All Things in Moderation

Vital Statistics:

Stocks are lower this morning after some inflation data came in higher than expected. Bonds and MBS are down.

The second estimate for third quarter GDP was revised upward to 2.1%. The PCE price index was unchanged at 5.3%. Ex-food and energy, it rose 4.5%. The PCE price index is the Fed’s preferred measure of inflation, and it is obviously higher than their 2% target rate. Wages and salaries were revised upwards as well.

Personal incomes rebounded in October by 0.5% after falling 1% in September. Consumption rose 1.3%. The PCE inflation index rose 5%, and if you strip out food and energy rose 4.1%. Note that this is below the averages for the third quarter (which we saw in the GDP report). This is at least one indication that inflation is beginning to moderate.

Just one quick note on inflation – home price appreciation does get incorporated into the inflation data via rents and “owner’s equivalent rent” which is a proxy for homeowners. That said, it generally shows up with a 12 – 18 month lag, so the current inflation numbers have yet to capture the torrid price appreciation we have been seeing this year.

It is important to note that inflation is as much a psychological phenomenon as it is a monetary one. It is more than simply “too much money chasing too few goods.” It is people wanting to get ahead of demand as well. Say for example, if you heard COVID cases were rising and we might be heading towards another lockdown, would you stock up on TP? Of course you would. So would everyone else. That would create shortages and increase prices.

Workers seem to be in the driver’s seat for the first time since the 1970s. Automatic cost-of-living increases were built into union contracts, and even non-union workers began to expect annual cost-of-living wage increases. Depending on how long this worker shortage lasts, these things may become a feature of the landscape going forward. It will be hard for the Fed to hit a 2% inflation target if wages are rising 4% a year.

At any rate, even if commodity prices begin to fall, home price appreciation is going to start showing up in the numbers starting next year. While some of that is certainly not “real” inflation – your cost of living doesn’t increase just because your home value rises – consumers are going to focus on the headline number and demand wage increases going forward. Unless the supply chain issues magically disappear we have the pieces in place for a long-term secular increase in prices.

New Home Sales rose 0.4% MOM in October, but are 23% lower than they were a year ago. The median home price rose 18% to 407,700.

Filed under: Economy, Morning Report | 43 Comments »

Vital Statistics:

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

Initial Jobless Claims came in at 268k last week. We are still well above pre-COVID levels, but at least the numbers are trending down.

The index of leading economic indicators increased in October, according to the Conference Board. The index rose 0.9% after increasing 0.7% in August and September.

“The U.S. LEI rose sharply in October suggesting the current economic expansion will continue into 2022 and may even gain some momentum in the final months of this year,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Gains were widespread among the leading indicators, with only the average workweek and consumers’ outlook making negative contributions.

“However, rising prices and supply chain bottlenecks pose challenges to growth and are not expected to dissipate until well into 2022. Despite these headwinds, The Conference Board forecasts growth to remain strong in the fourth quarter at around 5.0 percent (annualized rate), before moderating to a still historically robust rate of 2.6 percent in Q1 2022.”

Here is a good video describing what happened with Zillow Offers and the Orlando housing market. The Wall Street Journal also had a long piece about how Zillow’s algorithm got it so wrong. Zillow was obviously chasing properties in the hottest markets (especially Phoenix) and was overestimating the value that its improvements. It looks like the company is stuck with inventory and will be selling them at a 5% – 7% loss.

New York Fed Head John Williams spoke yesterday about Fed interventions into the Treasury and financial markets. If you were hoping that the Fed might allow the market for interest rates to become, well, a market, then you might be disappointed.

It’s also clear that we need not start from a position of how things are, but instead, how they should be. Let’s not think of how we can reform, but how we can design. Let’s create a system that can better withstand the unforeseeable and the unpredictable.

The problem with “designing a market” is that interest rates are an important input into the economy. They transmit critical information about the supply and demand for capital. For the last 12-13 years, the Fed has been actively intervening in the interest rate markets. God knows how they will handle the disruption if / when the sovereign debt bubble bursts.

The choice for the next Fed Head is between Jerome Powell and Lael Brainard. She is perceived as more dovish than Powell. The market perceives Brainard as more political than Powell: “Powell, I think, will be much less concerned about the midterm elections in determining when they should raise interest rates,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors. “I’m not saying that’s what Brainard is going to do if she’s in that seat, but that’s going to be the perception.” FWIW, the Fed has historically been loath to make any monetary policy changes late in a Presidential election year, but this is the first time I have heard a mention of midterms.

