All Things in Moderation

Markets are flattish after initial jobless claims came in lower than expected and import prices rose. Bonds and MBS are up small.

Stocks and bonds took off on the release of the FOMC minutes yesterday. The Fed considered a more explicit commitment to keep rates low until inflation reaches their target. This additional hurdle for raising rates cheered the markets and stocks went out on their highs. “A few” members (probably Plosser) thought the Fed Funds rate should increase soon, but the rest of the Committee disagreed, saying that the evidence the hawks cited was inappropriate to focus on at the zero bound. The takeaway is that the forecast of a June 2015 rate hike is looking more and more like an outlier and if inflation stays below the target rate of 2%, the Fed may consider holding rates at zero until inflation its 2%. Which, if China indeed hits the wall and its real estate bubble bursts, could be a long time. Start thinking about where the next bubble is going to be.

Remember Greece? The fiscal ne’er-do-well of Europe that got cut off from the bond market? Well, guess what? They just raised 4 billion euros of 5 year paper, with a bid to cover ratio of 5:1. The rate they paid? 4.75%. People have such short memories….. Or it is just the fact that since rates are so low, people have to reach for yield. Either way, once rates start going up, it is going to be a bumpy ride, IMO.

One other point about Greece – they did clean up its public spending issues a bit and trimmed its debt (the dreaded austerity that liberal economists love to hate). That is the difference between not being able to finance your government at all and being able to borrow at under 5%. Note to Paul Krugman. The bond market always gets the last word. Always.

Unintended consequence of Dodd-Frank? Turning non-judicial states into judicial ones anyway. Lenders are choosing to go through the court process, even if it takes more time, in order to reduce the potential liability under the new foreclosure laws (especially in states like California).

The CFPB is holding a forum on the mortgage closing process on April 23. It will be livestreamed on their site. Find out what sins we are apparently committing in the closing process.

Stocks are up on no real news. Bonds and MBS are down. Alcoa kicked off earnings season last night with better than expected EPS.

Mortgage applications fell 1.6% last week. Purchases rose 2.7% but refis fell 4.9%. Refis are now roughly half of all mortgages after being over 60% not too long ago. The 30 year fixed rate mortgage was unch’d during the week.

Later on today, we will get the minutes from the March FOMC meeting. There could be some volatility in the bond market around this release, so be careful. The street will be looking for the color on the “as soon as six months” statement – is it just one lone hawk who thinks we could start tightening in just over a year, or do other voting members share that sentiment?

Mortgage credit availability expanded in March, according to the MBA. Availability is expanding in the jumbo space. While credit availability is better than a year ago, we are still far away from any sense of normalcy, let along the go-go days of 2005-2007. The fact that the availability in credit is really only expanding in the jumbo space must be giving the CRA junkies in Washington conniptions.

Good backgrounder on the non-bank servicers. The pace of growth of the non-bank servicing sector is “scaring regulators, who see it as a threat to their four-year effort to improve how banks handle loans in default.” Hence NYS AG Eric Schneiderman has blocked a MSR deal between Wells and Ocwen. Not sure why the New York State Attorney General thinks banking regulation is his bailiwick, but I guess he is following the model Spitzer used – bash the financial sector all the way to the Governor’s Mansion.

Speaking of banks, it looks like they are going to need to raise $68 billion in capital to meet stricter standards, although most banks will likely meet the new standards by retaining earnings or restructuring some assets. We will hear from Wells and JP Morgan later this week.

Stocks are flat after a rough couple of days for stocks. Bonds and MBS are flat

 

Small Business turned slightly more optimistic in March, according to the NFIB. Expected increases in sales and inventories drove the increase. That said, plans to increase hiring fell. That said, small business did add more workers in March (an average of .18) than they did in February (an average of .11). Half of the respondents hired or tried to hire in the past three months, and 41% reported few or no qualified applications for open positions. Skilled trades are in short supply, and pretty much all of the homebuilders have noted the same thing on their conference calls. We are starting to see salary increases for the most in-demand workers. For the rest of us, any increased compensation is being eaten up by increased benefits expense. 

 

The National Association of Homebuilders reported that the recovery continues to spread. Nationwide, we are operating at 88% of normal economic and housing activity. Unsurprisingly, the most activity is in the energy patch, with Baton Rouge, Oklahoma City, and Houston topping the list. Encouragingly, stronger employment numbers seem to be driving the increase. 

 

The latest HUD Housing Scorecard is out, if anyone cares about the Administration or HARP / HAMP.

