bottom line is that it is too close to call. If the UK leaves the EU, the most likely effect will be a flight to safety, which would mean global flows to US Treasuries, lowering rates. Some of the forecasts I am seeing would be a sub 1.4% on the 10 year if the UK leaves, or a return to the old 1.7% – 1.9% range if they stay. FWIW, spread betting is common in the UK, and the markets there are much deeper than the political betting sites in the US. Right now, the spread betting markets are assigning a 25% probability of Brexit.

Janet Yellen adjusted her language to be slightly more dovish ahead of her testimony today in front of the Senate Banking Committee. She is exhibiting a little more uncertainty over whether the economy is ready to return to moderate growth. Not sure what changed in the last week or so, but there you go.

Homebuilder Lennar beat estimate this morning as the housing market continues to improve and wage growth begins to appear. Interestingly, they are pulling back a little from the market, it appears: “As this year’s spring selling season improved over last year, our second quarter new orders increased 10% to 7,962 homes year-over-year, while our home deliveries and home sales revenue also increased to 6,724 homes and $2.4 billion, respectively.  As the recovery has continued to mature, we have remained focused on our strategy of moderating our growth rate in community count and home sales, as well as on our soft-pivot land strategy, targeting land acquisitions with a shorter average life.” For some reason, the builders don’t seem to trust this recovery in housing.

Perhaps Lennar’s reticence comes from the attitudes of consumers. A recent survey shows housing affordability remains a big problem. That said, perceptions of real estate as a good long-term investment are improving. They should, since rental inflation is generally outpacing house price appreciation and the buy-rent decision is skewed heavily towards buying. That said, consumers are becoming more pessimistic that the housing crisis is over.

Good breakdown on how big of a boost homebuilding is for the economy. Unfortunately, the only discussion of housing in DC revolves around how hard we should be slugging the banks.

Filed under: Economy, Federal Reserve, Homebuilding, Morning Report | 14 Comments »

Morning Report: Housing starts flat in May 6/17/16

Posted on June 17, 2016 by Brent Nyitray

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

Housing starts came in at 1.16 million in May, a tiny decline from the downward-revised April number. Building Permits rose slightly. Starts rose the most in the West and fell the most in the Northeast. It is amazing that we have a shortage of housing and are building very little. Take a look at the chart below: It is housing starts divided by population. We have just barely touched the low from the 91-92 recession, which also was the result of a frothy real estate market. If the government wants to get the economy going, it should be asking the question why housing is still so depressed in the face of such tight inventory and high demand.

The Brexit campaign is on hold after a member of Parliament was murdered yesterday. Officials don’t have a motive, however there have been calls on both sides to tone down the rhetoric.

The current global economy resembles the 1930s in many ways, and can help explain why the Fed is going so slowly in raising interest rates. Of course there are major differences as well – rates didn’t go negative in the 1930s, the world was on the gold standard, and capital was much less mobile. Still, we have a recession in the aftermath of an asset bubble and the hangover is debt that needs to be worked down. The Fed is trying to avoid the mistake of the 1937 “depression within the depression” where they hiked rates too quickly. Of course by that time, FDR was on an anti-business tear with the undistributed profits tax, and that certainly put a wet blanket on business investment.

The most deadly words in investing are “this time is different.” That said, we are in a world of negative bond yields, and massive central bank balance sheet growth, which you won’t find in your Econ 101 textbook. This time is indeed different. Or, is the answer more simple: we are in a bubble for sovereign debt? When you are purchasing a German Bund for no yield whatsoever, the only reason why you would make that investment is because you anticipate a capital gain – in other words you are making the investment on the “greater fool” theory. Which is of course no different from paying 60x earnings for Cisco Systems in 1999 hoping to flip it to someone willing to pay 61x earnings. Or flipping condos in Palm Beach for that matter.

I went on Louis Amaya’s Capital Markets Today podcast after the Fed decision and discussed the Fed, the economy, housing and regulations. You can hear the podcast here.

