All Things in Moderation

Vital Statistics:

Stocks are higher this morning after yesterday’s bond rally. Bonds and MBS are down a touch.

The big event today will be the 10-year bond auction at 1:00 PM. Yesterday’s 3 year auction went well, and stock investors will be focused keenly on the bid-to-cover ratio for today. With tech stock valuations stretched, a rise in rates can pull down valuations quite a bit.

Inflation remains largely unchanged, with the Consumer Price Index rising 0.4% MOM and 1.7% YOY. Ex-food and energy, inflation rose 0.1% MOM and 1.3% YOY. The Fed prefers to focus on the PCE inflation index, but suffice it to say the inflation scare has yet to be included in the numbers.

Mortgage Applications fell 1.3% last week as purchases increased 7% and refis fell 5%. The 30-year fixed mortgage rate climbed to 3.26 percent last week, which is the highest since last July and up 40 basis points since the start of 2021,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Signs of faster economic growth, an improving job market  and increased vaccine distribution are pushing rates higher.”

JP Morgan was out with a note yesterday predicting that the US economy would grow 7.3% this year. That would be the fastest rate of growth since the end of the Korean War. As of the December FOMC meeting, the Fed was predicting 4.2% GDP growth. 7.3% seems quite aggressive to me, but maybe it happens. We will need to see massive job creation for this to play out, and with something like 1/3 of small businesses failing over the last year, this seems like a heavy lift. I suspect the big banks feel pressure to cheerlead the economy, and that is part of the equation as well.

The mortgage credit availability index remained depressed in February. “Credit availability in February was unchanged from January, remaining close to its lowest level since 2014,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The housing market is in strong shape heading into the spring, with robust growth in purchase applications, home sales, and new residential construction. Government credit supply has increased in five of the past six months, albeit in small increments, but remains tight by historical standards. This adds another obstacle for many aspiring first-time buyers who are already navigating supply and affordability constraints.”  

Fannie Mae’s Home Purchase Sentiment Index fell 16% YOY despite the improving economy. “As we expected, the HPSI remained relatively flat in February, but underlying data indicate growing job-related optimism among consumers, especially among lower-income and renter groups,” said Doug Duncan, Fannie Mae Senior Vice President and Chief Economist. “With the growing likelihood that lockdown restrictions will continue easing as vaccination efforts ramp up, and with warmer weather on the horizon and another round of fiscal stimulus pending, these two segments of consumers may have good reason to feel more positive about the labor market. This optimism appears to be well-placed, too, given Friday’s jobs report from the Bureau of Labor Statistics, which showed the strongest net gain in payroll employment since October, although the unemployment rate remains quite high by historical standards. However, other components of the index remain well below pre-pandemic levels, so we believe there may still be room for improvement in housing and economic attitudes in the coming months, depending in part on the future path of mortgage rates.”

The National Multifamily Housing Council reported that 80.4% of apartment renters paid rent as of March 6, which is a 4.1% decrease from February. While Texas wasn’t mentioned, I wonder if the ice storm is playing a part here. While Washington is focused squarely on the side of renters, landlords are struggling.

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Vital Statistics:

Stocks are higher this morning as techs rebound. Bonds and MBS are up strong.

The percentage of loans in forbearance fell 3 basis points to 5.2%, according to the MBA. “The pace of forbearance exits increased; this continues the trend reported in prior months,” said MBA Chief Economist Mike Fratantoni. “Of those homeowners in forbearance, more than 12 percent were current at the end of February, down somewhat from the almost 14 percent at the end of January. The improving economy, the soon-to-be passed stimulus package and the many homeowners in forbearance reaching the 12-month mark of their plan could all influence the overall forbearance share in the coming months.”

While interest rates are falling this morning, we do have some risks this week with a few Treasury auctions: a 3 year bond sale today, a 10 year on Wed and a 30 year on Thursday.

