All Things in Moderation

Markets are flat this morning ahead of a big week for data and events. Bonds and MBS are down.

Industrial Production fell .1% in August, while capacity utilization dropped by 30 basis points to 78.8%. It looks like the notoriously volatile motor vehicle sector accounted for the decline. The previous month had a big increase in motor vehicles, which it looks like we gave back in August.

The Empire Manufacturing Survey came in at 27.5, a multi-year high.

This week we will have the FOMC meeting, with the decision on Wed afternoon. This meeting will include new projections and also should include a press conference. The Street will be focusing on any changes in the rate projections from the voting members (note that the mix of voting members will turn much more dovish at the beginning of 2015).

One of the interesting features of mortgage rates this summer has been the decoupling from long-term bonds. As rates fell during the summer, mortgage rates stayed stuck at the 4.25% range. Now that bonds are selling off, mortgage rates are still relatively constant. Look at the graph below. The top line is the 30 year fixed rate mortgage according to Bankrate, and the lower line is the 10 year bond yield. The correlation has completely broken down.

Markets are flat as we close out a dull week. Bonds and MBS are down amidst a global bond sell-off.

Retail Sales increased .6% in August. Ex autos and gas, they increased .4%. July’s numbers were revised upwards.

Import prices fell .9% in August, driven by a drop in oil prices. Ex food and fuels, import prices were flat.

The preliminary September reading for the University of Michigan Consumer Sentiment indicator showed an increase and hit the high for the past year.

The jumbo securitization market is pretty much dormant, except for the occasional Redwood Trust deal. Only 2.3% of all jumbos originated in the first half of 2014 have been securitized. At the peak of the housing bubble, almost half of all jumbos were securitized. Banks are instead choosing to hold them on their balance sheet. Banks are subsidizing the jumbo mortgage rate in order to bring in the wealthy client and then offer all other sorts of banking services, including the lucrative wealth management business.

Another article about the lowering of the speed limit for the economy. Federal Reserve economists do not expect the labor force participation rate to increased meaningfully as the labor market improves. They argue that the number of people who aren’t working, but would work if conditions were better are relatively small. The upshot is that this paper bolsters the hawk case at the Fed and is ammo for those who want to start raising rates. Not sure dove Yellen will play along, and the voting members will take a dovish turn next year as hawks like Plosser lose their vote.

Markets are higher this morning on on real news. Bonds and MBS are rallying.

Initial Jobless Claims came in at 315k, a little higher than street expectations, but still a good number.

The President talked about ISIS last night. It was a declaration of war. Or something. Here are the takeaways.

The Fannie Mae National Housing Survey is out – average home price expectations continue to fall as consumers temper their bullishness on home price appreciation. People still have a dour view on the economy but it is improving slightly. That said, it looks like incomes took a bit of a hit in August.

Bill Gross of PIMCO has been raising cash in his Total Return Fund, selling Treasuries and developed sovereigns. Mortgages as a percent stayed flat at 20%.

Twitter is doing a new convertible bond which are convertible into stock or cash at Twitter’s election. This is rare – usually the choice is the bondholder’s not the issuer’s, at least on senior unsecured paper. This isn’t a convertible pref issue. It will be interesting to see the pricing on this – essentially the holder will be short a put on Twitter stock. If Twitter’s stock craters, Twitter gets to essentially sell stock at current levels. If Twitter stock continues to rally, they can either pay cash, or sell Twitter stock in the market at higher prices, redeem the bonds and pocket the difference between the sales price and the conversion price. The bigger point is that bond issues are getting more and more lopsided in favor of the borrower, and that is a classic market top signal. Investors are reaching for yield and taking risks they are not getting adequately compensated for. Paper like this can go no-bid in a hurry. IMO, the stock market is assuming that the Fed can start raising rates without anyone blowing up. Historically that hasn’t happened.

Foreclosure activity picked up in August, according to RealtyTrac. Activity picked up in the big judicial states like New York, New Jersey, and Connecticut.

Stocks are lower this morning on no real news. Bonds and MBS are down as European bonds sell off.

Mortgage Applications fell 7.2% last week as we had the Labor Day holiday and rates backed up. Purchases fell 2.6% while refis fell 10.7%. Refis accounted for 55.4% of all loans. The refi index just hit its lows for the year, even though rates have fallen almost 50 basis points. This effect is called prepayment burnout, and it is due to the fact that anyone that has been able to refinance already has. The driver of refis going forward will be home price appreciation, not rates.

