All Things in Moderation

Vital Statistics:

Stocks are higher this morning after the inflation came in more or less as expected. Bonds and MBS are flat.

Inflation at the consumer level rose 0.8% MOM and 6.8% YOY in November. This was the highest reading since 1982. Ex-food and energy prices rose 4.9% YOY. Rising energy prices were a big driver of the increase in prices. Used cars were another big contributor. Shelter was up only 3.5% YOY, and that number will be rising over the next year. The near 20% increase in home prices will impact the index, albeit with a 12-18 month lag. So these sorts of numbers might be with us for a while.

The Fed prefers the PCE Index (Personal Consumption Expenditures) index to measure inflation. That said, this reading on the CPI probably seals the deal that the central bank will step up the pace of tapering, and will probably get back to neutrality some time in early spring.

If you have noticed that the 10 year yield continues to fall, but mortgage rates are going nowhere, you aren’t alone. Mortgage Backed Securities spreads are widening as the market evaluates how much the reduced central bank demand will affect MBS pricing. The Fed currently owns about 30% of all the MBS outstanding. While the Fed experimented with reducing the amount they hold by runoff, they ended up abandoning it after some unintended consequences.

It is important to remember that the Fed is still buying MBS, just not as much as they used to. Even once they reduce their monthly purchase rate to zero, they will probably still buy enough MBS in the market to compensate for runoff.

Consumer sentiment improved in December, according to the University of Michigan Consumer Sentiment Survey. That said, consumer sentiment is down from a year ago.

Interestingly, the sentiment is improving more in the lower income tiers than the middle and higher income tiers. Richard Curtain, the Chief Economist discussed what is going on:

Sentiment posted a small overall gain in early December (+4.5%), although it was still nearly identical to the average reading in the prior four months (70.6). The more interesting result was the large disparity between monthly gain among households with incomes in the lowest third (+23.6%) of the income distribution compared with the modest losses among households in the middle (-3.8%) and top third (-4.3%). While small differences in the direction of change are rather common, it is quite unusual to record such a large change in the bottom third: a larger one-month percentage was recorded only once before, a gain of 29.2% in June 1980. While it is usually assumed that such extreme changes represent an erroneous result due to small samples, in 1980 it was the households in the bottom income third that initially signaled the end of the first part of the double recession in 1980-82, with upper income households following in subsequent months. The core of the renewed optimism among the bottom third was the expectation of income increases of 2.9% during the year ahead; the last time a higher gain for this group was expected was in 1981. This suggests an emerging wage-price spiral that could propel inflation higher in the years ahead. 

The punch line: the wage-price spiral is probably here. Start looking for Gerald Ford Whip Inflation Now buttons on Ebay.

Mortgage Credit Availability decreased in November, according to the MBA. This was the first decline in 5 months. “Credit availability in November was down slightly, even as the housing market continues to thrive amidst the improving job market,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “However, the picture was different depending on the market segment. An increase in conventional credit availability was offset by a decrease in government credit, as lenders reduced their offerings of government loan programs with lower credit scores, as well as those for investment homes. Credit supply for jumbo loans increased for the fifth straight month.”

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Vital Statistics:

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

Initial Jobless Claims fell to 184k last week, which included the Thanksgiving Day holiday. Initial Jobless Claims had remained stubbornly high, but it looks like it might have finally turned the corner.

Meanwhile, job openings were close to record levels at 11 million. The quits rate edged down to 2.8% after hitting a high in September. The quits rate is one of the leading indicators of wage inflation, and we are certainly seeing evidence of wage inflation – witness the lousy productivity numbers from a couple of days ago.

Wage inflation will be the story for the Fed as it wrestles with inflation. Despite the strength of the labor market, numbers like the employment-population ratio and the labor force participation rate show that there is still additional supply in the labor market. These numbers represent people who were working before the pandemic, and are not now. The unemployment rate doesn’t count people who haven’t worked for over 6 months, so those folks are not reflected in that number.

Ideally, if the people who exited the labor force during the last 2 years come back, it could help alleviate the shortages we are seeing. A shortage of workers ultimately limits the potential economic output of the economy and acts as a governor on the economy. Faster growth then translates into higher inflation.

Homeowner equity increased 31% in the third quarter, according to CoreLogic. This is a $3.2 trillion increase. The average homeowner picked up about $57,000 in equity over the past year. Frank Martell, CEO of CoreLogic said “Not only have equity gains helped homeowners more seamlessly transition out of forbearance and avoid a distressed sale, but they’ve also enabled many to continue building their wealth. This financial reserve will be especially helpful for homeowners looking to fund renovation projects.“

This increase in homeowner equity means that refinance activity will not be entirely dependent on interest rates. Cash-out debt refinancings will remain a great source of loans and represent evergreen activity.

