Morning Report: Wages increasing at the low end of the scale 7/21/17

Vital Statistics:

Last Change
S&P Futures 2470.8 -0.8
Eurostoxx Index 382.4 -1.6
Oil (WTI) 46.6 -0.4
US dollar index 86.7 0.2
10 Year Govt Bond Yield 2.25%
Current Coupon Fannie Mae TBA 103.31
Current Coupon Ginnie Mae TBA 104.375
30 Year Fixed Rate Mortgage 3.96

Stocks are flat this morning on another Summer Friday. Bonds and MBS are flat.

Should be a dull day as much of the mortgage business is at the Western Secondary conference, there is no data or Fed-Speak, and the rest of the Street will be on the LIE by noon.

What states still have the highest foreclosure issues? New Jersey is the worst, with 1% of all homes in some state of foreclosure. They are followed by DE. MD, IL, CT, NV, FL, SC, OH, and NM. Note there isn’t a lot of overlap between these areas and the best places to start a business.

Republicans in Congress plan to use the Congressional Review Act to overturn the Obama-era CFPB ruling that eliminates mandatory arbitration. The left wanted to overturn mandatory arbitration in order to make it easier to use class-action lawsuits to attack what it considers bad corporate behavior. The right worries that it will restrict credit, and amount to nothing more than a sop to the trial lawyers lobby.

Are we beginning to see the stirrings of wage inflation” Certainly at the low end of the wage scale we are. We are also starting to see wage inflation at the high end, where there are shortages of skilled labor. The middle is still lumbering along at 2.5% wage growth or so – better than inflation, but not all that satisfying. Especially since rental costs are outpacing inflation due to tightness in the real estate market. I have said this before: getting housing starts up fixed two major problems: lack of middle class jobs and a tight real estate market. Both would go a long way towards making the economy feel better.

Further to the above, Axios has a cool moving graph that demonstrates the malaise in the jobs market over the past decade. It plots the number of jobs on the vertical axis and wages on the horizontal axis. You can see in some professions where both the number and the wages have been falling.

Morning Report: What is the shape of the yield curve telling us? 7/20/17

Vital Statistics:

Last Change
S&P Futures 2475.8 4.3
Eurostoxx Index 387.3 1.8
Oil (WTI) 47.4 0.3
US dollar index 87.2 0.2
10 Year Govt Bond Yield 2.26%
Current Coupon Fannie Mae TBA 103.31
Current Coupon Ginnie Mae TBA 104.375
30 Year Fixed Rate Mortgage 3.96

Stocks are up this morning as global central banks remain easy. Bonds and MBS are up small.

The Index of Leading Economic Indicators jumped 0.6% in June, which is forecasting an acceleration in the economy going forward.

Initial Jobless claims fell to 233k, which is a 9 week low. The last time we were at similar levels was the early 1970s, when the Vietnam War was still raging. I have plotted initial jobless claims (left axis) versus wage inflation (right axis). You can see the inverse correlation, and it also suggests that with claims this low, we should be seeing wage inflation. Of course inflation has an influence as well, and the late 60s / 70s were characterized by inflation. However, pressures seem to be building, and we are seeing wage inflation at the lowest end of the spectrum – low wage workers.

initial jobless claims vs wage inflation

Bill Gross looks at the shape of the yield curve and warns investors not to read too much into it, since the curve is being manipulated by central bankers worldwide. The chart below shows the difference in yield between the 10 year bond and the 3 month T-bill. That difference has historically been somewhat predictive of recessions, especially when it has inverted. While the current spread is nowhere near zero, the trend is certainly heading that way. Does that mean a recession is imminent? His point is that we are really in an apples-to-oranges comparison with QE. Global central bank buying of sovereign debt is pushing that spread downward, and the relevant question is where would the yield curve be without the Fed’s (and other global central banks’) buying?

yield curve

He does make the point that Corporate America is more leveraged than before, however with rates so low, the debt service (actual interest paid) is much less than it was historically. You see that in households too. Total debt has risen past the old highs, however the debt service (interest paid as a percent of disposable income) is close to the lows.

The NYC luxury real estate market is soft, and many luxury sellers in Greenwich, CT are pulling the plug on sales. Of the homes in this market ($4.5 million+) days on market was 319, up by over 100 days. Some sellers have had to cut their price by 60% to entice a buyer. FWIW, I see very little building in this area of the country – only a handful of spec homes have been built, and they haven’t sold yet.