The MBA is forecasting that origination will hit $3 trillion this year, and over half of that will be purchase activity. Much of this is predicated on a sharp drop in refinance volume as mortgage rates hit 3.5% and strong economic growth. The business press and the analyst community is putting a lot of weight on the prediction that the stimulus package will unleash a massive wave of consumer spending and that unemployment will fall to 4.7% by the end of the year. Of course one major risk is that higher energy and rent consume any extra income, and that won’t be supportive of a rip-roaring recovery.

Note that Janet Yellen sees full employment in 2022, based on the stimulus package. Here is what that means. The current employment-population ratio is 57.6%. Pre-COVID, it was 61.1%. Assuming the US population is 330 million, that means we need 11.6 million people to get jobs in order to get back to pre-COVID levels. With last month’s job increase of 380k, that would take 2.5 years to get back to full employment at that pace.

The rapid rise in home prices is worrying politicians and policy wonks. “The dream of homeownership is out of reach for so many working people,” said Senate Banking Chair Sherrod Brown (D-Ohio). “Rising home prices and flat wages means that many families, especially families of color, may never be able to afford their first home.”

One think to keep in mind is that the hip new lens to view everything nowadays is the “K-shaped recovery.” The K represents the fortunes of the rich and the fortunes of the poor (one goes up while the other goes down). This is how Washington will view everything and housing policy will focus almost exclusively on low-income lending. The problem is that the banks hate FHA, and non-bank servicers can get eaten alive by FHA advances. Not sure what Washington is going to do about that, but the answer is more homebuilding.

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Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are flat.

The upcoming week is relatively data-light and we are entering the quiet period ahead of next week’s FOMC meeting. Hopefully that means less bond market volatility.

The spending bill is set to pass the House this morning. The stimulus bill has economists taking up their GDP estimates and lowering unemployment forecasts. Supposedly we are seeing record short positions in the US Treasury bond.

One thing that seems interesting to me is that we aren’t seeing a huge increase in corresponding sovereign yields. The latest spike in the US Treasuries is not being observed in German Bunds, Japanese Government Bonds or UK Gilts. This makes me skeptical on the inflation story. If we were really seeing inflationary pressures build, it would be a global phenomenon, and rates would be rising in lockstep (or at least correlating more than they are).

The issue appears to be the Supplemental Liquidity Ratio issue (which I admittedly don’t really understand). It stems back from measures taken back in the early days of COVID which were intended to make banks more likely to lend. It is coming up for expiration, and many on the left want to see it go away, as they consider it a sop to the banks. On the other hand, Democrats certainly can’t like the movement in Treasuries, as rising rates will depress the economy.

Prior to the Biden inauguration, Treasury Secretary Steve Mnuchin issued a directive to FHFA which would limit investment loans guaranteed by Fannie and Fred. This was the letter that limited cash window purchases to $1.5 billion per single originator. The directive also limits investment / second home purchase activity to only 7%. That second part is controversial given that we have a housing shortage, and raising costs isn’t going to help the affordability issue out there.

The war between United Wholesale and Rocket are heating up. Note that there has been bad blood between the two Detroit lenders for a while. United Wholesale recently issued a letter to its brokers saying that they can either work with UWM or with Rocket and Fairway. A small non-scientific survey out of the National Association of Mortgage Brokers shows that 30% of brokers will comply with UWM’s request, while 41% will ignore it and another 30% would report them for anti-competitive behavior. Here is Rocket’s response.

Urban apartment prices and rents are moving in opposite directions. I think two things are happening here. Landlords are cutting rent prices to buy occupancy and actual sales transactions are depressed and sellers pull apartments off the market to wait for better days. The other wrinkle is the anti-landlord sentiment in these cities where tenants are allowed to simply not pay rent and landlords just have to deal with it. I suspect the only properties moving in these cities are the big luxury apartments and the multi-stuff is not. This would skew the numbers.

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Vital Statistics:

Stocks are higher this morning after a strong jobs report. Bonds and MBS are down.

