All Things in Moderation

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.

The long-term bearish take on oil.

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.

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.

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.

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.

Mortgage Applications rose 2.3% last week as purchases rose 4.8% and refis rose 0.4%. The average 30 year fixed rate mortgage rose 3 basis points to 3.85%. The average jumbo rate increased 8 basis points to 3.82%.

Home prices rose 0.7% in March, according to the FHFA House Price Index. “While the overall appreciation rate was robust in the first quarter, home price appreciation was somewhat less widespread than in recent quarters,” said FHFA Supervisory Economist Andrew Leventis. “Twelve states and the District of Columbia saw price declines in the quarter—the most areas to see price depreciation since the fourth quarter of 2013. Although most declines were modest, such declines are notable given the pervasive and extraordinary appreciation we have been observing for many years.” Interesting to see prices begin to decline in some states.

A US appeals court threw out the $1.27 billion judgement against Bank of America for Countrywide’s sins related to the “hustle.” The 2nd U.S. Circuit Court of Appeals in New York said the proof at trial was insufficient under federal fraud statutes to establish liability. No comment yet from Manhattan U.S. Attorney Preet Bharara.

Hillary Clinton is trying to take Donald Trump to task over comments made as the real estate bubble was bursting. Not sure how much traction that is going to get, however she had a conference call with reporters to push the message. Separately, the Republican party is beginning to unite behind Trump.

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

New Home Sales came in much stronger than expected, at an annual rate of 619,000. This is the highest level since early 2008. While it is premature to bust out the champagne quite yet (prior to the bubble, the last time sales were this low was the early 90s), it is an encouraging sign. The Spring Selling season got off to a somewhat slow start, but seems to be picking up momentum. Note this number has an unusually wide margin for error this month, so expect a revision.

Speaking of new home sales, we got second quarter numbers out of Toll Brothers this morning. Earnings beat on the top and bottom lines, with revenues increasing 31% in dollars and 9% in units. Interestingly, average selling prices of signed contracts were flat. Contracts only rose 3%, and the problems were in California, with not enough inventory for sale. They continue to build out their urban apartment segment and plan to expand it to smaller cities and suburbs.

The Richmond Fed manufacturing index fell in May to -1 from 14.

More millennials are living with their parents than they are with a partner or significant other, for the first time in the modern era. This is probably a reflection of a lot of things – from the weak economy to people getting married later in life. However, it does represent pent-up demand for housing.

Foreclosure starts fell to 58,700 in April, the lowest level since 2006. Delinquencies increased slightly, but are still down 10% YOY. The active foreclosure inventory fell below 600,000 for the first time since 2007. The Northeast still has some wood to chop in terms of liquidating foreclosures.