Morning Report: Housing starts rebound 7/19/17

Vital Statistics:

Last Change
S&P Futures 2459.5 1.8
Eurostoxx Index 384.1 1.5
Oil (WTI) 46.5 0.0
US dollar index 86.9 -0.4
10 Year Govt Bond Yield 2.27%
Current Coupon Fannie Mae TBA 103.31
Current Coupon Ginnie Mae TBA 104.375
30 Year Fixed Rate Mortgage 3.96

Stocks are higher this morning as the ECB starts its two day meeting. Bonds and MBS are flat.

Bonds staged a strong rally yesterday after the Senate was unable to repeal and replace Obamacare. Obamacare repeal was to be the source of funds for infrastructure spend and tax reform, and this failure largely means the rest of the Trump reflation trade is pretty much dead.

Mortgage applications rose by 6.3% last week as purchases rose 1% and refis rose 13%. Treasury yields fell last week on dovish comments by Janet Yellen.

Housing starts rose to 1.22MM and building permits rose to 1.25 million. Starts were up 8.3% MOM and 2.1% YOY. Activity rebounded in the Northeast and the Midwest while falling in the South. The West was unchanged. This is a strong rebound after a terrible May. Tariffs on framing lumber are increasing home construction costs, just as the first time buyer re-enters the housing market. Historically starts have averaged around 1.5 million a year, which largely explains the current housing shortage. In reality, we should be closer to 2 million a year, which is typical for a post-recession rebound.

CNBC discusses the pros and cons of a 30 year mortgage versus a 15 year mortgage. Yes, the payments on a 30 year will be lower, but the interest paid over the life of the loan will be much higher. One thing worth remembering: you tend to get a decent drop in rate for moving from a conforming 30 year to a 15 year. That pickup is much, much smaller on a FHA or VA loan, due to the illiquidity of 15 year TBA. The one thing the article doesn’t really touch on is inflation. US Treasuries are priced as if inflation is never, ever coming back – if you are buying Treasuries at 2.27%, you are really betting that “this time is different,” which are the 4 most dangerous words in investing. If you can borrow money for 30 years at under 4%, you will almost assuredly see inflation running hotter than that at some point during the mortgage’s life. The world’s central bankers are on a mission to create inflation. Eventually they will succeed.

Morning Report: Obamacare repeal and Trump reflation trade dead 7/18/17

Vital Statistics:

Last Change
S&P Futures 2456.5 -2.0
Eurostoxx Index 383.9 -3.0
Oil (WTI) 46.0 0.0
US dollar index 87.0 -0.4
10 Year Govt Bond Yield 2.31%
Current Coupon Fannie Mae TBA 103.31
Current Coupon Ginnie Mae TBA 104.375
30 Year Fixed Rate Mortgage 3.96

Stocks are lower this morning after healthcare reform fails. Bonds and MBS are up small.

We are in the summer doldrums, with not much in the way of news or movement. Monday was so dull it felt like a 3 day weekend in the markets.

Obamacare repeal (and the lower spending that ensued) was going to be the source of funds for infrastructure spend and tax reform. So that pretty much sticks a fork in the Trump reflation trade. This should send rates lower, at the margin. Don’t forget the 10 year was trading below 1.9% before the election. Economists now see an even risk of overshooting and undershooting their GDP forecasts, the highest since the election.

The Fed Funds futures aren’t really reacting to the news yet, with September futures pricing in only an 8% chance of a hike and the Dec futures pricing in a 47% chance of a hike.

The Senate is considering a last-ditch attempt to simply repeal Obamacare without a replacement and then try and create a healthcare plan from scratch.

Import prices fell 0.2% in June and are up 1.5% YOY. Export prices are down 0.2% as well and up 0.6% YOY.

Homebuilder confidence slipped in July, according to the NAHB. “Our members are telling us they are growing increasingly concerned over rising material prices, particularly lumber,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas. “This is hurting housing affordability even as consumer interest in the new-home market remains strong.”

The House Appropriations Committee approved a bill to reform the CFPB. The biggest change will be to bring the agency under the normal appropriations umbrella, although there will be language regarding payday lending and mandatory arbitration.