Filed under: Economy, Morning Report | 46 Comments »

Morning Report: The Fed acknowledges reality in the bond market 6/16/16

Posted on June 16, 2016 by Brent Nyitray

Markets are lower this morning on overseas weakness. Bonds and MBS are flat

The Fed left interest rates unchanged yesterday, and the biggest data point was the dot graph which showed 6 members expect no change in interest rates this year. That sent the 10 year yield down 4 basis points and the 2 year down 5. The actual language of the statement wasn’t dramatically different from April. They released new economic forecasts, taking down their estimate for 2016 and 2017 GDP to 2%, and increasing their estimate of 2016 inflation from 1.2% to 1.4%. In the press conference afterward, Janet Yellen acknowledged the upcoming vote in the UK (Brexit) was also a factor. The big admission was that rates will remain lower for longer.

The Fed Funds futures market is now discounting a single-digit chance of a rate hike in July, and the futures are predicting less than a 50% chance of a move throughout the rest of the year.

Bond yields are falling worldwide, with the German Bund trading at -2.3 basis points, the Swiss 10 year at -51 basis points, and the Japanese government bond yield at -20 basis points. Like it or not, the US 10 year probably won’t be able to escape the low rate vortex in the rest of the world, as investors swap out negative-yielding assets and buy Treasuries. Not saying we are going to go negative, but I find it hard to see where the selling pressure is going to come from. Are we going to be positioned for another refi boom? Don’t rule it out.

The other potential beneficiary of low rates worldwide should be mortgage backed securities, especially GN securities which are guaranteed by the government. I would have to imagine overseas investors will find these appetizing at some point. GN and FN TBAs have lagged the movement in Treasuries so far this month. This should translate into better conforming and government pricing going forward, even if bonds take a breather.

The other beneficiary of negative interest rates? Gold, which has been on a tear lately. The knock on gold has always been that it has no yield. No yield is better than negative yields, and gold has upside, while there probably isn’t much upside in a government bond with a negative yield. A rule of thumb for gold has always been that an ounce of gold should buy a high quality men’s suit.

Initial Jobless Claims rose to 277k last week from 264k the week before. While it looks like payroll growth is slowing, we aren’t yet seeing evidence of layoffs. As a rule of thumb, a sub-300k initial jobless print is a sign of strength in the labor market.

The consumer price index rose 0.2% in May, and is up 1% YOY. Ex-food and energy, it is up 2.2%. Note the Fed doesn’t use the CPI, it uses the PCE.

Real average weekly earnings rose 1.1%.

Purchase loans are the majority of new originations despite the rally in bonds, according to Ellie Mae’s Origination Insight Report. Purchases accounted for 62% of all loans. Days to close increased a day to 45 days and average FICO increased a point to 724.

Filed under: Economy, Morning Report | 11 Comments »

Morning Report: Awaiting the Fed 6/15/16

Posted on June 15, 2016 by Brent Nyitray

Stocks are higher this morning as we await the FOMC decision at 2:00 pm today. Bonds and MBS are flat.

Bonds had a sensational rally yesterday, with the 10 year yield falling to 1.57% and the German Bund going negative before giving it all back. The Bund is basically at zero this morning.

The FOMC decision is due out at 2:00 pm EST today. No one is expecting a rate increase, but we the press release and press conference might have some market-moving news. We will also get new a new Fed Funds dot graph and updated forecasts for inflation, unemployment, and GDP growth. Here is a primer on what to look for.

Mortgage Applications fell 2.4% last week as purchases fell 4.9% and refis fell 0.7%. Refis accounted for 55% of the total number of loans.

Inflation remains in check at the wholesale level, as the producer price index rose 0.4% MOM and fell 0.1% YOY. Ex food and energy, the PPI was up 1.2%, much lower than the Fed’s 2% target rate.

Paul Singer of Elliott discusses central banks and how all of their policies have been slowing growth and exacerbating inequality. He is bearish on stocks, bullish on gold. Separately, Jeffrrey Gundlach of DoubleLine says that central bankers are losing control.

Completed foreclosures ticked up to 37,000 in April from 36,000 a month ago, however they are down 16% YOY. The foreclosure inventory is just over 400,000 homes, which works out to be 1.1% of all homes with a mortgage. This number is down 23.4% from a year ago. Foreclosure inventory remains concentrated in the Northeast, Florida, and the sand states.

iServe got a nice mention in Rob Chrisman’s blog this morning. If you want to learn more about VA loans, we conduct seminars all over the US with our VA expert. We serve those that served.

