Morning Report: The adverse market fee is gone

Vital Statistics:

S&P futures4,266-52.2
Oil (WTI)69.14-2.55
10 year government bond yield 1.22%
30 year fixed rate mortgage 3.08%

Stocks are lower this morning as investors fret about new COVID-19 cases in Asia. Bonds and MBS are up.

The upcoming week will begin the deluge of earnings reports. In terms of economic data, we will get housing starts and existing home sales. We won’t have any Fed-Speak as we are in the quiet period ahead of next week’s FOMC meeting.

On Friday, the FHFA eliminated the adverse market fee of 50 basis points on refinancings. “The COVID-19 pandemic financially exacerbated America’s affordable housing crisis. Eliminating the Adverse Market Refinance Fee will help families take advantage of the low-rate environment to save more money,” said Acting Director Sandra L. Thompson. “Today’s action furthers FHFA’s priority of supporting affordable housing while simultaneously protecting the safety and soundness of the Enterprises.” The fee was supposed to protect the government from credit losses stemming from COVID, however the low number of GSE loans in forbearance and rising home prices have mitigated the need for extra reserves.

The NAR has released a study finding a “dire shortage” of housing which requires a “once-in-a-generation” response. The US housing stock grew at a 1.7% pace from the 1970s through the 1970s, however it has averaged only 1% since, and has fallen to 0.7% over the past decade. They estimate that the supply gap is about 6.8 million units, which would require housing starts of more than 2 million units per year. In 2020, housing starts came in at 1.3 million, however COVID did impact those numbers slightly. Housing starts have returned to historical normalcy, however over the course of this chart, the US population has almost doubled.

The decrease in interest rates appears to be a warning regarding growth going forward. There was a study conducted by Reinhart and Rogoff, which said that a debt to GDP ratio of 90% was sort of a governor on economic growth, which negatively affects GDP growth by at least 1%. Countries with debt to GDP ratios above 90%, generally see growth in the low 2% rates.

This study was a bit of a political football about a decade ago, when leftist economists like Paul Krugman and Robert Reich were agitating for more and more government spending to support the economy. They wanted to avoid austerity, which is a loaded word meant to imply fiscal tightening when that isn’t the case. Austerity really just means spending as a percent of GDP is falling. If the government is spending 150% of GDP and it falls to 149.9% of GDP, that is austerity. In other words, you can still have highly accommodative fiscal policy and austerity simultaneously.

Back in the Great Recession, the US debt to GDP ratio was sitting just around 90%, which made for an interesting debate in Econ Twitter. Fast forward to today, where our debt to GDP ratio is 130%. IMO, this is something that has been absent from discussion (I suspect this is mainly because the press and left Econ doesn’t like the implications), however it will have a big impact on inflation going forward. If you look at the Fed’s economic projections, it sees long-term growth around 1.8% – 2%. This would be consistent with Rogoff and Reinhardt, which is simply not a conducive environment for inflation.

It may turn out that the model for the US going forward is not 1970s style inflation, but something more similar to Eurosclerosis and Japan. I would add that slow, tepid recoveries are a feature of post-residential real estate bubbles, and they typically take decades to play out.

I suspect the fast money shorting bonds right now is going to be disappointed.

Morning Report: Retail Sales Increase.

Vital Statistics:

S&P futures4,35612.2
Oil (WTI)71.840.25
10 year government bond yield 1.34%
30 year fixed rate mortgage 3.12%

Stocks are up this morning after good retail sales numbers. Bonds and MBS are flat.

Retail Sales rose 0.6% last month, which was better than expectations. If you strip out vehicles and gas, they rose 1.1%.

Ginnie Mae is considering increasing the capital requirements for GNMA servicers. In addition to the $2.5 million and 0.35% of the GNMA servicing book UPB, they are looking at require 0.25% of the UPB of a servicers agency book. When the foreclosure moratorium ends, servicers will have a lot of wood to chop.

DoubleLine bond investors Jeffrey Gundlach sees similarities between the current economic environment and the 1970s. “When you look at real interest rates on long-date Treasurys, it looks like Jimmy Carter area,” said Gundlach. “We’re talking about the CPI at 5.4%, and if we want to use the 10-year Treasury it’s not even at 1.4%, that’s a negative 4% interest rate. That’s Jimmy Carteresque.”

IMO the similarities to the 1970s are not that great. While LBJ’s Guns and Butter policies do resemble today, the big driver of 1970s inflation was probably the Arab Oil embargoes in the early 1970s, which drove oil prices up 6 times over the decade. That would be like oil increasing to $425 a barrel today.