 

The left is revolting over the effort to overhaul the GSEs. They want more low-income lending mandates. Of course, if the bill becomes larded with social engineering mandates, Republicans will vote against it. The problem is that the left simply does not believe that affordable lending mandates had anything to do with the housing bubble. Of course if one looks at the severities in CRA areas, it is obvious that it did. How many abandoned houses worth ten grand have $100,000 mortgages on them in places like Detroit, Harrisburg, San Bernardino, etc. That is CRA ground zero. This may be one area where the two viewpoints of what happened from 2000 – 2008 are irreconcilably different. Wall Street Sharpies caused the bubble! Social Engineering caused the bubble! Both viewpoints go to the core of what the different parties believe and no one is going to convince the other of anything. Meanwhile, the taxpayer backstops 90% of all new origination…. Ask who is happiest with the status quo and you’ll be able to see who drives the hardest bargain.

 

This week is a light one data-wise, with only the FOMC minutes (which will be released on Wed) as a potential catalyst. The market will be parsing the minutes looking for more color around the “as soon as six months” comment. 

 

This week starts off earnings season, and we will hear from JP Morgan and Wells late in the week. We will probably see poor mortgage banking numbers out of both (although Wells is very aggressive these days bidding paper). 

 

According to Black Knight Financial Services, monthly origination volume is the lowest on record. The government’s share of originations has fallen due to a sharp drop in HARP loans. There is very little origination activity happening in the lowest credit score buckets.

 

Stocks are higher after an okay jobs report. Bonds and MBS are rallying

 

Nonfarm payrolls rose 192k in March, slightly behind the 200k estimate. February was revised upward to 197k from 175k. The ADP Jobs report was spot on, for once with their estimate of 191k. The unemployment rate was unchd at 6.7% and the labor force participation rate rose to 63.2%. Average hourly earnings were flat, while average weekly hours increased to 34.5. So overall, it is an okay jobs report, nothing great, but nothing terrible either. Par for the course these days. 

 

Separately, outplacement firm Challenger, Gray, and Christmas reported that announced job cuts fell 30% in March, making the first quarter the lowest in announced job cuts in 20 years. Announced job cuts are dropping, and the ISM reports show employment plans are increasing. 

 

Smallish homebuilder Beazer Homes gave an update yesterday. Orders are down 9%, while backlog is down 2%. Orders on the West Coast dropped 16%. It appears prices simply moved to far too fast out there. 

 

James Lockhart, former regulator for Fan and Fred says the stocks are worthless. At this point, they are litigation lottery tickets. 

Markets are flattish after initial jobless claims jumped to 326k. Bonds and MBS are up small.

Challenger and Gray reported that announced jobs cuts are down 30% from a year ago. Most businesses seem to be picking up, and the financial industry has already downsized for the brave new no refi world.

The consensus seems to be that the Fed starts hiking rates in late 2015. What could delay it? Well, another recession here, which doesn’t seem to be in the cards. Or, a China implosion, and it looks like the smart money (Soros, Chanos etc) are betting on one. China has been growing so fast for so long, that it pretty much seems inevitable. It seems like periods of rapid growth foment real estate bubbles and a mountain of debt, which seem to culminate in a violent crash (called the Minsky Moment). We had one in the 1930s after a period of rapid growth post WWI, Japan had theirs in 1989 after a great two-decade run in the 70s and 80s, and China has had an incredible run since Mao Zedong’s death.

If China has their Minsky moment, what will be the fallout? The biggest one, IMO, will be a collapse of commodity prices. Second, China will try and export their way out of the collapse. Finally, they may end up dumping their properties in the US and Canada. We could see some pricing pressures at the high end of the market (remember in crises, you sell what you can, not necessarily what you want to). None of this would be inflationary, in fact China will be exporting deflation. This will give the Fed conniptions as they hope the US economy strengthens enough to reach escape velocity from a global deflationary spiral. In other words, if China hits the wall, the Fed will be very reticent to raise rates.

There were 43,000 completed foreclosures in Feb 2014, down 15% year over year, according to CoreLogic. The foreclosure inventory is down to 752k homes down 35% from a year ago. The judicial states (primarily FL, NY, and NJ) still have the biggest foreclosure percentages.

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

Mortgage Applications fell 1.2% last week. Purchases were up slightly, but refis fell.

The ADP Employment Change is forecasting 191k nonfarm payrolls this Friday. This has not been a very accurate predictor as of late, so take it with a grain of salt. Estimates are all over the board, with some as low as 100k and some as high as 275k. A lot of it will be due to weather, and the big question will be whether we had some pent-up hiring demand that got caught up in March.

Ellie Mae’s Encompass system went down for 24 hours yesterday. Apparently it was some sort of malicious attack. Things seem to be back on track, though. Lots of originators were unable to close loans yesterday. Imagine if it had happened a day earlier – end of the month and end of the quarter.

Markets are higher after some decent economic data out of Europe. Bonds and MBS are down small.