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Vital Statistics:

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

Nonfarm productivity declined 5.2% in the third quarter as output increased 1.8% and hours worked rose 7.4%. This is the lowest reading since 1960. Nonfarm business productivity fell 0.6%, the biggest decline since 1993. Unit labor costs increased 9.6% as compensation increased 3.9% and productivity fell by 5.2%.

Productivity is the key to non-inflationary growth. It is also the key to higher living standards. This is certainly an issue that will concern the Fed. FWIW, productivity is generally a pretty volatile measure, so one bad reading isn’t the end of the world. But it does comport with supply chain issues, rising wages and slower output increases.

Mortgage applications increased 2% last week as purchases fell 9% and refis increased 5%. The index includes an adjustment for the Thanksgiving holiday. “Mortgage rates declined for the first time in a month, prompting a pickup in refinancing, with government refinances increasing more than 20 percent over the week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “While the 30-year fixed mortgage rate and 15-year fixed mortgage rate both declined only one basis point, the FHA rate fell 7 basis points, driving the surge in government refinances. Borrowers are continuing to act on these opportunities, but if rates trend higher as MBA is forecasting, the window of opportunity to refinance will continue to get smaller.”

Saule Omarova has withdrawn her name from consideration to run the OCC. She was torpedoed due to some pretty out-there writings which advocated for state control of banking. Not the ideal person to regulate banks. I could see Biden tapping ex-CFPB head Richard Cordray to run the agency. He has been mentioned as a possibility for the Fed, but since he is a lawyer and not an economist he would be a better fit at OCC.

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Vital Statistics:

Stocks are higher this morning as Omicron fears subside. Bonds and MBS are down.

Home Prices rose 20% in November, according to the Clear Capital Home Data Index. The Western region rose 24%, while the Midwest increased 16%. Note that the Clear Capital Index is one month ahead of CoreLogic / Case-Shiller and 2 months ahead of FHFA.

Home prices rose 18% in October, according to CoreLogic. Prices are expected to rise only 2.5% next year, however. New household formation, investor purchases and pandemic-related factors driving demand for the limited supply of available for-sale homes continues to propel the upward spiral of U.S. home prices. However, we expect home price growth to moderate over the near term as many buyers take a break for the holidays.”

Overall, the consensus seems to be that as mortgage rates rise next year, home price appreciation should slow. The MBA forecasts that rates will rise to 4%, and if you think that buyers focus on the monthly payment versus the price, then increased rates should dampen price growth. Ultimately what will lower prices will be increased supply, and so far housing starts remain around long-term averages.

Apartment vacancy rates hit a high of 97.5%, and asking rents are rising at almost 14%. “The demand from renters is really strong, especially for the luxury product. As the economy has recovered we’ve done a better job in high- paying employment than we have in the lower paying jobs,” said Greg Willett, chief economist at RealPage.

It looks like Chinese real estate developer will default on its dollar debt after missing a payment yesterday. I suspect that foreign investors will be in the first-loss category, however the losses will spiral past that. So far, experts seem to be sanguine about this, as they assume that the Chinese government will be able to contain it. I am skeptical. Residential real estate bubbles throw off all sorts of shrapnel when they explode, and often hit innocent bystanders. Remember 2008? What got everyone’s attention was the collapse of the money market funds and the commercial paper market. Retailers were unable to fund inventory for the holiday shopping season. That is a long way from CDO squareds.

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Vital Statistics:

Stocks are higher this morning on hopes that the Omicron variant of COVID will be more mild than other strains. Bonds and MBS are down.

The upcoming week will be relatively data-light, as is typical following the jobs report. The biggest numbers will include the Consumer Price index on Friday, and job openings on Wednesday. There is no Fed-speak as we are in the quiet period ahead of the December FOMC meeting next week.

While the Fed isn’t expected to do anything with interest rates next week, the Street thinks the central bank might double the pace of tapering. This would explain some of the widening in MBS spreads.

The number of mortgage loans in forbearance fell below 1 million last week, according to data from Black Knight. Forbearance plans are down 18% from a month ago.

Mortgage origination hit 3.59 million units in the third quarter, according to data from ATTOM. This is up 3% from the same quarter last year, but is down 8% from the second quarter. In 2021, we saw quarter-over-quarter declines in Q2 and Q3, which is rare given that this is the seasonally strong period. That said, Q1 of 2021 was an exceptionally good quarter and the good times couldn’t necessarily last.

“The overflow stack of work that was hitting lenders for several years shrank again in the third quarter across the U.S. amid a few emerging trends,” said Todd Teta, chief product officer at ATTOM. “It looks more and more like homeowner’s voracious appetites for refinance deals has eased notably, while purchase lending also dipped. It’s still too early to say if the trends point to major shifts in lending patterns or the broader housing market boom. But the drop-off is significant, especially for home buying, which could suggest an impending housing market slowdown. We will be watching the lending trends extra closely in the coming months.”