In other economic news, the New York State Empire Manufacturing Index rebounded in June, while industrial production and manufacturing production fell in May. Motor vehicles (which can be volatile) accounted for a big part of the drop. Capacity Utilization fell to 74.9%. Interestingly, more CEOs intend to increase capital expenditures than they did in the first quarter.

Filed under: Economy, Morning Report | 22 Comments »

Morning Report: Uncle Sam is a huge consumer creditor 6/13/16

Posted on June 13, 2016 by Brent Nyitray

Stocks are lower this morning on fears over Brexit (The 6/23 vote to decide whether the UK leaves the EU). Bonds and MBS are up small.

No economic data today. The big event this week will be the FOMC meeting Tuesday and Wednesday. The markets are expecting no changes to interest rates, so any bond rally on the news of no changes will probably be limited.

Interesting chart about the Federal government’s percent of ownership of consumer debt. This is money that US citizens owe Uncle Sam. Ever since Obama nationalized the student loan sector, they have taken their percentage of consumer debt from 5% to 28%. The student loan market is a $1.3 trillion market – not exactly chump change. Expect some sort of write-down of student loan debt in the future: many graduates have degrees that will never pay enough to work this down. As a side note, more young adults aged 18-34 live at home with Mom and Dad than in any other arrangement.

Speaking of Millennials, the high student loan debt is causing lower credit scores. The average credit score for the 18-34 age cohort is 625, compared to the national average of 667. Almost a third of that age cohort have sub-600 scores. Good luck getting a loan with that. Finally, all of the new post-2008 regulations have added anywhere form 50k-100k to the cost of building a starter home, making it difficult for builders to make homes that are affordable for the first-time homebuyer.

There is now $10 trillion worth of global sovereign debt trading at negative yields. Bill Gross of Janus Capital calls that a “supernova” that will explode one day. All of the worlds’ central banks are on a mission to create inflation: one day they will succeed. What has been the best trade for bond investors lately? The Japanese 30 year bond, which now yields 28 basis points. Bill says that bond yields today are the lowest in 500 years. Not sure where he comes up with that number.

Speaking of Central Bank jiggery-pokery, ECB corporate bond buying now makes up for 1 in 5 trades. We are truly in uncharted waters with global central banking.

As a general rule, buy stocks in an election year. Election years tend to be optimistic times, and the Fed is usually on your side. That might not be the case this year.

Filed under: Economy, Morning Report | 27 Comments »

Morning Report: Negative equity falls 6/10/16

Posted on June 10, 2016 by Brent Nyitray

Stocks are lower this morning on no real news. Bonds and MBS are up as sovereign bonds rally globally.

The 10 year has broken out of its range and is now trading at 1.65%. The catalyst has been lower rates throughout the world. The German 10 year Bund is now trading at 2 basis points. The Japanese Government Bond yields negative 13 basis points. At some point, gold has to become interesting as an investment. The knock on gold was always that there is no yield, but compared to long term sovereign bonds that have no yield and (probably) no upside, why not? Definitely a better risk / reward.

Mortgage originator and servicer Walter Investment got slammed yesterday after the CEO resigned. Regulatory difficulties and costs were the catalyst. The stock has lost 82% of its value over the past year.

In economic news, initial jobless claims fell to 264k from 268k the week before. So in spite of the low job creation numbers, we aren’t seeing firms lay off people yet.

Consumer confidence fell slightly in June to 94.3 from 94.7 according to the University of Michigan Consumer Sentiment Survey

268,000 homes regained positive equity in the first quarter, according to CoreLogic. They estimate that 4 million homes (or about 8% of the homes with a mortgage) have negative equity. 18% of homes have less than 20% equity. Negative equity remains a problem in the Northeast, the Rust Belt and FL, NV, and AZ.

Ex Fed Head Narayana Kochlerakota argues the Fed should be doing more to get inflation up. Not only should they hold off on raising rates until the core PCE is above 2%, but it should pay nothing on excess reserves.

Filed under: Economy, Morning Report | 15 Comments »

Morning Report: Republicans address problems with Dodd Frank 6/8/16

Posted on June 8, 2016 by Brent Nyitray

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

Mortgage applications rose 9% last week as purchases rose 11.7% and refis rose 7.4%. Interest rates were flat for most of the week until the jobs report on Friday, so these are good numbers, all things considered. The 10 year continues to bump to see resistance at the 1.7% level.