The employment situation report showed the economy added 379,000 jobs in February, which was above expectations. The unemployment rate fell from 6.3% to 6.2%. The labor force participation rate declined to 61.4%, and is down 1.9 percentage points from a year ago. The employment-population ratio stood at 57.6%, which is down 3.5 percentage points from a year ago. Overall, the number of employed persons fell by 8.5 million over the past year. Ignoring normal demographics and population growth, it will take two years worth of job numbers like January just to get back to where we were a year ago.

Average hourly earnings rose 0.2% MOM and 5.3% YOY. Average weekly hours fell however from 35 to 34.6. Overall, the payroll number was nominally good, but some of the internals aren’t fantastic.

The bond market abruptly sold off yesterday during Jerome Powell’s webinar at the Wall Street Journal. The issue revolves around something called the supplemental liquidity ratio for banks. This is real inside-baseball stuff that I won’t get into, but suffice it to say that trading in all sorts of derivative interest rate markets like the repo market are trading at negative rates. The punch line is that the sudden uptick in bond yields isn’t so much due to economic fundamentals as it is to other issues which are being driven by Fed banking regulations. These regulations are being further complicated by the political mood in DC which will interpret any changes as a sop to the banks. Mortgage rates aren’t necessarily ignoring the movement in the 10 year, but they are lagging the move.

United Wholesale has said “its us or them.” Brokers can either choose to do business with United Wholesale or they can use Rocket and Fairway. They can’t do both. Matt Ishbia, CEO of United Wholesale said: “If you work with them, can’t work with UWM anymore, effective immediately. I can’t stop you, but I’m not going to help you, help the people that are hurting the broker channel, and that’s what’s going on right now. We don’t need to fund Fairway Independent or Rocket Mortgage to try to put brokers out of business. We don’t need to do that. If you want to do that as your own deal, no hard feelings, but you can’t work with UWM anymore.” Apparently this comes after reports that Fairway and Rocket were soliciting brokers and working directly with real estate agents.

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Vital Statistics:

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

Jerome Powell is scheduled to speak at a Wall Street Journal webinar today. Expect to hear dovish remarks about monetary policy and also a push-back against the “inflation is coming” narrative.

Initial Jobless Claims came in at 745,000 last week. To put that number in perspective, the ADP jobs report showed only 117,000 jobs were added last month. The 4 week moving average for initial claims is 790k, so last month that means 3.16 million jobs were lost while 117,000 were created. Meanwhile, companies announced 34,500 job cuts according to outplacement firm Challenger, Gray and Christmas.

Nonfarm productivity decreased 4.2% as output increased 5.5% and hours worked increased 10.1%. Unit labor costs rose 6%. Unit labor costs rose 6%. I think the pandemic is introducing a lot of noise into these statistics. FWIW, productivity measurement has been an issue for a while with the advent of “free” internet services which receive payment in monetizable data.

The Fed reported that economic activity grew “modestly” in January and February. “Modest” is fed-speak for “meh” which means growth probably decelerated in the first quarter from the 4% reported in Q4. “Most Districts reported that employment levels rose over the reporting period, albeit slowly.” Nothing in this report suggests that the Fed is at the point of contemplating any sort of tightening. One interesting tidbit: The Philly Fed said anecdotally that the $15 minimum wage is already here, as they are seeing warehouse jobs being advertised for $23 an hour. Still leisure and hospitality jobs are the hardest-hit area, so I am not really buying the big jump in wages arguments.

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Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

Rocket traded up 71% yesterday to $41.60 per share. What got into the stock? The Reddit / WallStBets crew who ramped up Gamestop took a look at the short interest in the name and decided to recommend it as a buy. I don’t know if Rocket is headed to a similar gain but the numbers the company put out were pretty good. The company also announced a special dividend, and the Street is taking up 2021 estimates (which are still too low, IMO). This could get interesting as the exchange traded funds start taking positions in the stock. The big retail ETFs like the XRT have Gamestop as their biggest holding. I could see some of the financial ETFs doing the same thing.