In addition, US factories, which were built in the early 20th century were beginning to show their age and incremental production was more expensive given that capacity utilization was already high. Today, we have much more of an IP-driven economy and low capacity utilization. In addition, globalization was not yet a thing in the 1970s. That started more in the late 80s and 1990s.

To me, the big question is what happens when this big COVID-related rebound is done and the supply chain shortages are fixed. Then what? Does growth return to 3% – 4%? Or does it return to 1% – 2%? If the latter, then the model isn’t the US in the 1970s, it is Japan in the 2000s.

Morning Report: Mortgage Credit Availability Falls

Vital Statistics:

S&P futures4,354-13.2
Oil (WTI)71.94-0.25
10 year government bond yield 1.32%
30 year fixed rate mortgage 3.12%

Stocks are lower this morning as Jerome Powell heads to the Hill for another day of testimony. Bonds and MBS are up.

Jerome Powell’s testimony in front of the House yesterday was considered more or less dovish, with with tapering “still a ways off.” “The high inflation readings are for a small group of goods and services directly tied to the reopening,” Powell testified, language that indicated he saw no need to rush the shift towards post-pandemic policy. The Fed at this point expects to continue its bond buying until there is “substantial further progress” on jobs, with interest rates pinned near zero likely until at least 2023.

Initial Jobless Claims fell to 360k last week, while the Philly Fed Manufacturing index fell and the Empire State Manufacturing Index rose. Finally, industrial production rose 0.4%, while manufacturing production fell slightly and capacity utilization ticked up.

Mortgage Credit Availability fell in June, according to the MBA’s Mortgage Credit Availability Index. “Mortgage credit availability in June fell to its lowest level since September 2020, ending more than half a year of increasing credit supply,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The overall credit availability index remains close to 2014 lows, as mortgage credit has not recovered since the sharp downturn in the first half of 2020.” The caps on higher risk and non-owner occupied loans remains an issue as well.

The FHA is relaxing the guidelines for student loan debt, making it easier to qualify for a FHA loan.

Home sales fell 1.2% from May to June, according to Redfin. The median home price rose a whopping 25% to $386,888 compared to a year ago. The lockdown comparisons of a year ago are almost certainly exaggerating the rise, but prices are rising across the US at a pretty hefty clip.

“In June we entered a new phase of the housing market,” said Redfin Chief Economist Daryl Fairweather. “Home sales are starting to stall because prices have increased beyond what many buyers can afford. This summer I expect home prices to stabilize as more homeowners list their homes, realizing they likely won’t fetch a higher price by waiting longer to sell. But as rents rise, homeownership will become appealing to more people, and home sales will rev back up by 2022.”

Morning Report: Bank Earnings Improve

Vital Statistics:

S&P futures4,37716.8
Oil (WTI)75.01-0.25
10 year government bond yield 1.37%
30 year fixed rate mortgage 3.14%

Stocks are higher this mornings as the banks report big increases in profits. Bonds and MBS are up.

Jerome Powell will testify in front of the House Financial Services Committee at noon today. Here are his prepared remarks. On the labor market, he laid out the disconnect between job openings and a high number of idle workers:

Conditions in the labor market have continued to improve, but there is still a long way to go. Labor demand appears to be very strong; job openings are at a record high, hiring is robust, and many workers are leaving their current jobs to search for better ones. Indeed, employers added 1.7 million workers from April through June. However, the unemployment rate remained elevated in June at 5.9 percent, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year. Job gains should be strong in coming months as public health conditions continue to improve and as some of the other pandemic-related factors currently weighing them down diminish.

Inflation at the consumer level rose 0.9% MOM and 5.4% YOY. Ex-food and energy, the index rose 0.9% MOM and 4.5% YOY. The producer price index (which measures inflation at the wholesale level) rose 1% MOM and 7.3% YOY. While the YOY increases are big numbers, they really deserve an asterisk next to them because the lockdowns of a year ago are distorting the numbers. The Fed is dismissing these increases as “transitory” and believes they will fall again as the supply chain shortages disappear. If you look at the chart below, you will see that inflation is much less volatile than it was from the 1950s through the 1980s. Much of this is due to things like just-in-time inventory management, globalization, and the transition from a manufacturing to an IP-based economy.

Mortgage applications rose 16% last week as purchases increased 8% and refis increased 20%. Note that last week had an adjustment for the 4th of July holiday. “Overall applications climbed last week, driven heavily by increased refinancing as rates dipped again,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Treasury yields have trended lower over the past month as investors remained concerned about the COVID-19 variant and slowing economic growth.” Conforming rates fell 6 basis points last week to 3.09%.

