All Things in Moderation

Vital Statistics:

Stocks are weaker this morning as global markets continue the sell-off that began on Friday. Bonds and MBS are lower.

Dennis Lockhart is speaking this morning, and said that it is time to have a serious discussion about raising rates. Neel Kashkari and Lael Brainard will be speaking later on today. That should be the end of Fed-speak until the FOMC meeting later this month. Fed Funds futures are now signalling a 60% chance of a rate hike by the end of the year.

So far it appears that mortgage rates are lagging the move up in sovereign yields. The same thing happened after the taper tantrum in 2013. The 10 year bottomed in spring, while mortgage rates kept falling and didn’t start rising until fall.

Donald Trump went after Janet Yellen and monetary policy, accusing the Fed of being political to protect Obama’s legacy. FWIW, it seems like there is a change in the consensus over ZIRP and whether it is causing more problems than it is solving. Not too long ago, such comments would have been treated with “How dare you!” kvetching by the press.

Certainly you are seeing the change in consensus overseas, as foreign bond markets have been selling off over the past week, with the German Bund now trading with a positive yield. Even the Japanese bond market is heading lower. Deutsche Bank lays out the scenarios going forward.

The chart below (courtesy of Deutsche Bank) looks at overvaluation / undervaluation of various asset classes over a two centuries. Bonds are extremely overvalued (we know that already), but ZIRP has also caused overvaluation in stocks and real estate, which should unwind as rates start going up. Best case scenario: a situation like the post WWII era where rates gradually crept up over the course of a few decades. Of course currencies were linked to gold back then.. Today, we are on the PhD standard where the value of paper is based on the relative value of other paper.

It is almost as if global bond markets jumped the shark last week when Sanofi and Henkel were able to issue corporate debt at negative yields.

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Vital Statistics:

Stocks are lower as emerging markets sell off. Bonds and MBS are down.

Risk-off feel today, but bonds aren’t rallying. What is going on? Global bond yields are increasing, especially in Japan where the BOJ is taking a breather purchasing bonds. The German Bund is down as well. Some strategists are beginning to sense that the Japanese bond market could be headed lower. So, despite weak US economic data, a global bond sell-off will affect US Treasuries as well.

Boston Fed President Eric Rosengren is sounding hawkish, which is not his natural home. His argument is that a campaign of slow, steady rate hikes will prolong the expansion more than waiting and then having to move more aggressively. Of course it all comes down to wage growth, which decelerated in the last jobs report.

Barry Ritholz took a look at the the lack of wage growth and comes up with an interesting chart: the ratio of the unemployed to the number of job openings. This ratio is back down to pre-crisis levels. While we have yet to see much evidence of increased turnover in the quits rate, it does appear at least anecdotally that we are seeing more turnover. Certainly the stage is set for further wage inflation.

Mortgage credit tightened slightly in August, according to the MBA. Apparently, one investor is exiting the correspondent business and that accounted for the tightening. Credit is easing in the jumbo space however.

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Vital Statistics:

Stocks are higher after the ECB left rates unchanged. Bonds and MBS are flat.

Initial Jobless Claims came in at 259k, We have been below 300k (an important level) for 80 weeks now.

Consumer comfort increased to 44 last week, according to Bloomberg.

Wage inflation is evident only in certain pockets of the labor economy – tech workers, engineers, construction, and remains flattish in the less skilled sectors. Elsewhere, hours are being cut and we are seeing full-timers being relegated to part-time. Until we start seeing broad-based wage inflation, the Fed is going to move slow. Note there is a disconnect between the Fed heads and what the markets are saying regarding near-term rate hikes. The markets aren’t buying the hawkish language.

Consumers are getting somewhat more constructive on the economy, according to Fannie Mae. The number of people who think the economy is on the right track improved to 38% and the number of people who think the economy is on the wrong track fell to 52%. Given the weak data recently that could be a temporary blip.

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Vital Statistics:

Markets are flattish on no real news. Bonds and MBS are up small.

Mortgage Applications rose 1% last week as purchases and refis rose the same amount.