On the plus side, all-cash transactions are down to a six year low.  Cash sales fell to 33% of total home sales in June, down from 36.3% a year ago.

Stocks are flat on no real news. Bonds continue their post-ECB retreat.

Consumer credit increased 9.7% year over year in July, according to the Fed. Note this does not include mortgages. Revolving debt increased 7.4%, while non-revolving debt increased 10.6%.

Job openings remained steady at 4.7 million in July, which is the highest level since 2001. So why does the labor market stink? People don’t have the skills employers demand.

Small business optimism increased by .4 in August to reach 96.1, the second highest reading since October 2007. Expectations are still glum, however as the majority of small business owners think conditions will be worse in six months. NFIB owners increased employment by an average of 0.02 workers (basically flat), however it was the eleventh positive month in a row. Earnings trends improved 1 point to -17. This statistic shows the stark contrast between the big S&P 500 names (which have a lot of international exposure) versus Main Street Small Business. Reading the report, you wouldn’t guess the S&P 500 is at record highs.

Consumers continue to temper their expectations for home price appreciation, according to the Fannie Mae National Housing Survey. Consumers expect an average 12 month appreciation of 2.1% going forward. 42% of respondents thing house prices will increase, 45% expect them to stay the same, and 9% expect them to fall. 23% said their household income was significantly higher than it was a year ago (a drop from 28% last month), while 15% said their income was significantly lower than it was a year ago (an increase from 12% last month). So regardless of what the consumer sentiment surveys say, things are not necessarily getting better for the average homeowner.

Slow news day. The week following the jobs report always has a dearth of data, so there isn’t much on the economic front to talk about.

We will get consumer credit out of the Fed sometime this afternoon.

Why is credit so tight for first time homebuyers and people with low FICOs? Ask Washington. It seems like the authorities are now forcing buybacks and fines over relatively minor errors, and as a result, lenders are refusing to extend credit to low-income / low FICO borrowers. Of course the Administration continues to exhort the industry to loosen standards at the same time it announces record settlements.

A majority of primary dealers see the first rate hike in the second quarter of 2015. The median forecast for the Fed Funds rate at the end of 2015 is 1% and 2.5% for the end of 2016.

Hawk Charles Plosser says that keeping rates near zero until the Fed’s goals are achieved is a risky strategy.

Markets are lower after a lousy jobs report. Bonds and MBS are up.

The jobs report came in surprisingly weak. Payrolls increased 142k in August, while the Street was expecting to see 230k. The two-month revision was -28k. Unemployment ticked down to 6.1%, however the labor force participation rate dropped back to its lows at 62.8%. Average Hourly Earnings rose .2% and the workweek was flat at 34.5 hours. Overall, a very disappointing report that doesn’t really comport with some of the other data we have been seeing (like the ISM which has been super strong). I wouldn’t be surprised to see this report revised upward (for the record, August reports are notorious for big revisions), but for the moment, there it is.

Demographically, it looks like the biggest growth was in the 25-35 year old cohort, which is what we need to see in order to bring back the first time homebuyer. Interestingly we saw a bit of growth in the 55+ age bracket.

Minneapolis Fed President Kocherlakota believes the Fed should be doing more, not less to stimulate the economy. He says that “interest rates are not low enough….Given where we are with inflation, I think that it’s challenging to know why we are removing stimulus from the economy at the rate that we are.” Note that the makeup of the Fed changes every year, and two hawkish voting members – Plosser and Fisher are being replaced by doves Evans and Lockhart. This  will mean one lone hawk, four neutral, and five doves.

Mortgage credit tightened slightly in August, according to the MBA. Credit did ease for 203k loans and construction loans, but overall credit dipped, particularly on the government side.

Markets are higher this morning after the ECB cut rates to 5 basis points and committed to start buying securitized debt and covered bonds in October. Bonds are flat as this decision had been priced in already.

Just something to think about – the “buy the rumor, sell the fact” effect. In other words, the big move for ECB QE was over the past six months, and it wouldn’t be surprising to see a sell-off in sovereigns as the announcement is out of the way and speculative players unwind their positions. Euro sovereigns are driving the US bond market at the moment.

Fun fact, 45% of global sovereign bonds yield under 1% according to Bank of America.

Denmark just cut its deposit rate to negative 5 basis points. They are in the throes of a burst real estate bubble.