Mortgage applications actually increased last week despite the jump in rates. Purchases rose by 2% and refis rose by 0.5%. “Mortgage rates jumped last week on market expectations of stronger economic growth and higher inflation,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The overall share of refinances declined for the fourth consecutive week, and conventional refinance applications fell more than 2 percent to the lowest level in four months.”

The ADP Employment report showed that 117k jobs were added in February. This is below the Street estimate of 140k for Friday’s jobs report. “The labor market continues to post a sluggish recovery across the board,” said Nela Richardson, chief economist, ADP. “We’re seeing large-sized companies increasingly feeling the effects of COVID-19, while job growth in the goods producing sector pauses. With the pandemic still in the driver’s seat, the service sector remains well below its pre-pandemic levels; however, this sector is one that will likely benefit the most over time with reopenings and increased consumer confidence.

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Vital Statistics:

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

The number of loans in forbearance ticked up slightly last week, according to the MBA. 2.6 million homeowners (or 5.23% of mortgages) are in forbearance plans right now. “A small increase in new forbearance requests, coupled with exits decreasing to match a survey low, led to the overall share of loans in forbearance increasing for the first time in five weeks,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The largest rise in the forbearance share was for portfolio and PLS loans, due to increases for both Ginnie Mae buyouts and other portfolio/PLS loans.”

Home prices rose 0.9% MOM and 10% YOY in January, according to CoreLogic. First-time homebuyers are being particularly affected by this, as there is a dearth of entry-level homes on the market, and rapid price appreciation is negating the positive effect of low interest rates.

The Fed meets this month, and will almost surely discuss the rapid increase in interest rates at the long end of the curve. One policy prescription could be a re-introduction of Operation Twist, where the Fed sells short-dated paper and buys long-term bonds as a way to flatten the yield curve. This would have the effect of pushing down long-term rates.

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Vital Statistics:

Stocks are higher this morning after central banks assure markets that they will remain supportive of the markets for a long time.

The bond markets are beginning to price in a rate hike in 2022 and a couple more in 2023. That was part of the reason for the huge sell-off in bonds last week. The Fed’s December dot plot showed only one member projecting a rate hike in 2022 and only a few projecting increases in 2023.

Remember, the FOMC is a voting body, and according to that graph, we would see no hikes through 2023. The Fed will run a new dot plot at the March 16-17 meeting, which will also introduce a forecast for 2024. That will be a reality check for the bond market, and I would be surprised if the Fed started forecasting rate hikes in 2023. Simply put, the data doesn’t support it.

The upcoming week will be dominated by the jobs report on Friday. We will also have quite a bit of Fed-Speak.

Rocket was up 10% on Friday after earnings. This is surprising given how the market has had a “meh” reaction to everyone else’s numbers. I think a couple things were going on here. First, the company announced a $1.11 special dividend that will get paid in March. The company doesn’t pay a quarterly dividend or anything yet.

The second thing was that Rocket forecast Q1 origination volume of about $100B. This is only a small drop from the fourth quarter, and is almost double Q1 of 2020. This is despite the huge jump in rates. I think that is what got investor’s attention.

Rocket’s CFO claimed on the earnings call that the Fed is buying 95% of all new conforming production. I found that stat surprising.

Construction spending rose 1.7% MOM and 5.8% YOY in January. Residential construction was up 2.5% MOM and 21% YOY. This was better than expectations.

Manufacturing improved in February, according to the ISM. The big takeaway from the report is that the supply chain is depleted and commodity prices are up. Part of this is COVID-19 related, while some is due to the Texas ice storm. Either way, commodity price inflation seems to be driven by technical factors and inventory depletion is similar. During COVID, businesses basically lived off of their inventory in place, which wasn’t being replenished as quickly as normal.