The ISM Manufacturing Index rose to 53.7 from 53.2. While new orders rose slightly, the production index jumped from 48.2 to 55.9. The snippets from various business owners seem to agree that the first quarter is looking good, and that things are accelerating. If you annualize out the March reading of 53.7, it would correspond to a GDP growth rate of 3.5%. Of course manufacturing isn’t the entire economy, but it shows that there is at least one part that is working. Senator Barbara Boxer noted the nascent manufacturing boom and said that the U.S. needs to ensure an adequate supply of affordable energy in order to entice companies to re-locate production back to the U.S. “While everyone would like to see alternative energy companies prosper, we have to recognize that coal and natural gas will remain the mainstay of U.S. energy and we are shooting ourselves in the foot if we raise fossil fuel prices in order to encourage more green energy.”

February construction data is out, and it looks like it rose .1% month-over-month from January and is up 8.7% year-over-year. Private construction is up 13% year-over year, while public construction was flat. Residential construction was up 13.5%. Nobel Laureate Paul Krugman noted in his blog that private construction seems to be doing just fine and there is no need to push up public construction as it would only add to inflationary pressures.

Domestic vehicle sales are out today, with both Ford and Chrysler noting a bounce mid-March. GM was unable to release their March sales numbers due to a computer problem. Separately, GM CEO Mary Barra will be testifying before the House at 2:00 pm today regarding the recall issue. Representative Henry Waxman said that “The botched roll-out of the Affordable Care Act shows that mistakes will happen and perhaps the government should have a little humility before it second-guesses everything a company does.”

House prices rose 12.2% in February, according to CoreLogic. House Prices remain just under 17% lower than their peak in April 2006. Price Appreciation has been driven by limited inventory, and CoreLogic expects prices to moderate over the coming year as increases in home equity releases pent-up supply. That said, there is still the small matter of the first time homebuyer who remains MIA. Separately, Janet Yellen mused that the Fed may have kept rates too low too long which could have been a contributing factor to the real estate bubble. “It may be time to take a second look at the dual mandate” she said.

We are beginning earnings season next week and it looks like weather will be the excuse du jour over why companies missed their earnings targets. GM, McDonalds, and FedEx already warned, blaming the weather. Amazon.com CEO Jeff Bezos reaffirmed the company’s commitment to margin expansion over revenue growth at a recent Morgan Stanley retail conference. “You can’t make it up on volume” he reportedly said.

Feels like a little end-of-quarter window dressing as the SPUs are up 11 points on no real news. (No, a strong ISM Milwaukee report doesn’t count). Bonds are getting hit as well. 

 

The ISM Milwaukee report jumped from 48.6 in February to 56 in March. New Orders and production rose 19 points. Could this be a weather-related rebound? Perhaps. However, note that we are starting to see other data points (Kansas City Fed) showing that the Midwest may be waking up. 

 

Lots of important data this week, starting with the ISM and construction spending tomorrow. Then on Friday we get the jobs report. The Street is at 200k nonfarm payrolls, and an unemployment rate of 6.6%. Given the “six months” number thrown out by Janet Yellen, we could start to see the jobs reports begin to matter again for bonds, where a strong reports will be very bearish.

 

Following on that theme, investors pulled $10.3 billion out of bond ETFs in March, the biggest liquidation since December 2010. If the economy is in fact picking up some steam, then the bond market is about to become a very treacherous place. 

Stock markets in the US are following overseas markets higher. Bonds and MBS are flat

 

Personal Income and Personal Spending rose .3% month over month in February. January’s spending number was revised down. The core personal consumption expenditure growth rate was 1.1% annualized, showing inflation remains tame and gives the Fed leeway to keep interest rates low. For all the talk about “six months” and “considerable time” don’t forget that this Fed takes the dual mandate seriously and believes inflation can be too low. If inflation remains around 1%, they will want to pursue policies to push it closer to 2%. The Fed has been trying to create inflation for six years and the numbers remain stubbornly low. 

 

Note that in response to recent data, Barclays has trimmed its estimate for Q1 GDP to 2% from 2.4%. 

 

The latest CoreLogic Market Pulse is out, with a couple of good articles. First, it discusses how housing affordability differs between first time homebuyers and buyers with an existing home. Affordability has been declining, but it has been declining more for first time homebuyers, which may partially explain why the first time homebuyer remains on the sidelines. Until they return to the market, we are going to have this sort of abnormal market, IMO. 

 

Foreclosure inventory is down 31% nationally from a year ago to about 837,000 homes. or about 2.1% of all homes with a mortgage. In states like California, professional investors snapped up the foreclosure inventory and at this point supply is constrained and prices are rising. Not so in the Northeast, where very little progress has been made on the foreclosure inventory, and unsurprisingly prices have barely budged.