Job opening increased to 5.8 million in April, according to the JOLTS report, which matches a record set last July. Hires and quits fell however, which is another reason for the Fed to stand pat at the FOMC meeting next week.

Separately, a survey of CFOs indicates that companies are holding off hiring due to uncertainties regarding regulation and the general machinations in DC. Interestingly, hiring and retaining skilled labor came in as the #2 concern from #5 last year. That corroborates what the JOLTS report is saying: there are a lot of openings for skilled labor, but hirings are down because skilled labor is tough to find. On the other side of the coin, unskilled labor is becoming more expensive due to the recent spate of minimum wage hikes, which is creating an even bigger glut as companies substitute technology for labor.

Meanwhile in banking, machine learning continues to displace more and more workers. What can be automated ultimately will be.

Hillary Clinton won California and has enough delegates to sew up the nomination. Donald Trump continues on his mission to alienate as many people as possible. The big question is Bernie Sanders. Given the backdrop of the FBI investigation, he may decide to stick around until that is settled. That said, Obama has signalled that Hillary did nothing wrong, and I am sure his DOJ and his FBI has taken note. The Democratic establishment is going to put more and more pressure on Bernie to throw his support behind Hillary and unite to defeat Trump.

Was the big miss in payrolls just a spurious data point or is it the start of a downturn in the labor market?  Citi says to watch the initial jobless claims number tomorrow. Typically you should see a spike in initial jobless claims following such a weak number.

Republicans are drafting a bill to fix some of the issues with Dodd-Frank, particularly Volcker rule and some of the issues with the CFPB. Banks that meet capital requirements will be allowed to prop trade, and the CFPB will come under Congressional oversight and have a Board instead of a single director. There are two issues this is intended to fix. First, market making almost doesn’t exist any more as banks are afraid to venture too close to proprietary trading and the Volcker rule. The next crash (and there will be one) investors will be in for a rude awakening when they cannot sell their less liquid stocks because there is no bid. It will be even worse for bonds, and could be a major issue for ETFs. The second issue is the CFPB, which is regulating by enforcement action. Consumer advocates are getting sick and tired of tight credit, which is creating some consternation with other members of the left who still think the banks are unregulated and need to be reined in. Elizabeth Warren is leading the charge against this, which makes sense since the CFPB is her baby.

Filed under: Economy, Morning Report, politics | 6 Comments »

Morning Report: ADP jobs report comes in line with expectations 6/2/16

Posted on June 2, 2016 by Brent Nyitray

Markets are lower this morning as ECB President Mario Draghi speaks. Bonds and MBS are flat.

The ECB will now start buying corporate bonds in an attempt to stimulate their economies. Truly an amazing time we live in.

We get some labor market data this morning, before the big jobs report tomorrow.

The ADP Employment Change report came bang in line with expectations at 173k jobs created. Tomorrow’s non-farm payroll expectation is for an increase of 160k jobs created in May. Small business led the way, adding 76k employees. Professional and business services increased the most. Manufacturing jobs fell.

Note that tomorrow’s payrolls number could be affected by the Verizon strike. Regardless. the number to focus on tomorrow is the change in average hourly earnings.

Job cuts fell to a 5 month low, according to outplacement firm Challenger, Gray and Christmas. Announced job cuts came in at just over 30k, a drop of about 50% from April. The two biggest industries in job cuts – energy and finance – appear to be slowing down the pace of headcount reduction.

Initial Jobless Claims came in at 267k last week,

Homebuilder Hovnanian reported second quarter earnings this morning. Deliveries were up 31% and revenues were up 40%. Earnings were still below expectations. The stock is down this morning

US auto sales fell in May, which is usually one of the stronger months for auto sales. Auto sales had been increasing for 6 years, pushed by a stronger economy and ridiculously cheap financing. Yield pigs may find that doing 8 year auto loans at 3.5% is a dumb trade.

Despite being disappointed by the current crop of presidential candidates, consumers still plan to buy cars and houses. Despite all the rhetoric, the economy is not doing all that badly, and there is tremendous pent-up demand for housing, especially from younger buyers. The issue for them is affordability, and tight inventory combined with a lack of building is making it hard.

Here is a new one in the world of apartment leasing: Like our facebook page, or else.

