All Things in Moderation

The ECB cut interest rates again, and threw a kitchen sink worth of QE, lender subsidies, and other goodies.They will also start buying corporate debt. Not sure what the markets were looking for, but Euro rates are higher this morning with the German Bund yielding 32 basis points, up 8. This is what is dragging US rates higher. Buy the rumor, sell the fact, I guess.

Initial Jobless Claims came in at 259k, while the Bloomberg Consumer Comfort Index ticked up slightly to 43.8.

Americans have regained most of the wealth lost when the real estate bubble burst. Homeowners’ equity has more or less doubled since the lows of 2009. Since 2013, real estate has outperformed ther S&P 500 by 16 percentage points.

Bank of America is forecasting home prices will rise 3.6% this year.

Is the global economy going through a great metamorphosis?

Mortgage Applications edged up 0.2% last week as purchases increased 4.2% and refis fell 2.3%. The 30 year fixed rate mortgage rose 6 basis points. We saw a big move up in ARM rates from 3.02% to 3.2%. In an environment where the yield curve is flattening, switching from an ARM to a 30 year fixed is the trade to make.

Wholesale sales fell 1.3% last month while inventories built up 0.3%. The inventory-to-sales ratio is 1.35 month’s worth, which is the highest since April of 2009. This is a negative sign for the economy going forward, as inventory build adds to GDP, and a buildup essentially “borrows” growth from future quarters. While this number doesn’t carry the same weight it did 20 years ago, it still matters.

Marco Rubio had a tough day yesterday. John Kasich is looking more and more like he could be the “establishment candidate.” Bernie Sanders beat Hillary in Michigan, as anti-trade populism resonates deeply in the hard-hit rust belt.

Consumers are becoming a touch less bullish on future home price appreciation, according to the latest Fannie Mae National Housing Survey. They anticipate that home prices will appreciate 1.7% next year, as opposed to 2.2% last month. We are certainly seeing some signs of softness in the oil states as well as the high end. Their view on the economy is about the most negative it has been since the big equity sell-off in August. 56% believe the economy is on the wrong track, and only 37% believe the economy is on the right track. This statistic explains the appeal of Sanders and Trump these days, two candidates who would ordinarily get zero traction.

Global financial markets are forecasting that the age of ZIRP will be with us for 10 years or more. Sound far-fetched? Japan has been at 0% interest rates for over 20 years. Interest rate cycles are long. While the US may not be in the sort of deflationary trap that Europe and Japan are in, relative value trading will help keep a lid on rates going forward. In fact, the US may be more at risk of future asset bubbles than deflation.

With rates so low, consumers are happy to rack up the credit card debt. The average credit card debt level for a US consumer is $7,879, closing in on the unsustainable levels we saw early in the Great Recession.

Consumer credit rose by $10.5 billion in January, the lowest in a year. Lower levels of credit card debt drove the deceleration.

Small Business Optimism hit a 2 year low, according to the NFIB. Worryingly, job creation fell for the first time in quite a while, as small businesses shed about .12 workers per firm. The difficulty in finding qualified workers also fell in importance, although it is still elevated. Washington remains the biggest impediment, with taxes and red tape occupying the #1 and #2 concerns for small business. The report summed it up this way: “Overall, a “ho hum” outcome, confirming that the small business sector is not headed up with any strength, just treading water waiting for a good reason to invest in the future.”

The big drop in interest rates has bumped up the refinanceable population to 6.7 million borrowers from 5.2 million last month, according to Black Knight Financial Services.   An additional 15 basis point drop in rates would add another 2.1 million borrowers. This data is based on mid-February numbers, with a FHLMC 30 year rate of 3.65%. Just another reason why 2016 might be a little better than expected.

Foreclosure activity continues to fall, according to CoreLogic. Foreclosure inventory is down 21.7% to 456,000 homes, and completed foreclosures fell 16% in January. Serious delinquencies also fell to 1.2 million mortgages, the lowest since 2007. Foreclosure activity is making the home price recovery more durable: “The improvement in distressed properties continues across the country in every state which is contributing to the lack of stock of available homes and resulting price escalation in many markets,” said Anand Nallathambi, president and CEO of CoreLogic. “So far the trend toward lower delinquency and foreclosures has been immune from shocks from such things as the collapse in oil prices attesting to the durability of the housing recovery.”