Morning Report: Retail Sales disappoint 7/17/17

Vital Statistics:

Last Change
S&P Futures 2457.0 2.0
Eurostoxx Index 387.2 0.4
Oil (WTI) 46.5 0.0
US dollar index 87.3 -0.1
10 Year Govt Bond Yield 2.30%
Current Coupon Fannie Mae TBA 102.625
Current Coupon Ginnie Mae TBA 103.59
30 Year Fixed Rate Mortgage 3.96

Stocks are higher this morning after a strong GDP report out of China. Bonds and MBS are up.

There isn’t much in the way of market-moving events this week with a sparse economic calendar and the Fed is in the quiet period ahead of their FOMC meeting next week.

Inflation at the consumer level remains below the Fed’s target as the consumer price index was flat MOM and up 1.6% YOY. Ex-food and energy, it was up 0.1% MOM and 1.7% YOY.

Retail sales disappointed, falling 0.2% MOM. The prior month was revised upward however from a drop of 0.3% to a drop of 0.1%. The Street was looking for 0.1% gain. The control group fell 0.1% versus expectations of a 0.4% gain.

Industrial production rose 0.4% MOM while manufacturing production rose 0.2% and capacity utilization ticked up to 76.6%. Improvements in the mining sector accounted for the rise.

Business inventories rose 0.3% as autos increased. Inventory will amount to a slight positive in the Q2 GDP report. The inventory-to-sales ratio is at 1.38, which is elevated compared to historical norms and would ordinarily be associated with a downturn in the economy.

The Empire State Manufacturing Survey fell to 9.8 last month, but is still reasonably strong.

Earnings season gets into full gear this week, with a lot of the big banks reporting.

Wells Fargo reported better-than-expected earnings last week. The stock was down about 2% on the news, despite the earnings beat as improvements in credit quality were offset by high expenses. Mortgage origination was down 11% YOY to $56 billion, while applications fell 13% and the size of their pipeline fell 28%. Nonconforming loans rose by $7.3 billion, while second mortgages fell. Mortgage banking revenues fell 19%, however which indicates margin compression.

Mortgage banking revenues at JP Morgan and Citi also fell by 26% and 52% respectively.

Defaults are soaring for subprime auto loans, as the sector has hit new post-crisis highs. While subprime auto loans are not going to have the impact on the economy that subprime mortgages did, this is a tell that all is not necessarily well in consumer-lending land. Despite the aggressive underwriting in auto loans, mortgage credit remains tight as a drum. The auto loan issue is yet another one of the unintended consequences of Fed policy: many of the biggest investors in this sort of paper are pension funds, insurance companies, etc, who have to hit a return bogey and cannot earn enough in government and investment grade paper to meet their actuarial obligations. Many of the state pension funds are solvent only if you squint at the asset return assumptions.

Mortgage credit eased a touch in June, according the the MBA Mortgage Credit Availability Index. Conforming and non-conforming credit eased while government credit tightened.

Morning Report: More Yellen testimony 7/13/17

Vital Statistics:

Last Change
S&P Futures 2443.0 3.0
Eurostoxx Index 386.4 1.5
Oil (WTI) 45.5 0.0
US dollar index 87.9 -0.1
10 Year Govt Bond Yield 2.33%
Current Coupon Fannie Mae TBA 102.625
Current Coupon Ginnie Mae TBA 103.59
30 Year Fixed Rate Mortgage 4.03

Stocks are flattish as Janet Yellen begins her second day of testimony in front of Congress. Bonds and MBS are flat.

Initial Jobless Claims fell to 247k last week, showing that employers are hanging on to employees.

Inflation still remains in check at the wholesale level, as the producer price index rose only 0.1% in June. Ex-food and energy it rose 1.9% YOY, which is below the Fed’s target. Services increased 0.3%, which could indicate wage growth is beginning to happen.

The markets rallied yesterday on Janet Yellen’s dovish comments. Fed-Watcher Tim Duy believes the markets have it wrong. His view is that Yellen has spent enough time at the Fed to understand that the longer the Fed waits to address inflation, the more aggressive they will need to be, which increases the risk of a recession. He basically lays out four scenarios:

  • Inflation rebounds while unemployment remains steady, which is the base case Fed scenario
  • Inflation remains low while unemployment holds steady. This is the market’s bet.
  • Inflation rebounds while unemployment goes lower: This would mean a more aggressive Fed in 2018
  • Inflation remains low while unemployment goes lower: Difficult for the Fed.