The House included language in the 2017 budget to bring Congressional oversight to the CFPB and subject it to the appropriations process. Currently, it is funded by the Fed, who really has no choice but to give them what they want. Second, the provision would replace the single director with a five-member board appointed by the President. While this is going nowhere (we haven’t had a budget since early in Obama’s Presidency), it will be fodder for the fall elections. For the moment, it appears the CFPB is directing its attention to payday lenders.

Filed under: Economy, Morning Report | 91 Comments »

Morning Report: Don’t fear another real estate bubble 6/1/16

Posted on June 1, 2016 by Brent Nyitray

Markets are lower this morning on overseas weakness. Bonds and MBS are up.

Mortgage Applications fell 4.1% last week as purchases fell 4.7% and refis fell 3.9%. Refis ticked up to 54.3% of the total number of loans.

The ISM Manufacturing report came in better than expected, indicating that the manufacturing economy is expanding, albeit modestly. The ISM services number is much more important, as manufacturing only represents 15% of the economy. It looks like the exporters are getting hit harder than those who mainly focus domestically. Employment was flat month-over-month, however it is in a contracting trend.

Construction spending fell 1.8% month-over month, however the previous 0.3% print was revised upward to 1.5%. Residential construction fell 1.5% month-over-month, however it is up 8% YOY.

As we saw from the FHFA House Price index, home prices have recouped their losses from the bubble years. Is it time to start worrying about a new housing bubble? Freddie Mac takes a look at real estate prices relative to incomes, credit scores, inventory, and leverage in the system and concludes that it is not yet time to worry. While house prices are indeed stretched relative to incomes, that figure ignores the effect of interest rates. The overall credit profile for new originations has been strong since the crisis, and while we are beginning to see some credit deterioration in the oil states, it is nothing like 2007-2008. Tight inventory remains a huge issue in terms of pricing, and notwithstanding last week’s 617k print on new home sales, new construction is still well below historical levels. Consumers are increasing mortgage debt, however they seem to be using the cash-out refi to pay down credit card debt instead off funding consumption. The froth in the housing market still remains concentrated in the big coastal urban areas like San Francisco and Manhattan, which is driven by foreign demand.

At the end of the day, bubbles are psychological phenomenons, where investors and lenders both believe an asset is “special” and cannot go down in price. We will probably never see another real estate bubble, but our grandkids might. If anything, the bubble is in sovereign debt, and people will wonder why investors chose to tie up their money for 10 years for negative returns. Purchasing a German Bund yielding 13 basis points over 10 years is in the same category as buying a new construction McMansion in Stockton CA circa 2006 or paying $76 a share for E Toys the day of its $20 IPO in 1999.

Auto sales are coming in this morning, and it looks like they are coming in weaker than expected.

Interesting editorial by Clintonite Doug Schoen who says Hillary might not be the Democratic Party nominee. There is talk in the Democratic party about a white knight candidate, like Joe Biden or John Kerry who could enter the race at the convention, and select someone like Elizabeth Warren to be VP.

Filed under: Morning Report | 35 Comments »

Morning Report: Incomes and spending rise 5/31/16

Posted on May 31, 2016 by Brent Nyitray

Markets are up this morning after Chinese stocks rallied overnight. Bonds and MBS are down.

The second revision to first quarter GDP came in at 0.8%, slightly below the Street estimate of 0.9%. This was an upward revision from the initial 0.5% estimate.

Personal incomes rose 0.4% in April, in line with expectations. Personal spending rose 1%, which topped the 0.7% estimate. The personal consumption expenditures index (which is the inflation measure preferred by the Fed) rose 0.2% month-over-month and is up 1.6% annualized. We are seeing some sell-side firms take up their second quarter GDP estimates on this number.

Home prices rose 0.9% MOM and 5.4% YOY, according to the Case-Shiller Home Price Index. This was slightly ahead of estimates. An improving labor market along with tight inventory is driving prices higher.

In other economic data, both the Chicago Purchasing manager index and the consumer confidence index fell.

The highlight of this short week will be the jobs report on Friday, which will be the last big data point before the FOMC meeting in a couple of weeks. The number to watch: average hourly earnings. Average hourly earnings growth has been accelerating over the past 6 months or so, to around 2.5%. You can see the trend in average hourly earnings growth in the chart below:

On Friday, Janet Yellen hinted that the next rate hike is probably at the June or July FOMC meetings.

Filed under: Economy, Morning Report | 4 Comments »

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