Job openings hit a record 5.9 million in July, according to the JOLTS data. The quits rate, which is the best indicator of economic strength inched up to 2.1% which was the typical level pre-recession. Note the JOLTS data is older than the more recent employment data, however it continues to indicate either strength in the labor market, or a mismatch of skills. Job openings in construction are about the same level as the go-go years of 2005 – 2007.

Same store sales increased 0.8% last month, which was the strongest showing since May. This is the back-to-school shopping season, which is the second most important period for retailers.

There is no doubt that the latest economic data has pointed towards a deceleration of growth. The ISM report from yesterday was the worst in 6 years. Still some strategists see the chance of a September move – Goldman’s Jan Hatzius just took down his probability of a Sep hike from 55% to 40% (still pretty high). Given the non-existent inflationary picture, it is hard to make a case that the Fed needs to hike rates now.

Second quarter originations were the highest since 2013, right before the “taper tantrum” killed the refi market, according to Black Knight Financial Services. Total first lien originations were 512 billion, of which 58% were refis.

Distressed sales are falling as a percent of home sales, and the discounts appear to be narrowing slightly. The biggest discounts are still in the judicial states where foreclosures sit and depreciate during the elongated timelines. Compare New York’s 40% with Texas’s 14%.

Aside from raising the Fed Funds rate, the next shoe to drop with the Fed will be dealing with the assets it purchased during quantitative easing. Pre-2008, the Fed’s balance sheet stood at something like $800 billion in assets. Today, it is about $4.5 trillion. The Fed intends to eventually return its balance sheet to pre-2008 levels. Ben Bernanke argues that the Fed should maintain its balance sheet at current levels for the long term.

File under “things that will astonish people some day:” In Europe, you are starting to see negative yields in the corporate bond sector. Yesterday, Germany’s Henkel and French pharma giant Sanofi sold 1.5 billion euros of 0% corporate bonds above par. Astonishing that people would pay to take credit risk and interest rate risk, but there you go.  With the ECB buying corporate bonds as well as sovereigns maybe the thought is that they will flip them to the ECB a couple of basis points higher? I don’t know. IMO, this is the equivalent of buying eToys at 40x revenues of iVillage at 2x pageviews in the hopes that the daytraders will ramp them so you can exit.

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Vital Statistics:

Markets are slightly higher this morning on no major news. Bonds and MBS are flat.

Jobs report data dump:

• Nonfarm payrolls + 151k vs 175k expected
• Unemployment rate 4.9% vs 4.8% expected
• Labor force participation rate 62.8% flat
• Average hourly earnings +0.1% vs. 0.2% expected
• Average weekly hours 34.3 versus 34.5 expected

Overall, not a report that should move the needle for the Fed, especially with respect to the September meeting. Bonds initially rallied on the report, but sold off during the rest of the day. The key numbers (the disappointing hourly earnings and average weekly hours) point to the Fed standing pat in September.

The ISM Non-Manufacturing missed expectations by a country mile, falling to 51.4 versus expectations of 55. Growth is still positive (since the number is above 50), but growth took a big step back.

The Labor Market Conditions Index slipped to -0.7 in August.

Lack of construction workers are a drag on housing, according to Freddie Mac. About 30% of the construction workers from 10 years ago found jobs in other fields. There are about 200,000 unfilled construction jobs in the US at the moment, and the ratio of job openings to hiring is the highest since 2007. The number of open jobs has increased 81% over the past two years.

Home prices rose 6% YOY in July, according to CoreLogic. Home price appreciation continues its torrid pace out West, while the Northeast and Midwest lag. We are beginning to see overvalued markets especially out west. Here is a map of the overvalued (red) and undervalued (green) markets:

Delinquencies ticked up in July, according to the Black Knight Financial Services Mortgage Monitor. Part of that was technical, with the month ending on a Sunday. Foreclosures and foreclosure inventory continue to work their way downwards.

What are the markets thinking about the Hillary versus Trump match up? While the US has some betting markets, the UK has a very liquid market in betting. You can track the markets here, at Sporting Index. The current markets are here:

The original bets pre-dated the conventions, so the payout is 25 if the person gets the party nomination and 50 if they win. Based on these markets the implied probability of the election is 72% Clinton, 28% Trump. FWIW, in the US-based PredictIt markets, Trump costs 37 cents and Hillary costs 64 cents…

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