All Things in Moderation

• Nonfarm payrolls + 257k
• Two month payroll revision + 147k
• Unemployment rate 5.7% (increase of .1%)
• Average Hourly earnings +.5% MOM
• Average Hourly earnings + 2.2% YOY
• Average Weekly Hours 34.6
• Labor Force Participation rate 62.9% (increase of .2%)
• Underemployment rate 11.3% (increase of .1%)

Markets are higher this morning as Greece and Germany spar over bailouts for the Greek banking system. Bonds and MBS are down.

In economic data, initial jobless claims rose to 278k, higher than expected, but still good. Productivity fell 1.8% while unit labor costs rose 2.7%. Finally the trade deficit increased by $8 billion, dashing hopes for a big upward revision in Q4 GDP.

Uber-dove Boston Fed President Eric Rosengren says they Fed can remain “patient” in terms of raising interest rates, given the deflationary winds from overseas. Rosengren is a non-voting member. Janet Yellen in the Dec FOMC press conference characterized “patient” as “more than two FOMC meetings away). So, if the Fed intends to move at the June meeting, that word will probably be gone in the March statement. Listen to the language of the different Fed heads going forward – if it starts disappearing from prepared statements, etc that fact is telling you something..

Grexit (the name for Greece leaving the Euro) will get a lot of discussion in the press, but it probably won’t happen. Voters in Germany and Greece both support Greece staying in the Euro. Exporters like Germany benefit from the drag Greece (and the rest of the PIIGS) put on the Euro. The issue is that Germany, Finland etc don’t trust the Greek government to make the necessary structural changes without the risk of being booted. In other words, much of what you will hear over the next few months will be posturing ahead of another bailout.

Mel Watt is considering principal mods for underwater borrowers with loans held by FHFA. However, any plan will be “narrow” and will have to be done without incurring costs to the taxpayer. Interestingly, by cutting MI premium and G-fees, he is effectively increasing costs to taxpayers by increasing the chance they have to bail out the fund. Given that we are within 5% of peak levels, according to the FHFA Home Price Index, Mel can probably make this problem disappear by running out the clock. Note that Mel says mass principal forgiveness would cost the government billions. The Congressional Budget Office disagrees that a mass principal forgiveness program would cost anything. Looks like not even the Administration buys that argument…

Standard and Poors agreed to pay $1.5 billion in fines, without admitting wrongdoing. They have been forced to stop saying the suit was in retaliation for their downgrade of US Treasuries. Moody’s – you’re next. Hopefully Mark Zandi said enough nice things about the Administration that you’ll get off easier…

Stocks are higher this morning after the Greek government backed off from the ledge and decided not to restructure their debt. The Greek 10 year is trading at 9.68%, down 126 basis points from yesterday. The German Bund has officially passed the Japanese Government Bond in yield. There is generally a risk-on feel as G7 debt gets sold to buy the PIIGS.

Vehicle sales are coming in strong this morning as we go through an upgrade cycle.

The ISM New York dropped by a lot in January, from 70.8 to 44.5. Factory orders fell 3.4%, but it could be weather-related.

James Bullard is speaking this morning, calling the 10 year yield “astonishingly low” and talking up the US economy.

Construction Spending rose .4% in December, lower than estimates. In his latest budget, Obama proposed a one time tax on overseas earnings to pay for infrastructure spending. Of course this is going to go nowhere as Republicans will only entertain special taxes like this in the context of overall corporate tax reform. Special taxes are going to be traded for lower rates, not stimulus spending.

About 10% of US refining capacity is offline as a union walkout has launched the biggest strike since 1980. Talks have been going on since January 21. The workers want higher wages and to pay less in deductibles and premiums for health care. If the workers get what they want, it could mean that we will finally start seeing wage inflation in the US. Of course the other issue could be wage increases being eaten by rising healthcare costs…

Old merger arbitrage professionals might feel a sense of deja-vu. Office superstores Staples and Office Depot are in talks to combine. This is the second time these two companies tried to merger – the first time was blocked by antitrust regulators in 1997. (The internet? Whats that?)

Banks are easing standards for mortgage loans, however some have noted weaker demand for mortgages linked to purchase activity, according to the Fed’s Senior Loan Officer Survey. This is a strange observation given that the MBA Purchase Index is up about 26% in January…

Agency Mortgage REIT giant American Capital Agency reported earnings yesterday. They have been aggressively moving down-coupon in TBAs, which is one of the big reasons why higher coupon TBAs have underperformed so much on the way down. This means a borrower is going to be somewhat disappointed in the points they receive for going up in rate.

Stocks are lower after Q4 GDP disappoints. Bonds and MBS are up.

Fourth Quarter GDP came in at 2.6%, lower than the 3% estimate from the Street. Consumption came in better than expected, which is a bright spot. Inflation remains nowhere to be found, as the core PCE Index (the inflation measure preferred by the Fed) came up zero.