Green on the screen this morning as oil and emerging markets rally and the Chinese act to boost lending. Bondsd and MBS are flat.

The ISM manufacturing Index improved to 49.5 from 48.2 last month. Still below 50, which indicates a slowdown, but better than expected. The Markit US Manufacturing PMI came in at 51.3, better than expected.

Construction Spending rose 1.5% in January, much higher than the 0.3% forecast. Public construction drove the increase. Private residential construction was flat for the month.

The turmoil in the financial markets and the global economy have cooled the market’s forecast for further rate hikes. The Fed Funds futures contracts are now forecasting only a 10% chance of a rate hike at the upcoming March meeting and a coin toss for one by December. This is at odds with the last dot graph from the December FOMC meeting, where the median forecast was 1.25% by the end of 2016.

Vehicle sales are coming in strong this morning. Ford Feb sales were up 20%, while Fiat Chrysler sales were up 12% on strong Jeep sales. SUVs were the big gainer overall, as lower gasoline prices entice drivers to switch to bigger cars. Much of this growth is being fueled by cheap credit, however there is so much pent-up demand for new cars (the average age of a car in the US is 11.4 years) that this growth is probably sustainable for the near term and isn’t just a cheap credit story.

Today is Super Tuesday, where 12 states are holding primaries. So far, it looks like Hillary Clinton and Donald Trump will emerge as the winners.

Elmer Fudd warns of “distortions to savings and investment” due to negative interest rates. As the primary architect of the Great United States Housing Bubble, it would have been nice if he had worried about monetary policy-driven distortions to savings and investment say, 15 year ago.

Home prices continue to rise according to CoreLogic. Prices rose 1.3% MOM and are up 6.9% YOY. According to Corelogic, prices remain about 7% below their April 2006 peak. Overvalued markets include many in Texas, Washington DC, and Florida. You can see in the map below, which areas are cheap and expensive (green=cheap, red=expensive).

Markets are higher this morning after the Chinese cut reserve requirements in an effort to stimulate their economy. Bonds and MBS are flattish.

The ISM Milwaukee Index improved to 55.2 from 50.4, while the Chicago Purchasing Manager index fell to 47.6 from 55.6.

Pending Home Sales fell 2.5% in January, according to NAR. A dearth of inventory continues to weigh on the market.

The corporate bond market is having difficulty digesting new issuance. Over the past 12 months, there have been 75 “no go” days, where the primary market was essentially shut. This is higher than the bad old days of 2008-2009. High Yield is even worse, with issuance down 75% year-over-year.

When the stock and bond markets disagree, go with what bonds say. Unsurprisingly, asset managers continue to rotate out of stocks and into bonds.

Warren says don’t worry, be happy. Also the annotated version of the annual letter.

What are the characteristics of houses that sell quickly? Spanish architecture and 1,500-2,000 square feet.

Originator and servicer Walter Investment reported lower than expected earnings this morning and the stock is down about 10%. for 2015, originations were up 36% and the servicing portfolio increased by 4%. In the fourth quarter, origination volume was up 8% YOY.

Walter wasn’t the only company to miss this morning: Ocwen also is down about 11% after missing its quarter. Delinquencies rose to 13.7% from 13.1%.

Markets are getting pounded on the new worry du jour: Brexit. Bonds and MBS are rallying..

Brexit is the threat of the UK leaving the EU. It has implications mainly in the foreign exchange markets, but if the markets need something to worry about, well there you go.

Mortgage Applications fell 4.3% last week as purchases rose 2.2% and refis fell 7.7%. The spike in rates last week killed the refis.

New Home Sales continue to disappoint. Sales fell in January to 494k from 544k in December. For whatever reason, homebuilders continue to hold back production and rely in price hikes to move the top line.

Regardless, people are still optimistic about the housing sector going forward. Toll Brothers mentioned that a dearth of skilled labor is an issue. Interestingly, average selling prices on signed contracts are falling for them in some areas of the country (the Mid-Atlantic and the South) and are flat in the West. Their urban luxury apartment sector was where all the ASP growth was. Perhaps the builders have pushed price hikes about as far as they can and now buyers are beginning to balk.

Donald Trump performed well in the Nevada caucuses, easily beating Ted Cruz and Marco Rubio.