All Things in Moderation

Initial Jobless Claims fell to 267k last week, while consumer comfort dipped slightly.

Mortgage Applications rose 2.7% last week as purchases fell 2.4% and refis rose 6.8%.

We will get the FOMC minutes later today at 2:00 pm EST. Given the big move downward in rates over the past couple of weeks, look for a rebound in rates if the minutes aren’t sufficiently dovish.

Pessimism in the stock market is one of the reasons why it is levitating. Short interest is at an 8 month high. This represents future demand for stocks.

Another negative consequence of ZIRP: companies are more leveraged today than they were during the financial crisis. Many companies have used debt to buy back stock, which doesn’t improve asset quality. That said, the rates on this debt are much lower than they were 10 years ago, which will ease the pain somewhat.

Global bond yields continue to fall. The yield on the Bank of America Global Bond index is 1.3%.

With the latest bond market rally, the 10 year bond yield is a stone’s throw away from the 2013 “taper tantrum” when the Fed began its withdrawal of QE. Part of the reason for the bond rally is the flight to safety in Europe. The German Bund now yields under 10 basis points. Talk about a all-risk/no reward trade. Falling global bond yields are pulling US Treasury yields lower as investors sell European and Japanese bonds to buy US Treasuries. For the mortgage industry, it should mean more refi volume. Since the Fed hiked rates in December, the 10 year yield has fallen 58 basis points. Who’d a thunk?

Stocks are lower after the jobs report. Bonds and MBS are flat.

Jobs report data dump:

• Payrolls up 215k vs 205k expected
• Unemployment rate 5% up .1%
• Labor Force Participation rate 63%
• Average hourly earnings up 2.3% YOY
• Average hourly earnings flat at 34.4

Despite the drop in manufacturing employment, the ISM Manufacturing Index increased smartly in March, New Orders and production drove the increase, while employment fell. Prices rose as commodity and raw material prices increased. This level of manufacturing would be consistent with 2% GDP growth. A shortage of skilled labor continues to be a problem.

Construction spending fell 0.5% in February, while January was revised upward to an increase of 2.1%. Residential construction rose 0.9% and is up 10.5% YOY. We are almost back to the pre-bubble highs.

Consumer Sentiment ticked up in March, according to the University of Michigan to 91.

Markets are flattish on no real news. Bonds and MBS are flat as well.

Initial Jobless Claims rose to 276k from 265k last week.

In other economic data, the ISM Milwaukee rose to 57.8 while the Chicago purchasing Manager Index jumped. Consumer comfort fell however to 42.8.

Job cuts fell 13,4k to 48.2k in March, according to outplacement firm Challenger Gray, and Christmas.

Note that Boeing announced 4500 job cuts yesterday, and the financial industry is going through another round of lay-offs.

Not everything is grim in the labor markets, however. Some parts of the country are seeing outsized wage growth.

Mohammed El-Arian on what to look for in tomorrow’s jobs report. The numbers to watch: wage growth and the labor force participation rate.

TRID issues have shut the jumbo securitization market down for the moment. Non-bank jumbo originators are sitting on the sidelines at the moment because they can’t move their inventory. Another unintended consequence of TRID.

One unappreciated fact relating to the 10 year has been the massive short position that built up in them ahead of the Fed’s hiking rates. Now that the Fed is becoming more dovish, it is creating a short squeeze in Treasuries, which is pushing down rates. The punch line is that the bid under Treasuries (and thus the forces pushing yields down) are somewhat temporary.

Markets are lower this morning on weaker commodity prices. Bonds and MBS are up small.

Pending Home Sales increased 3.5% MOM and are up 5.1% YOY. This is the best number in a year, and points to a strong Spring Selling Season. Lack of inventory remains a problem.

Janet Yellen will be speaking around noon EST today. Don’t expect her to break any new ground, but just be aware.

Inflation remains tough to find, but both BlackRock and PIMCO are calling for investors to add an inflation hedge, either by switching out of Treasuries into TIPS or by buying gold.

Barclay’s is calling the latest rally in commodity prices a dead cat bounce, and is calling for a steep decline as fast money exits en masse.

Home prices rose .52% month-over-month according to Case-Shiller. Prices are up 5.4% YOY. Portland, Seattle, and San Francisco reported the biggest gains. Again, tight inventory remains an issue, along with tight credit for the first time homebuyer.

Prices continue to defy gravity in New York City, however the demand for luxury condos is beginning to wane. 423 Park Avenue, now home of the tallest residential building in the Western Hemisphere, has 141 apartments for sale and luxury buyers are beginning to fade as foreign money is hesitant. Yet Manhattan is dotted with cranes, largely building high-end condos.

Homebuilder Lennar reported better than expected earnings this morning. EPS is the highest third quarter number since 2006. Average selling prices increased 12% to $365,000 while new orders increased 10% in units and 15% in dollar volume.

Markets are lower this morning on no real news. Bonds and MBS are up small.

Mortgage Applications fell 3.3% last week as purchases fell 1% and refis fell 4.9%. Despite an 11 basis point drop in the 10 year yield, mortgage rates barely budged, falling only 1 basis point.

New Home Sales ticked up slightly to an annualized pace of 512,000. The increase was driven entirely by building out West where there is an acute shortage of housing. Note that homebuilder KB Home reports after the close tonight. The median sales price increased 2.6% to $301,400.

Bullard isn’t the only dissenter, however. Janet Yellen has a bit of a mini-revolt on her hands (as much as central bankers can “revolt” in the first place)

The FHFA House Price Index rose 0.5% last month. House prices have recouped all of their losses from the housing bust and are making new highs. Note the FHFA House Price Index is the only one showing the losses have been recouped – Case Shiller, and Core Logic have not.

You can also see the huge geographic disparity between the different regions in the US. The Northeast (which includes New England and the Middle Atlantic) are picking up the rear compared to the other parts of the country. As someone who grew up in the Rust Belt, I am beginning to notice similarities in the Northeast.

We are well aware there is a problem with the first time homebuyer. They are saddled with large student loan debt, and are under-employed for the most part. The other big issue – low housing inventory is making the starter home unaffordable. When you look at the expensive areas, it gets ridiculous. The mortgage payment for a starter home in San Francisco (admittedly an extreme example) would run someone 110% of median income! I have said it before: the difference between 2% GDP growth and 3% GDP growth is housing. To address the dearth of inventory, we should have a run rate of 2 million starts a year. Yet we remain mired around 1.2 million. It obviously isn’t an oversupply issue – it is a credit issue. Yet the consensus seems to be that the financial sector remains “unregulated” and needs to be reined in. You would think politicians would like to see 3% economic growth but apparently they don’t. All obama seems to care about is racial bean-counting in the burbs..