The inventory depletion will take years to correct, at least according to logistics REIT Prologis. This will probably accelerate growth in the second half of 2021 as manufacturing activity will satisfy that pent-up demand. Will that be inflationary? I doubt it. There is an old saying in commodities markets: “The cure for high prices is high prices.” In other words, high prices encourage more production, which lowers prices again.

IMO we are not going to see inflation unless we get wage inflation. Friday’s jobs report may indeed show inflation, but that will be due to lower-wage workers in the restaurants and retail losing their jobs as these businesses close. The loss of the lower tier workers will push up the average. Once these businesses re-open we will see a reversal. The Fed has been trying to create inflation for year, and was unable to do it in 2019 when the economy was picture-perfect and unemployment was in the mid 3s. I don’t see it happening during a pandemic-driven economic slowdown.

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Vital Statistics:

Stocks are higher this morning after yesterday’s wild ride in the bond market. Bonds and MBS are up.

Yesterday was an absolutely incredible day in the bond market with the 10 year yield hitting 1.61% at one point. While there are some technical issues for the move, the punch line is that we are seeing a similar phenomenon to the 2016 Donald Trump “reflation trade” where bonds sold off and stocks rallied in response to his election. This time though, the sell-off is global. We have seen yields rise in the UK, Japan, Germany, and Australia.

Personal incomes rose 10% in January due to stimulus payments. Personal consumption rose 2.4%, while the personal consumption expenditure index (PCE – the Fed’s preferred measure of inflation) rose 0.3% MOM and 1.5% YOY. Two things jump out at me regarding this report: First, people are saving their stimulus payments, not spending them (10% increase in income versus 2.4% increase in spending). Second, inflation is still below the Fed’s target. So, while the bond market thinks the Great Reflation is happening, so far we aren’t seeing it in the data.

Just for fun, I decided to create a graph showing initial jobless claims by week in 2009 (the depth of the Great Recession) versus last year. I think this puts the shock into perspective:

While that chart does look dismal, the chart of continuing claims (meaning the cumulative number of people claiming benefits has been falling pretty steadily. Continuing claims are now about where they were in early 2010

Don’t forget, the recovery during the Great Recession was during the aftermath of a residential real estate bubble, which are the Hurricane Katrinas of economies. This time around, real estate prices are rising smartly, which is adding to people’s wealth, not subtracting from it.

Rocket announced earnings this morning, and the stock is up 10%. (See, all is not bleak for mortgage originators). For the year, volumes rose 121% to 320 billion. GAAP earnings per share came in at $1.76.

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Vital Statistics:

Stocks are lower this morning as global sovereign yields continue to sell off. Bonds and MBS are down big again.

In terms of sovereign yields, we are seeing the German Bund up to -25 basis points, and the Japanese Government Bond yields 15 basis points. The quick rise in European bonds has the European Central Bank worried about hobbling any recovery before it gets off the ground. Jerome Powell is more sanguine, saying the rise in yields is a sign of confidence in the economy.

The second estimate for fourth quarter GDP came in at 4.1%, which was unchanged from the first estimate. Personal consumption expenditures were revised downward from 2.5% to 2.4%. Durable Goods orders rose 3.4%, which capital goods expenditures rose 0.5%.

Initial Jobless claims fell to 730k last week. You can see just how elevated they are compared to pre-COVID, when 200k was the usual print. To put these numbers into perspective, the worst weekly reading during the Great Recession was 665k, and the average for most of 2009 was around 575k or so. The average weekly number over the past year has been 1.5 million. IMO the stock and bond market is in denial over just how bad the carnage has been.

The CFPB is reconsidering new rules for non-QM loans. Here is the letter written yesterday.

Pending Home Sales fell 2.8% in January, according to NAR. “Pending home sales fell in January because there are simply not enough homes to match the demand on the market,” said Lawrence Yun, NAR’s chief economist. “That said, there has been an increase in permits and requests to build new homes.”

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