The impact on the Treasury market would be worse (at least for mortgage bankers) if Biden nominates Brainard. She will be viewed as more inflationary. FWIW, the Fed Funds futures are still handicapping either two or three rate hikes next year. Brainard would mean a steeper yield curve (in other words a bigger difference between long-term and short-term rates).

Filed under: Economy, Morning Report | 15 Comments »

Vital Statistics:

Stocks are lower as investors fret about inflation. Bonds and MBS are down.

Housing starts disappointed again, coming in at 1.52 million. Building Permits were a bit better, rising to 1.65 million. Given the shortage of housing in the US, these numbers should be north of 2 million. This has been going on for years, so it cannot be blamed on the supply chain shortages of the past two years.

Housing starts are stuck around the average level since 1959. When you consider that the US population has risen 85% since then you can see the issue. Below is a chart of housing starts divided by population.

According to the National Association of Realtors, we have a shortage of about 5 million units. That is 3 years of housing starts alone.

Separately, homebuilders sentiment rose 3 points, according to the NAHB / Wells Fargo housing index. “The solid market for home building continued in November despite ongoing supply-side challenges,” said NAHB Chairman Chuck Fowke. “Lack of resale inventory combined with strong consumer demand continues to boost single-family home building. In addition to well publicized concerns over building materials and the national supply chain, labor and building lot access are key constraints for housing supply,” said NAHB Chief Economist Robert Dietz. “Lot availability is at multi-decade lows and the construction industry currently has more than 330,000 open positions.”

Mortgage Applications fell by 3% last week as purchases increased by 2% and refis fell by 5%. “Refinance applications decreased for the seventh time in eight weeks, as mortgage rates moved higher after two weeks of declines.” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Activity has been particularly sensitive to rate movements, and last week’s decline was driven by a drop in conventional and FHA refinance applications, which offset an increase in VA refinance applications. All mortgage rates in MBA’s survey increased, with the 30-year fixed rate climbing to 3.2 percent.”

Filed under: Economy, Morning Report | 17 Comments »

Vital Statistics:

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

Retail Sales rose 1.7% in October, according to the Census Bureau. On a YOY basis, they rose 16.3%. Gasoline prices were a big driver of the increase. Electronics retailers also saw decent gains. Ecommerce sales were up 4%.

Overall, this is a good start for the holiday shopping season. Note that Walmart reported third quarter numbers this morning. Same store sales rose 9.2%, which is a strong reading, albeit it is an easy comparison to a year ago.

Industrial Production rose 1.6% MOM in October, while manufacturing production rose 1.2%. Capacity Utilization rose to 76.4% from 75.8%.

Applications for new home mortgages rose 6% from September, but are down 15% compared to a year ago. “The strong monthly gain puts MBA’s estimate of new home sales at its strongest pace since January,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity continues to be dominated by higher loan balance transactions, which pushed the average new home loan size up to over $412,000, another new record in the survey. Recent U.S. Census data show an increasing share of new sales are for homes yet to be built or still under construction, and a shrinking share of completed homes. Housing demand remains strong, and buyers are making quick decisions in a still very competitive market.”

Renters who are exiting from the eviction moratorium are seeing a 10% increase in asking rent. “Single-family rental vacancy rates remained near 25-year lows in the third quarter of 2021, pushing annual rent growth to double digits in September,” said Molly Boesel, principal economist at CoreLogic. “Rent growth should continue to be robust in the near term, especially as the labor market improves and the demand for larger homes continues.”

Rent growth was strongest in Miami, rising 27%. Phoenix and Las Vegas rose 20% and 16% respectively. On the other side was the Northeast, where rents rose under 5% on average.

Real Estate investors bought 18.2% of homes in the third quarter, according to Redfin. This has made it difficult for homebuyers who have to compete with these folks. We are seeing lots of institutional money flood into the space as the potential returns in rentals dwarf anything else in the financial markets.

Filed under: Economy, Morning Report | 9 Comments »

Vital Statistics:

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

The upcoming week won’t have much in the way of market-moving data, although we will get some important housing data with housing starts and the NAHB Housing Market Index. The biggest day for non-housing data will be tomorrow when we get retail sales and industrial production.

Mohammed El-Arian says the Fed has a credibility problem when it comes to inflation. “I think the Fed is losing credibility,” El-Erian said Monday. “I’ve argued that it is really important to reestablish a credible voice on inflation and this has massive institutional, political and social implications….We are in this transition of central banks mischaracterizing inflation. The repeated narrative: ‘It is transitory, it is transitory, it is transitory.’ It is not transitory,” El-Erian said, warning the Fed risked making a major policy mistake….We have ample evidence that there are behavioral changes going on….Companies are charging higher prices [and] there’s more to come. Supply disruptions are lasting for a lot longer than anybody anticipated. Consumers are advancing purchases in order to avoid problems down the road — that of course puts pressure on inflation. And then wage behaviors are changing.”