The Employment Cost Index fell to 0.6% in Q4, matching expectations.

Overseas, rates are lower again. The Great Bund / JGB convergence trade continues, with the spread under 5.5 basis points. On the other side of the coin, Greek yields continue to rise, with the Greek 10 year now yielding 10.8%.

Household formation grew 4x to 1.7 million in Q4 from a year ago. Granted, the vast majority of these are renters, but they probably will buy houses at some point. Think of what 1.7 million housing starts would do for the economy. That is just an indication of how much pent-up demand there is in the housing sector.

The homeownership rate fell to 64% in the fourth quarter, however the lowest since the mid 1990s, when we began this huge experiment in social engineering via housing policy.

So far, we are not seeing much of a slowdown in the energy patch states as a result of lower oil prices. This was echoed by builders Horton and Pulte. Of course it is still early in the game.

Markets are higher after yesterday’s sharp sell-off. Bonds and MBS are flat.

Mortgage Applications fell 3.2% last week as purchases fell .1% and refis fell 5.1%.

There is anecdotal evidence (Redfin and also D.R. Horton) of buyer demand for homes, which bodes well for business this year. The wrinkle is that buyers are highly price sensitive and are not chasing homes, even though rates are lower. Existing home inventory is at 4.4 months, which is well below the mid 5s we have been seeing for years and the mid 6s, which indicates a balanced market.

Mel Watt testified before the House Financial Services Committee yesterday. Here are the prepared remarks. He more or less defended an activist government role in the housing market. On the subject of principal mods for Fannie and Freddie loans, he told the left that the check is in the mail, saying that they are still looking at the best way to serve both homeowners and the government. As the FHFA home price index is within 5% of peak levels already, this problem is melting away over time.

We will have the FOMC decision today around 2:00 pm. Nothing major is expected, as there is no press conference. I suspect any action will be in the minutes, not the statement.

Is the non-QM securitization market finally coming back? Maybe. As if now, non-QM loans are portfolio’d. However some hedge funds are thinking of selling MBS backed by these loans. Of course the big question will be how much overcollateralization the Street will require. High quality jumbos have been having something like a 50% equity tranche. That said, financial repression leads to investors reaching for yield, so this may work.

Markets are down small as a historic snowstorm bears down on the Northeast. Bonds and MBS are up small.

The Northeast is bracing for a historic snowstorm to start today and go through Tuesday night. NYC is expected to get up to 2 feet, while Boston could get close to 3 feet. The evening commute will probably start around noon today, as the National Weather Service has a blizzard warning for the tri state area beginning at 1:00 pm today. Expect to see a touch more volatility in the markets as desks will be understaffed for the next couple of days.

Aside from the snowstorm, we have some important data this week, with the FOMC meeting and also Q4 GDP on Friday. The January FOMC meeting should not have any economic projections and I don’t anticipate anything market moving to come out of the press release, but you never know. The Street is forecasting +3.0% on the advance estimate for Q4 GDP.

Homebuilder D.R. Horton announced better-than-expected earnings this morning. Sales, orders, and backlog are up smartly. Analysts will be most concerned about the Texas housing market. The stock is up a buck as of now. The conference call begins at 10:00 am. Note that both Lennar and KB waited until the conference call to disclose poor Q1 forecasts, so don’t feel the need to lift any Horton quite yet.

Markets are higher this morning after the European Central Bank announced a 1.1 trilllion euro quantitative easing program. Bonds and MBS have been all over the map this morning, but are rallying at the moment.

The ECB QE program will consist of 60 billion euros a month, ending in September 2016. Draghi is walking a fine line here, trying to increase inflation and growth while at the same time mollify German voters that he is coming to the rescue of their Southern brethren. FWIW, I think Germany doth protest too much – their manufacturers have to love seeing the Euro get whacked. Such is the symbiotic relationship of the European monetary union – the profligate Southern European countries get to borrow at lower rates than they otherwise would, and the Northern European exporters get a depressed Euro which makes them more competitive.

The formal announcement was very similar to what was leaked yesterday in terms of amount – 50 billion for 2 years vs 60 billion for 18 months. The markets were looking for something like 500 billion euros in QE, so it is an upside surprise. Bonds are rallying in Europe, with the German Bund challenging its lows of 42 basis points. US Treasuries are being taken along for the ride.

Initial Jobless Claims fell to 307k, but are still the second week above 300k. Good numbers nonetheless. The Bloomberg Consumer Comfort Index slipped to 44.7 from 45.4 last week.

Home Prices rose .8% in November, higher than expected according to the FHFA. On a year-over-year basis, prices are up 5.3% and are within 4.5% of their April 2007 peak. On a seasonally adjusted basis, New England was negative while the West Coast was highly positive. Note that the FHFA Home Price Index only looks at houses with conforming mortgages, which makes it a subset of the overall real estate market.