All Things in Moderation

Markets are up this morning after yesterday’s bloodbath. Bonds and MBS are up.

Initial Jobless Claims ticked up to 284k last week. Import prices fell 1.2% as the dollar rallied, and consumer comfort ticked up a tiny bit last week.

JP Morgan reported good numbers this morning. Mortgage Banking net income fell 21% as revenues fell 10%.

The bursting of the China bubble is going to dominate the markets for the foreseeable future. This will be an epic battle of Mr. Market versus Big Communist Government. With debt at 282% of GDP, China’s economy is more fragile than it appears. This is another reason why long term interest rates are probably not headed much higher for the foreseeable future.

Note that the Chinese stock market is dominated by retail investors, not institutions. This makes their market more volatile. They are pouring money into Chinese government debt (probably a good call), the dollar (another good call) and gold.

Note that in the President’s State of the Union address, housing was basically ignored. The country has an acute shortage of affordable housing, and housing starts are still mired well below historical averages. Getting housing back on track is the difference between 2% GDP and 3% GDP. Unfortunately, the only mention political candidates have regarding housing is that Wall Street is evil, the banks are too big, and there needs to be more government control. Which is most definitely not the way to increase credit or confidence.

Markets are lower again after Chinese markets got slammed down 7% overnight. Bonds and MBS are up small.

Chinese shares fell 7% in the first 30 minutes of trading and the authorities suspended trading for the rest of the day. FWIW, George Soros is comparing what is going on in China with 2008. That probably isn’t far off, given they have a real estate bubble which seems to be bursting as well.

North Korea claimed to have detonated a hydrogen bomb, but the US has so far found no evidence they actually did.

In spite of all the volatility in the markets, we aren’t really seeing much of a bid under Treasuries, or the dollar for that matter. No big flight to safety trade. The market seems to be taking the view that any problems in China will remain contained and won’t affect the Fed’s policy of normalization. Remember, the Fed was going to hike rates in September and chose not to after the late summer sell-off, so overseas markets do matter to them.

The FOMC minutes were generally upbeat yesterday, with the Fed noting the continued improvement in the labor markets, nascent wage inflation, and strong consumer spending, especially autos. Worries included the stress in the high yield markets and weakness in overseas markets. The members are still divided over how much slack remains in the labor markets, and for some the decision to raise rates was a “close call.”  Bonds didn’t react to the release, although they were strong on the day to begin with.

Initial Jobless Claims fell to 277k from 287k the week before. Announced job cuts fell 28% according to outplacement firm Challenger, Gray and Christmas.

Markets are getting slammed as China revalued the yuan at a weaker level than expected. Bonds and MBS are up on the flight to safety trade.

Mortgage Applications fell 11.6% last week as purchases fell 11% and refis fell 12%.

The ADP Employment Change came in at 257k, much better than the 198k Street expectation. Note Friday’s jobs report is forecasting an increase of 200k.

The ISM Non-Manufacturing Index fell to 55.3 from 55.9 last month.

Factory Orders fell 0.2% in November, while durable goods orders were flat. Capital Goods orders (a proxy for business capital expenditures) fell 0.3%.

Fed Vice Chairman Stanley Fischer says that 4 rate hikes this year is “in the ballpark” of what to expect. Note the FOMC minutes are scheduled to be released at 2:00 pm EST today.

Banks are taking down their estimates of Q3 GDP based on the lousy ISM data. Deutsche Bank took down Q4 to 0.5% from 1.5%. The Atlanta Fed took it down to 0.7% from 1.3%.

While inventories and exports are pushing down the GDP data, consumption seems to be turning around. 2015 was the best year for vehicle sales in the US since 2000. While some of that undoubtedly has to do with easy financing (some calling autos the new subprime) most was due to a replacement cycle that was long overdue.

Speaking of autos, GM is inventing in Lyft, the competitor to Uber. This is to have a foothold in the future of summonable driverless cars.

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

The ISM New York ticked up to 62 from 60.7 in December.

House prices rose 0.5% month-over-month and are up 6.3% year-over-year, according to CoreLogic. Home prices remain 7.3% below their April 2006 peak. Note the FHFA House Price Index has recouped its post-bubble losses.

“Dragon tail risk” is the new moniker for China risk. Overnight, the government signaled that restrictions on selling in their stock market will remain in place after they expire this week. Even if the Chinese economy “only” grows 4%, it will have effects on the global economy, particularly Asia. It would probably lop a half of a point worth of GDP from the US as well. UBS gamed out the scenario and they predict it would slow the Fed’s pace of tightening, but not stop it.

The bigger question for China is what happens when their real estate bubble bursts. If that happens, 4% GDP growth may be optimistic. The reverberations will almost certainly be felt in the US real estate market, especially at the high end in the big pricey urban markets like NYC, SF, and Seattle.

After the weak ISM numbers yesterday, the Atlanta Fed took down their estimate for Q4 GDP growth from 1.3% to 0.7%.

Byron Wein’s predictions on 2016: Another down year for the S&P, the 10 year holds below 2.5% and Hillary defeats Ted Cruz. Oil stays in the 30s, and the Fed only hikes once, in March.