All Things in Moderation

The NFIB Small Business Optimism Index rose from 94.8 to 95.2 last month. We see big positive numbers on plans to increase employment and capital expenditures. Earnings trends are down, however. Note that confidence is still depressed however.

Job openings continue remain at 16 year highs, according to the JOLTs jobs report.

The IBD / TIPP economic optimism index inched up as well last month

Junk bond spreads are widening as troubles continue in the energy patch. According to one prognosticator, the current risk premium for high yield debt is implying a 44% chance of a recession next year. Note the Fed seemed to be pretty sanguine about HY in the FOMC minutes.

China’s economic slowdown is having repercussions all over the global economy. The US is probably the most insulated, but it is wreaking havoc in South America and Asia.

Markets are getting rocked to start the new year, with China limit down overnight and Euro markets down anywhere from 2% to 4%. Bonds and MBS are up.

The ISM Manufacturing Index fell to 48.2 from 48.6 in December, which is the second month of contraction in the manufacturing sector. Blame the dollar. A 48.2 reading in the manufacturing PMI would normally be associated with GDP growth of around 1.6%.

Construction Spending fell 0.4% in November and October’s number was revised downward from 1.0% to 0.3%.

Foreign demand for US real estate will continue to grow in 2016. Foreign purchases of US real estate were $87 billion last year compared to $9 billion in 2009. Berlin, London, New York City, and San Francisco are the markets where global hot money are headed.

Tensions are increasing in the Middle East, with Saudi Arabia cutting diplomatic ties with Iran over the execution of a cleric. Saudi Arabia is struggling since its economy is based on redistributing oil money and there hasn’t been a lot of oil money to redistribute lately. They may have miscalculated on trying to drive out fracking – it can be turned on and off with very little expense and time.

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

Not a lot going on today with New Year’s just around the corner. The MBA will be releasing mortgage application data next week, but is skipping this week.

Pending Home Sales fell 0.9% in November and are up 5.1% YOY. The Midwest and South had modest gains while the Northeast and West fell. Tight inventory and rising prices are hitting affordability.

A good recap of 2015. They discuss wages, consumer confidence and real estate, with a good chart of where the action was (and wasn’t) in 2015.

Median incomes are almost back to pre-recession levels, according to Sentier Research. The median income at the end of November was $56,888 and the median existing house price was $220,000. This puts the median income / median house price ratio to 3.87x, which is still a little elevated compared to pre-bubble years.

Markets are higher this morning as commodities gain. Bonds and MBS are down.

Home Prices rose 0.84% in October and are up 5.5% YOY, according to the Case-Shiller Home Price Index. Portland, San Francisco, and Denver led the charge. For those worrying about how the increase in the Fed Funds rate will affect mortgage rates, don’t worry about a 1-for-1 increase in mortgage rates as the Fed hikes rates. Note that in the 2004-2005 tightening cycle, the Fed Funds rate went from 1% to 5.25% while the average 30 year fixed rate mortgage went from 6% to 6.75%.

Ever since the bubble burst, homebuilders have largely focused on the luxury end of the market and the move-up buyer. Fun fact: the average size of a new home has increased by 150 square feet since 2008. Entry-level homebuyers had been priced out of the market. Now that is beginning to change, as builders are focusing on starter homes. High land prices remain an issue.

Consumer Confidence rose from 92.6 to 96.5 in December.

Retailers had a decent holiday shopping season, with sales between Black Friday and Christmas up almost 8%.

Average days to close a loan increased by 3 in November, according to Ellie Mae. Blame TRID. Average FICO slipped a point to 721.

Stocks are lower on weaker data out of China. Bonds and MBS are flat.

Not a lot of data this week, which will be shortened by the New Year’s holiday on Friday. Not sure if we get an early close on Thursday.

2015 will be remembered as the year that nothing worked. Stocks, bonds, and commodities all performed lousy. Jim Bianco explains: “The Fed stimulus lifted all boats, and then the Fed withdrawing the stimulus is holding the boats down,” Bianco said by phone. “If the argument is right that the economy is going into 2016 weak and earnings are negative, those conditions will continue and therefore on the asset allocation level, I don’t expect anything to break out just yet.”

Know what did work in 2015? Real estate. Speaking of which, here are the hottest real estate markets according to NAR. As expected, the Bay Area tops the list, and California urban areas are well represented. Know what didn’t work in real estate? The stocks of companies in real estate with names like Stonegate and Nationstar in the dumps.

Foreclosure starts are the lowest since 2006, according to Black Knight Financial Services. Fewer than 700,000 active foreclosures remain.

Stocks are up this morning on no real news. We are entering the end of year “window dressing” time where a lack of volume allows people to move stocks (at least temporarily). Bonds and MBS are down.

Big economic data dump today and tomorrow with the holiday shortened week.

Mortgage Applications rose 7.3% last week as purchases rose 4.1% and refis rose 10.8%.

New Home Sales rose to 490k from a downward revised 470k in November. Consumer sentiment rose to 92.6 from 91.8.

Personal Income and Personal Spending rose 0.3% last month.

PCE Inflation was flat on a month-over-month basis and up 0.4% YOY. The core PCE, which strips out volatile commodity related items rose 1.3% YOY. Inflation remains nowhere to be found.

Durable goods orders were flat in November, and fell 0.1% ex-transportation. Capital Goods shipments (a proxy for business capital expenditures) fell 0.5%. The Street was looking for 0.5%, so that is a big miss.

Existing Home Sales fell by a lot yesterday, which was largely attributed to TRID issues. Look at the chart – biggest drop in a long time – certainly since 2010 when the homebuyer tax credit expired.