Small Business optimism decreased in May, according to the NFIB. The labor shortage is the biggest problem right now. Rising inflation is beginning to worry small business owners, especially with the perception that the COVID-19 rebound is getting played out. Owners expecting better business conditions over the next six months declined 11 points to a net negative 26%. A net 40% reported increasing average selling prices. The construction sector and the professional sector are the most negative, while manufacturing and agriculture are the most optimistic.

JP Morgan reported better than expected quarterly earnings of $3.78 per share, which was a big increase from the $1.38 it reported a year ago. Earnings were impacted by a $3 billion (or about $0.75 per share) reserve release. These are reversals from provisions for loan losses taken out last year. Simply put, consumers largely did not default on credit card debt during the COVID-19 crisis, so JPM reversed these non-cash charges.

Mortgage banking revenue fell 22% QOQ and 40% YOY as margins compressed. This is interesting given that volumes were flat QOQ and up 64% compared to a year ago. Total originations came in at 39.6 billion.

Wells reported quarterly earnings of $1.38 compared to a loss of $1.01 a year ago. Originations rose 3% QOQ and fell 10% YOY to $53.2 billion. Gain on sale fell compared to Q1, but increased compared to a year ago. Overall mortgage banking income improved as mortgage servicing right valuations rose.

Morning Report: Housing affordability declines.

Vital Statistics:

S&P futures4,357-2.8
Oil (WTI)73.76-0.85
10 year government bond yield 1.34%
30 year fixed rate mortgage 3.09%

Stocks are flattish this morning as investors fret about global growth. Bonds and MBS are down small.

Earnings season kicks off this week with many of the big banks reporting. The first report will be JP Morgan on Tuesday, followed by Wells and Citi on Wednesday. Last year, the big banks were taking huge COVID-19 and CECL provisions for loan losses, so year-over-year comparisons will be quite strong.

In terms of economic data, we will get the consumer price index and the producer price index and quite a bit of Fed-speak.

The Atlanta Fed’s GDPNow model is predicting 7.9% growth for the second quarter. You can see the estimates from this model have been falling rapidly, especially compared to the Blue Chip Consensus which is based on Wall Street research. The Blue Chip consensus is perhaps a good indication of what has been driving the stock market higher, while the GDPNow forecast is pushing bond yields lower.

Janet Yellen is agitating for a global tax system to prevent corporations from playing low tax jurisdictions against each other. “We need sustainable sources of revenue that do not rely on further taxing workers’ wages and exacerbating the economic disparities that we are all committed to reducing,” Yellen said in remarks prepared for delivery to Eurogroup finance ministers. EU countries like Ireland which attract capital due to lower taxes are lukewarm about the proposed system, which presumably would require legislation in the US and possibly elsewhere.

Housing affordability is falling as real estate prices rise. The NAR Housing Affordability Index has fallen from 180 last year to 151.7 now. This is a function of a 1.2% increase in income versus a 20% increase in mortgage payments. FWIW, I would take this index with a grain of salt given that YOY comparisons are being heavily distorted by the lockdowns of a year ago. That said, rates and home prices have risen while incomes have been relatively stagnant.

The West is by far the least affordable, while the Midwest is the most affordable. I wonder if the South is going to become less affordable than the Northeast at some point, as housing prices are soaring in places like Austin and Nashville.

I would add that housing bubble questions are back in the press along with Google searches. We do not have a housing bubble. Bubbles are extremely rare events and the memories of 2008 are simply too fresh that we won’t see another. We have a supply / demand imbalance which was exacerbated by COVID-19 shortages. While we could see home prices level out, the chance of a 2006 – 2008 wholesale decline in real estate prices isn’t in the cards. The cure for the market will be more homebuilding and it will take years just to get to a balanced market, let alone an oversupplied one.

Morning Report: Rental collections slipping

Vital Statistics:

S&P futures4,33217.8
Oil (WTI)73.910.85
10 year government bond yield 1.33%
30 year fixed rate mortgage 3.08%

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

The global rally in bonds seems to be emanating from growth fears out of Asia. “Asia was seen as the poster child in pandemic response last year, but this year the slow vaccination rollout in most countries combined with the arrival of the delta variant means another lost year,” said Mark Matthews, head of Asia research with Bank Julius Baer & Co. in Singapore. “I suspect Asia will continue to lag as long as vaccination rollouts remain at their relatively sluggish levels and high daily new Covid counts prevent them from lifting mobility restrictions.”

Given that COVID issues are behind the lagging growth in Asia, I suspect this temporary respite in bond yields will be short-lived.