The Atlanta Fed’s GDP Now estimate has fourth quarter GDP accelerating to 8.2%. Much of this will hinge on consumer spending for the holidays and whether supply chain issues work themselves out.

There were 10.4 million job openings at the end of September, according to the JOLTS jobs report. The quits rate, which tends to lead wage growth, rose to a series high of 3%. This will alarm the Fed as we have the pieces in place for a wage-price spiral.

Filed under: Economy, Morning Report | 31 Comments »

Vital Statistics:

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

Volatility in the Treasury market is back to March and April of 2020. While this volatility isn’t as bad as the 2013 taper tantrum, we should still expect volatility in the interest rate market as the Fed begins its tapering process. FWIW, MBS spreads are still super-tight, which means the mortgage backed securities market is sanguine about the process. I have received some emails from NQM lenders saying that conditions in the NQM securitization market are deteriorating, and there is the possibility that this could start flowing through to other markets.

The Evergrande situation in China has the potential to affect financial markets outside of China. There is so much leverage in the system that financial distress gets transmitted quite quickly. Don’t forget in 2008, pain in the subprime market (which theoretically should have been contained in the hedge fund / investment bank community) ended up making it impossible for retailers to borrow money in the commercial paper market to fund inventory for the holiday shopping season. This is why I keep harping on this situation.

Mortgage delinquencies fell for the fifth straight quarter, according to the MBA. Delinquency rates fell by 59 basis points on a quarterly basis and 277 on an annual basis to 4.88% of all loans outstanding. “For the fifth consecutive quarter, the mortgage delinquency rate declined, commensurate with a decline in the U.S. unemployment rate over the same time period,” said Marina Walsh, CMB, MBA Vice President of Industry Analysis. “The improvement was driven entirely by a decline in later-stage delinquent loans – those loans that are 90 days or past due, but not in foreclosure. By the end of the third quarter, many borrowers were approaching the 18-month expiration point of their forbearance terms and were being placed in permanent home retention solutions, such as modifications and loan deferrals.”

Consumer sentiment fell again, according to the University of Michigan Consumer Sentiment Survey. This is the lowest level in a decade. The index hit 66.3, which goes back to 2011 levels. Consumers cited inflation as the prime reason, along with a belief that government policy will be unable to address it. FWIW, consumer sentiment surveys tend to mirror gasoline prices, but the inflation issue is something we haven’t dealt with for a long time.

On the issue of policy responses, the government has 3 options. First, they can hope that things eventually work out. That is Plan A, and is what the Biden Admin is pursuing. The second option is for the Fed to tighten, which will probably cause a recession since GDP growth is around 2%, and productivity is highly negative. The third option is price controls, which is probably going to be pursued as well. It will start with fire and brimstone speeches alleging profiteering and price gouging. Next year is an election year, so expect Plan C to be utilized.

Filed under: Economy, Morning Report | 14 Comments »

Vital Statistics:

Stocks are lower this morning after the inflation numbers came in hotter than expected. Bonds and MBS are down.

The Consumer Price Index rose 0.9% MOM and 6.2% on an annual basis. Ex-food and energy, it rose 4.6%. This was the highest reading in 30 years. Energy prices drove the month-over-month increase, but we are seeing increases across the board. Aside from energy, meat / poultry / fish and used cars were up big.

Mortgage Applications rose 5.5% last week as purchases rose 3% and refis rose 7%. “Although overall activity remains close to January 2020 lows, homeowners acted on the decrease in rates,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance activity was up 7 percent overall, with gains in both conventional and government refinances. Additionally, the average loan balance for a refinance application was the highest in a month.”

Initial Jobless Claims came in at 267k last week. We are still pretty elevated compared to pre-pandemic numbers.

United Wholesale reported third quarter numbers yesterday. Originations rose 16% YOY and 6% QOQ to $63 billion. Gain on sale margins came in at 94 basis points, an improvement from the 81 bps in Q2 but much lower than the 318 from a year ago. For the fourth quarter, they are guiding for gain on sale margins to come in between 85 and 105 basis points and for production to fall by around 11%.

Filed under: Economy, Morning Report | 22 Comments »

Vital Statistics:

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

Inflation at the wholesale level rose 0.6% MOM and 8.6% YOY. Ex-food and energy, they rose 6.8% on a YOY basis. About a third of the increase was due to higher gasoline prices. The producer price index is upstream of the consumer price index, which means it will percolate down to the consumer level. While the history of the PPI doesn’t go back as far as the CPI, we are seeing record inflation.