His view is that we see one of the latter two scenarios. FWIW, I think the unemployment rate is a bit of a red herring given that the employment to population ratio is still pretty low. Granted, some of that is demographic (older Boomers retiring) and some of it is discouraged workers, but a 4.5% unemployment rate today doesn’t really mean the same thing it meant, say, 20 years ago. I think the mistake people make is that they fail to recognize that recoveries after burst residential real estate bubbles are fundamentally different animals, characterized by low inflation, weak demand, and risk aversion in business. Weak demand and risk aversion are not recipes for inflation. I suspect the second or the fourth scenario is the most likely. IMO, we won’t see inflation until we see wage growth, and that has been slow to materialize.

Angel Oak Advisors priced a $210 million deal of non-prime residential mortgages recently, and it looks like the second quarter may break $1 billion in non-prime RMBS. This is a record since the financial crisis, but is still a shadow of its former self. At one point during the boom, 1/3 of all mortgages were alt-A or subprime. Even if we hit a record for the rest of the year, we probably won’t even sniff 5%. In fact, many of the loans being put in these securitizations wouldn’t have even been considered non-prime during the bubble years. These loans are non-QM, and mainly consist of two types of  borrowers: self-employed who don’t have enough W2 income and borrowers with a credit event in the past who have large down payments. The borrowers in Angel Oak’s portfolio are paying between 5% and 9%.

Why do appraisals sometimes come in low?  Typically, the problem is in apples-to-oranges comps (i.e. not in the neighborhood, or comps that had an issue like asbestos, mold, etc). The other big issue surrounds things that have value, but tend to get short shrift with appraisers: things like a nice finished basement, a good view, nice appliances, etc. Raised ranch homes are often problematic, as the lower level gets completely excluded from the square footage, basically cutting your square footage in half.

Morning Report: Janet Yellen’s remarks spark a rally 7/12/17

Vital Statistics:

Last Change
S&P Futures 2435.3 11.0
Eurostoxx Index 382.2 3.0
Oil (WTI) 45.7 0.7
US dollar index 88.1 -0.1
10 Year Govt Bond Yield 2.31%
Current Coupon Fannie Mae TBA 103.31
Current Coupon Ginnie Mae TBA 104.375
30 Year Fixed Rate Mortgage 4.03

Stocks and bonds are sporting their rally caps on Janet Yellen’s prepared testimony in front of Congress.

The big event of the day will be Janet Yellen’s semiannual testimony in front of the House Financial Services Committee. Expect the focus to be on the tightness of the labor market and why we have yet to see any real wage inflation. Both sides will also try and get her to agree with their viewpoints on banking regulation. Here are her prepared remarks.

The statement that jumped out to me was this: “That expectation is based on our view that the federal funds rate remains somewhat below its neutral level–that is, the level of the federal funds rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel. Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.” That is a dovish statement, and bonds took off, especially the long end of the yield curve. This sentiment was echoed by Lael Brainard as well.

The Fed Funds futures reacted to the remarks by assigning a 91% probability of no move in September and assigning a 53% chance of no move in Decsember. These are about 9-10 basis points higher than they were last week.

Minneapolis Fed President Neel Kashkari is skeptical that the economy is close to overheating, and he believes that wage growth will happen once labor is scarce. The fact that wages aren’t really increasing leads him to believe there is still plenty of slack in the labor market, despite some shortages in certain skills.

Donald Trump Jr. met with a Russian lawyer last year who supposedly had dirt on Hillary Clinton. Turns out the info mainly concerned the Ziffs and was tangentially related to the Clinton Foundation. Interpretation of the gravity of this is predictably falling along partisan lines. PIMCO is warning that this could affect markets since it makes bipartisan consensus less likely in DC, but that ship has sailed. Note stocks went out on their highs yesterday, which indicates the stock market assigns zero import to the latest “bombshell.”

Mortgage Applications fell 7.4% last week as purchases fell 3% and refis fell 13%. The index does include an adjustment for the 4th of July holiday, however many people took off on the Monday prior. Interest rates did rise on the back of a European bond sell-off, which hurt production.

RBS reached a settlement with the FHFA for $5.5 billion related to toxic MBS securities from the go-go days.

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