The number of homeowners in active forbearance plans continues to drop, according to Black Knight. Over the past month, loans in active forbearance have fallen 12% to 1.9 million.

No money down mortgages are back, under the rubric of 80/20 piggybacks. They aren’t cheap, with a 4.5% floor rate on the primary and 10% on the second, but I guess rising home prices cure all sorts of underwriting sins.

The National Multifamily Housing Council reported that 76.5% of renters made a full or partial rent payment by July 6 this year. This compares unfavorably to the 77.4% which paid by July 6 2020 and 79.7% that were collected by July 6 2019. Separately, momentum seems to be flagging in commercial real estate.

Morning Report: Parsing the FOMC minutes.

Vital Statistics:

S&P futures4,293-57.8
Oil (WTI)71.41-0.85
10 year government bond yield 1.29%
30 year fixed rate mortgage 3.11%

Stocks are lower as investors lose their confidence in the reflation trade. Bonds and MBS are up.

Mortgage backed securities are lagging the move in bond yields, as usual. This means that mortgage rates are not going to correlate perfectly with the decline in the 10-year. It may take a day or two for MBS to catch up.

Initial Jobless Claims were more or less unchanged last week at 373,000. The number came in above expectations.

The FOMC minutes from June didn’t really say much, although the Fed is at least greasing the skids for tapering:

“Participants discussed the Federal Reserve’s asset purchases and progress toward the Committee’s goals since last December when the Committee adopted its guidance for asset purchases. The Committee’s standard of
“substantial further progress” was generally seen as not having yet been met, though participants expected progress to continue. Various participants mentioned that they expected the conditions for beginning to reduce the
pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data. Some participants saw the incoming data as providing a less clear signal about the underlying economic momentum and judged that the Committee would have information in coming months to make a better assessment of the path of the labor market and inflation. As a result, several of these participants emphasized that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans for asset purchases. Participants generally judged that, as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than anticipated progress toward the Committee’s goals or the emergence of risks that could impede the attainment of the Committee’s goals.”

The FOMC also discussed reducing the purchases of mortgage backed securities earlier than expected “in light of valuation pressures in the housing market.” While lower mortgage rates probably are helping support asset prices the fundamental issue is a supply shortage, not mortgage rates.

The stance of the FOMC on reducing MBS purchases will make mortgage rates move down more slowly than otherwise. Ultimately, the reduction will depend on inflation and the labor market. The Fed will be comfortable with inflation above the 2% target, and the commodity-push inflation is probably going to ease. The labor market is the bigger question, and so far it is providing such mixed signals that I don’t see the Fed adjusting policy in response to it. That said, expect disappointment when you run a scenario after hearing on CNBC that Treasury yields are down another handful of basis points.

On the labor market, the Fed expects the current labor supply constraints to ease. It believes that the current issue of unfilled jobs is a due to a combination of “early retirements, concerns about the virus, childcare responsibilities, and expanded unemployment insurance benefits.”

Morning Report: Global bond yields fall

Vital Statistics:

S&P futures4,3394.8
Oil (WTI)73.810.45
10 year government bond yield 1.31%
30 year fixed rate mortgage 3.11%

Stocks are higher this morning as we await the FOMC minutes at 2:00 pm this afternoon. Bonds and MBS are up.

It looks like the big decrease in yields is an across-the-board phenomenon in global sovereign debt markets which started on Monday when US markets were closed. The German Bund has dropped 10 basis points in yield to -30 bp, and Gilts / JGBs are up as well. The drop in yields doesn’t appear to be driven by, say the jobs report.

One possibility is that investors are thinking that the post-COVID recovery has peaked, and that inventory re-stocking is wrapping up which means that any commodity-driven inflation has peaked. Commodity-driven inflation is almost always transitory (the exception being the oil shocks of the 1970s), and a durable increase in inflation requires higher wages combined with low productivity.

MBS are lagging the move in Treasuries as usual.

The number of mortgages in forbearance fell to 2 million, which is the lowest since March 2020 at the onset of COVID. The percentage fell to 3.87%. “For the first time since last March, the share of Fannie Mae and Freddie Mac loans in forbearance dropped below 2 percent. The share in every investor type and almost every loan category dropped as well, bringing the number of homeowners in forbearance below 2 million,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The rate of forbearance exits and new forbearance requests remained at low levels, but we expect the pace of exits to increase with reporting next week for the beginning of July.”