Small business optimism slipped again, according to the NFIB Small Business Optimism Index. This is the lowest overall reading since March of this year. “The Optimism Index decreased slightly in October by 0.9 points to 98.2. One of the 10 Index components improved, seven declined, and two were unchanged. The NFIB Uncertainty Index decreased 7 points to 67. Owners expecting better business conditions over the next six months decreased 4 points to a net negative 37 percent. Owners have grown pessimistic about future economic conditions as this indicator has declined 17 points over the past three months to its lowest reading since November 2012.

You can see the increase in prices below, which corroborates the PPI:

Mortgage credit availability increased in October, according to the MBA. “Credit availability inched forward in October, but the overall index was 30 percent lower than February 2020 and close to the lowest supply of mortgage credit since 2014,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Within the subindexes, a 4 percent increase in the jumbo index was essentially offset by a 6 percent drop in the conforming index. There was an increase in the supply of jumbo ARM and non-QM products, which drove most of the increase in the jumbo index. On the conforming side, there was a pullback in ARMs, higher LTV loans, and lower credit score products.

Home prices rose 18% in September, according to CoreLogic. They see home price appreciation moderating to only 2% over the next year, however. The flight out of urban areas into the suburbs and exurbs continued, however CoreLogic sees that trend reversing over the next year.

Filed under: Economy, Morning Report | 10 Comments »

Vital Statistics:

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

The upcoming week will be relatively data-light as is typical in the week after the jobs report. We will get inflation data with the Producer Price Index tomorrow and the Consumer Price index on Wednesday.

Jerome Powell will be speaking today and tomorrow at Jackson Hole. Note that the bond market will be closed on Thursday for Veteran’s Day.

Fannie and Freddie made $5.3 billion from the adverse market fee. The proceeds from the fee are expected to partially cover the losses Fan and Fred are eating from the foreclosure moratorium. The FHFA anticipates that the moratorium will cost the GSEs between $7 and $8 billion over the next couple of years.

Chinese high-yield bondholders have lost about a third on their investment this year as the property developers begin to default on their debt. FYI, the Chinese stock market is flattish on the year. As a general rule, when the bond market and the stock market disagree on the future the bond market usually has it right.

Chinese media claims that Evergrande has made all of its interest payments. It looks like offshore investors have not received a November 6 interest payment.

Rocket reported that it originated $88 billion in the third quarter. This was an increase from the second quarter, and roughly flat on a YOY basis. Gain on sale margins rose from 2.8% in the second quarter to 3.05% in the third. I guess they see the market getting more competitive in the fourth quarter. Guidance for gain on sale margins are expected to come in between 2.65% and 2.95%.

Jerome Powell and Lael Brainard met with Joe Biden presumably to discuss who will lead the Fed when Powell term expires soon. Brainard is viewed as more dovish than Powell. Whoever gets the nod might end up being the G William Miller of this generation. Miller was nominated by Jimmy Carter to run the Fed in 1978, and lasted a little over a year before getting kicked upstairs to run Treasury.

During this time period, the inflation rate rose from about 6.5% in March of 1978 to almost 12% in August of 1979 when he was replaced. Below is a chart of the last inflation cycle, which pretty much lasted from 1965 to 1980.

Filed under: Economy, Morning Report | 19 Comments »

Vital Statistics:

Stocks are higher after the payrolls number came in above expectations. Bonds and MBS are up.

The economy added 531,000 jobs in October, according to the BLS. The unemployment rate fell 0.1% to 4.6% and the employment-population ratio increased by 0.1%. The labor force participation rate was flat at 61.6%. Average hourly earnings increased at a 4.9% clip. Interestingly, the average workweek fell by 0.1 hours, so that sort of jives with the drop in productivity we saw yesterday.

The end of mortgage forbearance has increased the number of affordable homes on the market, according to Redfin. “The end of forbearance has forced many lower-income Americans to put their homes up for sale and become renters,” said Redfin Chief Economist Daryl Fairweather. “This has caused the number of affordable homes on the market to surge, helping replenish inventory amid an acute housing shortage. It’s a rain storm after a long drought, but the drought isn’t over yet.”

On the other side of the coin, luxury home sales are beginning to slip after spiking during COVID. Home prices are still up mid-teens.

Zillow’s exit out of iBuying caused competitor Opendoor to rally 19% yesterday. I guess it is one less competitor, but do they really have a better real estate price forecasting model than Zillow?

Analyzing repeat sales and comps is complex, but it isn’t splitting the atom or anything. And market movements (like what happened with Zillow) are impossible to predict. The bottom line is that investing in real estate is a highly leveraged business, and leverage and volatility don’t mix.

Filed under: Economy, Morning Report | 42 Comments »