I would also add that this report looks only at units, and not dollar volume. If you look at dollar value, the drop was only 6% since home prices (and average loan sizes) are rising.

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Vital Statistics:

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

The economy added 210k jobs in November, which came in below the the Street estimate of 545,000. Since this is the headline number, it will be the focus, however the internals of the report are pretty good. The unemployment rate fell 0.3% to 4.2% while average hourly earnings rose 4.8% on a YOY basis.

The labor force participation rate rose to 61.8% while the employment-population ratio increased to 59.2%. Both numbers are still well below where they were pre-COVID, however. FWIW, there is a pretty big disconnect between the Establishment survey (which asks employers) and the Household survey (which talks to people). Employers reported an increase of 210k jobs while households showed an increase of 1.1 million.

Overall, it shows that the labor market is on the mend, and the increases in wages are no longer just being driven by technical factors. The Great Resignation continues as we saw a record 4.4 million people quit their jobs in September. Overall, the economy is making progress towards full employment, which gives the Fed the wiggle room policy-wise to attack inflation more aggressively.

Bonds sold off on the report, despite the miss on the payroll number. I think the household survey is telling the real story this month, not the establishment survey.

The ISM Services Report hit an all-time high last month, which is another data point that the economy is starting to re-accelerate. Business Activity and Employment were the big drivers of the increase. Interestingly prices are still rising, but the rate of growth is decelerating.

If you look at the statements from businesses, shortages of materials and labor continue to be a constraint, however demand remains strong.

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Vital Statistics:

Stocks are rebounding after yesterday’s sell-off. Bonds and MBS are up.

Initial Jobless Claims came in at 224k last week, which was up from 194k the week before. Last week’s print was a 50-year low, but it looks like it might have been a fluke.

Despite the falling 10-year rate, mortgage rates have not been falling much. In trader’s parlance, this means MBS spreads are widening. The current spread is about 70 basis points, which has blown out over the past couple of weeks, however it is around the average for 2021. FWIW, 2021 spreads were “tight,” compared to historical levels, which means that we should expect mortgage rates to fall grudgingly, and to rise easily going forward.

As a general rule, MBS prices tend to lag the moves in Treasuries, however there is more going on right now. The Fed is looking at accelerating its tapering process which means that demand for MBS is expected to fall faster than expected. Lower demand for TBAs = Lower Prices for TBAs = Higher Mortgage Rates.

The drop in commodity prices will probably give the Fed some wiggle room on how fast they need to raise rates, however the market’s perception is that the Fed is behind the curve. The drop in the 10-year rate doesn’t really make sense in this context, however IMO it is part of the global “risk-off” trade which is driven by the new COVID variant.

Announced job cuts fell to 14,875 last month, according to outplacement firm Challenger, Gray and Christmas. This was the lowest number since 1993. “With the Omicron variant emerging and the unknowns that come with its spread, coupled with the ongoing difficulty hiring and retaining workers, it’s no surprise job cuts are at record lows. Employers are spread thin, planning best- and worst-case scenarios in terms of COVID, while also contending with staff shortages and high demand,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

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Vital Statistics:

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

Jerome Powell sounded hawkish at yesterday’s Senate Banking Committee testimony, saying it is time to retire the word “transitory” to describe inflation. The Fed is expected to make a decision regarding a faster tapering at the mid-December FOMC meeting, which will be largely determined by the severity of Omicron.

The Fed Funds futures increased the probability of further rate hikes, and are pricing in 3 hikes in 2022, with the first one expected at the June meeting.

The new conforming loan limits are out, with the new level at 647,200. The high balance limit rises to $970,800.

ADP estimated that there were 534,000 jobs added in November. This is exactly what the Street is looking for in Friday’s jobs report.

“The labor market recovery continued to power through its challenges last month,” said Nela Richardson, chief economist, ADP. “November’s job gains bring the three month average to 543,000 monthly jobs added, a modest uptick from the job pace earlier this year. Job gains have eclipsed 15 million since the recovery began, though 5 million jobs short of pre-pandemic levels. Service providers, which are more vulnerable to the pandemic, have dominated job gains this year. It’s too early to tell if the Omicron variant could potentially slow the jobs recovery in coming months.”

Mortgage applications fell 7.2% last week as purchases rose 5% and refis fell 15%. “Mortgage rates rose for the third week in a row, reducing the refinance incentive for many borrowers,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Over the past three weeks, rates are up 15 basis points and refinance activity has declined over 18 percent. Despite higher mortgage rates, purchase applications had a strong week, mostly driven by a 6 percent increase in conventional loan applications. Conventional loans tend to be larger than government loans, and this was evident in the average loan amount, which increased to $414,700 –the highest since February 2021. As home-price appreciation continues at a double-digit pace, buyers of newer, pricier homes continue to dominate purchase activity, while the share of first-time buyer activity remains depressed.”