Mortgage applications fell 1.8% last week as purchases fell 1% and refis fell 2%. “Even as mortgage rates declined, with the 30-year fixed rate dropping 5 basis points to 3.15 percent, both purchase and refinance applications decreased,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Treasury yields have been volatile despite mostly positive economic news, including last week’s June jobs report, which showed ongoing improvements in the labor market. However, rates continued to move lower – especially late in the week. The 30-year fixed rate was 11 basis points lower than the same week a year ago, but many borrowers previously refinanced at even lower rates. Refinance applications have trended lower than 2020 levels for the past four months.”

The Fannie Mae Home Purchase Sentiment Index was largely unchanged last month, however the some of the components are beginning to reflect the current housing market. The percentage of people who think it is a bad time to buy increased by 8 ppts to 64%, while the number of people who think it is a good time to sell increased by 10 ppts to 77%.

There were 9.2 million job openings at the end of May, according to the JOLTS jobs report. Interestingly, the quits rate fell from 2.8% in April to 2.5% in May. Since the quits rate tends to lead wage inflation, the drop in that statistic could be considered bond-bullish. The labor market continues to be a mess of conflicting signals.

Morning Report: Uneventful jobs report

Vital Statistics:

S&P futures4,3154.8
Oil (WTI)74.91-0.32
10 year government bond yield 1.44%
30 year fixed rate mortgage 3.16%

Stocks are higher as we head into a 3 day weekend. Bonds and MBS are up small. Note the bond market has an early close today.

The jobs report was a mixed bag this morning. Payrolls came in at 850,000, which was higher than the Street estimate. The 2 month revision was also modestly positive. The unemployment rate ticked up from 5.8% to 5.9%, and the labor force participation rate was flat at 61.6%. Average weekly earnings came in at 3.6% versus expectations of 3.4%.

Overall, the report was more or less a push for the bond markets, and bonds are down modestly on the report.

The CFPB is warning landlords to not report inaccurate information on credit reports. “Errors in your tenant screening report shouldn’t hold you back from having a place to call home,” said CFPB Acting Director Dave Uejio. “For families already struggling to make ends meet, an inaccurate report can be the difference between homelessness or settling into a safe and affordable home. Landlords and consumer reporting agencies have clear obligations under federal law, regarding the accuracy of information reported about tenants, and to conduct timely investigations when consumers dispute information. They need to get this right. The CFPB will closely monitor their compliance, and we will use all the tools at our disposal including enforcement, to protect consumers during this critical time.”

The title of the memo from the CFPB is “As Federal Eviction Protections Come to an End, CFPB Warns Landlords and Consumer Reporting Agencies to Report Rental Information Accurately.” Presumably this means that the government plans to end the eviction and foreclosure moratorium soon.

Morning Report: Job cuts at a 21 year low

Vital Statistics:

S&P futures4,2958.8
Oil (WTI)75.602.32
10 year government bond yield 1.48%
30 year fixed rate mortgage 3.16%

Stocks are higher as we start the second half of 2021. Bonds and MBS are down small.

Announced job cuts fell to a 21 year low last month, according to outplacement firm Challenger, Gray and Christmas. Job cuts fell 88% YOY to 20,476. Note that this statistic measures announced cuts (as in via a press release). “We’re seeing the rubber band snap back,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc. “Companies are holding on tight to their workers during a time of record job openings and very high job seeker confidence. We haven’t seen job cuts this low since the Dot-Com boom.” Energy and defense lead the sectors in job cuts.

Initial Jobless Claims fell to 364k, which is still elevated compared to pre-COVID where 225k was the norm. If you compare the last year to the Great Recession, the 2009 bust looks like a molehill compared to a mountain:

The Challenger and initial jobless numbers illustrate the conundrum of analyzing the labor market. Job openings are at record highs, yet initial claims are stubbornly high. Unemployment is elevated, but it seems like every fast food place and retail establishment has a “help wanted” sign. The Fed minutes don’t really shed any light on the situation; they just lay out the same contradictions I just did. I don’t think anyone really has a handle on it, and think tanks are interpreting it via their own ideological lenses. And with global bond markets under the firm control of central banks’ activist policies interest rates are a pretty useless indicator as well.

Lumber prices are finally falling back to earth. Lumber has done quite the round trip over the past year, rising from $438 to $1,670 and then falling back $783. Falling lumber costs will hopefully re-ignite the homebuilding sector which should help alleviate the acute housing shortage.

The manufacturing sector grew in June, according to the ISM Report. Shortages of all types continue to hamper manufacturing growth: ” “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to parts shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.” I found the worker absenteeism issue to be interesting. I wonder if it is simply COVID-19 driven, or is something else going on.

Construction spending fell 0.2% MOM but is up 7.5% YOY. Resi construction is up 28% YOY, but the lockdowns of a year ago are probably affecting the numbers.

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