The ISM Non-Manufacturing index rose to 59.6, the highest since August 2005. The manufacturing index rose to 59, and would correspond to a GDP growth rate of 5.2%. Of course manufacturing doesn’t have the impact on the US economy it used to, but still….

ADP is forecasting the economy will add 204,000 jobs in August. ADP has been spot-on the last couple months. The Street is forecasting 215k tomorrow.

In other labor market data, announced job cuts fell 21% according to outplacement firm Challenger, Gray and Christmas. Unit Labor Costs fell .1% in the second quarter as productivity rose 2.3%. Finally, initial jobless claims ticked up slightly to 302,000. Initial Jobless Claims levels are back to boom-time levels, and as a percent of the population are back to levels not seen since the late 1960s.

What is holding back wage inflation? Pent-up deflation. As Keynes pointed out, during recessions wages should fall as the demand for labor falls. However, employers are loath to cut pay (a phenomenon called sticky wages) which means that by not cutting wages, employers are overpaying during a recession. As the recovery builds steam, therefore they are not feeling pressure to raise them either. Interesting theory, and one thing the researchers say is that once this runs its course, wages could rise more quickly than economic models suggest as businesses that kept wages low for too long are forced to play catch up. This may in fact be what was behind the language in the FOMC minutes about there being less slack in the labor market than people think. We will see tomorrow with the jobs report. Separately, the average weekly hours worked by a full time employee inched up to 46.7 hours.

Markets are stronger this morning as tensions ease in Ukraine. Bonds and MBS are down small.

The ISM New York Index fell to 57 from 68, while factory orders rose 10.5%.

Luxury builder Toll Brothers reported earnings this morning. The luxury end of the market is doing just fine, with deliveries up 53% in dollars and 36% in units. ASPs increased 12% to 732k. Net signed contracts fell however, and the average price for signed contracts increased only 1.4% year-over-year, Perhaps we have seen the point where buyers are finally balking at higher prices.

Part of the reason why purchases are slipping is due to seasonality, however mortgage rates have not been falling with Treasury rates. The average 30 year fixed rate mortgage has been stuck in the same 4.1% to 4.2% range for the past 3 months, while the 10 year has rallied from 2.6% to 2.34%. The last time rates were this low, the average 30 year fixed rate mortgage was 3.93%. I think there are two things going on here – first I think banks view this move in rates as being driven by overseas events and therefore temporary. Second, I think that lenders are taking more risk than they were a year ago, which means higher rates on average.

Have you noticed that chocolate bars are getting smaller? That your “pint” is no longer a pint at your local watering hole? Welcome to shrinkflation, a state of affairs where companies maintain the same price, but give you a little less. We saw this movie before in the 1970s and 1980s, which was captured quite eloquently in Wendy’s “Where’s the Beef” ad campaign. This actually started in the 1970s, and shows that inflation can take two forms – price increases and quantity (or quality) decreases.

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

Short week, but a lot of important economic data. Today, we get the ISM Manufacturing Survey and Construction Spending. On Thursday, we get the ISM Non-Manufacturing Index, and on Friday, we get the jobs report. Between the data and European events we could have a volatile week for rates.

The ISM Manufacturing Index rose than expected, while the ISM prices paid index dropped. Production and New Orders jumped. Employment ticked down slightly. The production and new orders numbers bode well for 3Q GDP.

Construction spending rose 1.8% month-over-month as residential construction increased .7% and non-residential rose 2.5%. Of private residential construction, 52% was single family construction, 12% was multi-fam, and 36% was home improvement.

The IBD / TIPP Economic Optimism Index rose slightly, but came in a bit light. Note that this Thursday we will be getting same store sales from the retailers and back-to-school shopping numbers. BTS is a good indicator for holiday shopping. We have seen strong consumer sentiment numbers, but so far that hasn’t translated into actual spending.

Euro sovereigns are weaker this morning, which means US Treasuries are weaker. Speculation over whether the ECB will start quantitative easing is going to be driving bonds as much, or even more, than US economic data. Note that hedge funds are getting long Treasuries. It finally happened. People are momentum trading bonds.

Angelo Mozillo has no regrets over what happened with Countrywide. As he puts it: “Countrywide didn’t change. I didn’t change. The world changed.” Compared to other CEOs of that era, Mozillo has not shied away from the public spotlight. The US Attorney’s Office in Los Angeles is suing him now.

Finally, I appeared on Louis Amaya’s Mortgage Markets Today show last week and discussed interest rates and the housing market. The full interview is here.