The ISM Manufacturing Index came in at 61.1, an increase of 0.3 from October. “The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, with some indications of slight labor and supplier delivery improvement. All segments of the manufacturing economy are impacted by record-long raw materials and capital equipment lead times, continued shortages of critical lowest-tier materials, high commodity prices and difficulties in transporting products. Coronavirus pandemic-related global issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — continue to limit manufacturing growth potential. However, panel sentiment remains strongly optimistic, with 10 positive growth comments for every cautious comment. “

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Vital Statistics:

Stocks are lower this morning on COVID fears. Bonds and MBS are up.

Jerome Powell is scheduled to speak in front of the Senate Banking Committee this morning. Here are his prepared remarks. One sentence caught the market’s attention: “The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation. Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.” The market took this as bullish for bonds, which is why rates fell late yesterday.

The Fed Funds futures are getting a little more dovish compared to a week ago. The central tendency is now looking at 50 bps in hikes next year versus 75 a week ago.

Home prices rose 18.5% in the third quarter, according to the FHFA. This number will supposedly determine the new conforming limits for next year. I am hearing conflicting interpretations however. If you divide the Q321 index level by the Q320 index level, you get a 18.05% increase. This would put the new conforming loan limits at $647,200. If they use the headline number, then it would come in at $649,700. We should get the official numbers in a day or two.

“House price appreciation reached its highest historical level in the quarterly series,” said William Doerner, Ph.D., Supervisory Economist in FHFA’s Division of Research and Statistics. “Compared to a year ago, annual gains have increased in every state and metro area. Real estate prices have risen exceptionally fast, but market momentum peaked in July as month-over month gains have moderated.”

Separately, the Case-Shiller Home Price Index rose 19.5%.

Consumer confidence slipped in November, according to the Conference Board. “Consumer confidence moderated in November, following a gain in October,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Expectations about short-term growth prospects ticked up, but job and income prospects ticked down. Concerns about rising prices—and, to a lesser degree, the Delta variant—were the primary drivers of the slight decline in confidence. Meanwhile, the proportion of consumers planning to purchase homes, automobiles, and major appliances over the next six months decreased. The Conference Board expects this to be a good holiday season for retailers and confidence levels suggest the economic expansion will continue into early 2022. However, both confidence and spending will likely face headwinds from rising prices and a potential resurgence of COVID-19 in the coming months.”

The pipeline for MSR sales is heavy, with a bunch of sellers trying to ring the register as servicing valuations improve ahead of an expected increase in rates. Both Rocket and United Wholesale made big bulk sales of servicing in the third quarter.

If the Omicron variant of COVID causes rates to fall, it will be good news for refis, but it will be awful for servicing valuations. We have seen this movie before: People pile into servicing ahead of an expected increase in rates, and then something like Brexit, COVID or Omicron causes rates to fall, not rise. Falling rates are bad for MSR valuations, it causes a double-whammy of lower modeled values and writedowns as MSRs are refinanced away.

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Vital Statistics:

Stocks are rebounding today after getting smacked on Friday. Bonds and MBS are down.

Stocks were hit hard late last week on news about a new variant of COVID – Omicron. The moves were probably exaggerated given that many participants were taking Friday off, so we’ll see if this move has legs.

Black Friday sales were up 48% compared to last year’s depressed level. That said, they were below 2019. Lots of Black Friday sales make me wonder if demand is slipping. With all of the apparent shortages out there, I thought retailers would not need to cut prices to get business.

We have a big week for data. The most important numbers will probably be the FHFA House Price Index tomorrow, which will determine the conforming loan limits for 2022. The jobs report on Friday will be big, along with ISM data and construction spending. Jerome Powell also speaks tomorrow.

More Fed officials are comfortable with increasing the pace of tapering and raising rates more quickly. “Various participants noted that the (policy-setting) Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher than levels consistent with the Committee’s objectives,” the Fed said in the minutes.

Pending Home Sales rose 7.5% in October, according to NAR. “Motivated by fast-rising rents and the anticipated increase in mortgage rates, consumers that are on strong financial footing are signing contracts to purchase a home sooner rather than later,” said Lawrence Yun, NAR’s chief economist. “This solid buying is a testament to demand still being relatively high, as it is occurring during a time when inventory is still markedly low. The notable gain in October assures that total existing-home sales in 2021 will exceed 6 million, which will shape up to be the best performance in 15 years.” The hottest markets were Jacksonville, Tampa, Dallas and Nashville.

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