All Things in Moderation

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

Initial Jobless Claims ticked up to 276k from 260k last week. Still strong numbers – the lowest since the Nixon Administration, which is even more impressive given the growth in the population over that time period.

Challenger, Gray and Christmas announced job cuts fell 1.3% in October after rising 93.2% the month before. We are continuing to see layoffs in the energy patch.

Nonfarm productivity rose 1.6% in the third quarter and unit labor costs rose 1.4%. Productivity tends to be somewhat volatile. Productivity growth is necessary if we are going to see real wage growth.

The Bloomberg Consumer Comfort Index fell to 41.1 last week.

Mortgage originator Stonegate reported lower-than expected earnings yesterday. Originations in Q3 were up 1% on a quarter-over-quarter basis and down 2% on a year-over-year basis. The stocks of the originators / servicers have gotten absolutely hammered this year, with Nationstar down 2/3 over the past year, Stonegate down 60%, and Ocwen down 72%.

Not only has it been rough for the mortgage originators and servicers, mortgage investors have had a rough go of it as well. Pretty much all of the agency mortgage REITs got roughed up last quarter and reported decreases in book value. The volatility in the financial markets over the third quarter pushed out MBS spreads. All of the REITs are switching out of interest-rate sensitive MBS (things like 30 year fixed rate securities, or what originators are typically selling) into more commercial and credit sensitive instruments. It is a bet that the economy is recovering. At the margin, the fact that these entities are pulling back in the MBS market means that mortgage rates are a little higher than they otherwise would be.

Citi’s Head of North American Economics thinks Janet Yellen and the Fed are making a big mistake, letting the markets influence their decision-making. Economists are starting to discuss the possibility that the Fed is really subject to a triple mandate these days – not only are they supposed to keep inflation expectations in check and to minimize unemployment, they also have an unspoken mandate to keep the financial markets stable. The genesis of this really started with the Crash of 1987 when Alan Greenspan said the Fed stood buy to provide liquidity in the aftermath. The Fed rode to the rescue again after the Asian Tiger Crisis, the Long-Term Capital Management crisis, and even took prophylactic measures to prevent Y2K from becoming a crisis. Eventually this all became known as the “Greenspan put” and we have seen the endgame, which is the serial inflating of asset bubbles.

Stocks are higher this morning after Tesla beat earnings estimates. Bonds and MBS are flat.

Mortgage Applications fell 0.8% last week as purchases fell 0.6% and refis fell 0.9%. Mortgage rates spiked after the FOMC decision, so that could have been a factor.

The ADP Employment Change report came in at 182,000 jobs, which is exactly the forecast for Friday’s jobs report.

The ISM services index rose to 59.6 from 56.9 in October, one of the bright spots economically.

There will be lots of Fed-Speak today, with Janet Yellen, Stanley Fischer, and William Dudley all speaking at various points today. Yellen testifies about banking regulation at 10:00 am before the House Financial Services Committee. New York Fed president William Dudley speaks at 2:30. and Stanley Fischer will speak after the market closes. I don’t expect Yellen’s testimony to be market moving.

What’s old is new again: Amazon is opening a bookstore.

We had numerous elections last night – as a general overview Republicans are cheering this morning, while Democrats are talking about low turnout..

Earnings season is in full swing, and so far the box scores are pretty dismal. This is the worst quarter for earnings since 2009. Blame low commodity prices for the most part – the energy patch is getting killed with oil at these levels. This will make the stock market even more vulnerable once the Fed starts pulling away the punch bowl.

Speaking of low energy prices, Transcanada has pulled its application for the Keystone XL pipeline, which inexplicably became a cause celebre for the environmental movement. Tar sands oil doesn’t make sense at sub-$50 oil prices.

Stocks are higher this morning after some stronger economic data out of Europe. Bonds and MBS are down.

Construction spending rose 0.6% in September. Residential Construction increased 1.8% while nonresidential construction fell 0.1%.

The ISM Manufacturing Index fell to 50.1 from 50.2. This is the weakest reading since 2013. The strong US dollar and weak overseas demand is acting like a wet blanket for the big US exporters. Even more worrisome, the employment reading decreased to 47.6 in October, which was the lowest reading since August 2009.

We have a lot of important data this week, with construction spending today, vehicle sales tomorrow, productivity on Thursday, and the jobs report of Friday. The jobs report will carry the most weight with regards to December’s FOMC meeting. The big question the Fed is grappling with is how solid the recovery is. We know that central bank efforts to prop up the economy have supported asset prices more than they have helped actual Main Street businesses. This is why (IMO) the Fed is going to take it slow raising rates. The Bloomberg article compares mortgage credit versus credit everywhere else. The reason why QE hasn’t translated into easier mortgage credit (as compared to, well, everything else) is due to the regulatory environment.

One result of QE and ZIRP has been a spate of merger activity. We have about $10 billion in new merger activity this morning alone. When companies have cash burning a hole in their pocket, but don’t see much in the way of expansion opportunities, they buy their competitors and they buy back their stock.

The latest Fed model has the US using up its resource capacity by the first quarter of 2016. The markets and the Fed have been predicting diametrically opposed outcomes. So far, the markets have been correct. Below, is a chart of the implied inflation rate using the prices of Treasury Inflation Protected Securities. The implied inflation rate has fallen by 100 basis points over the past 2 years.

Mohammed El-Arian sees a 25% – 30% chance of a recession by 2017. Even Larry Summers and Dr. Cowbell disagree on the state of the economy. We are in uncharted territory – not with the recession, since we have had asset bubbles before – it is with the recovery where the central bank has taken such an aggressive role in combating it.

Stocks are lower this morning as the Fed begins their two day FOMC meeting. Bonds and MBS are up small.

Another sign the economy is slowing down: Durable goods orders fell 1.2% in September, and are down 0.4% ex-transportation. Capital Goods orders (a proxy for business capital expenditures) fell 0.3%. As a result of these numbers, Goldman took down their Q3 GDP estimates to 1% from 1.2% and JPM took theirs down to 0.6%.

The Markit US Composite PMI slipped to 54.5 from 55 in October and the Services PMI fell from 55.1 to 54.4.

Consumer confidence fell in October to 97.6 from a downward-revised 102.6 in September.

The S&P/Case-Shiller Home Price Index rose 0.11% in August and is up 5.1% year-over-year. They make this point about home price appreciation: “A notable part of today’s economy is the continuing low inflation rate; in the year to September, consumer prices were unchanged. Even excluding food and energy, the core inflation was 1.9%. One result is that a 5% price increase in the value of a house means more today than it did in 2005-2006, the peak of the housing boom when the inflation rate was higher. The rebound from the recent lows was faster than the 1997-2005 housing boom, and also much less driven by inflation.”

Supposedly there is a deal to prevent a government shutdown. The sequester is lifted, and the carried interest deduction goes away. This should clear the decks for Paul Ryan to take over as Speaker of the House. This deal will probably get unanimous Democratic support, but it might be hard to get the necessary 30 Republican votes.

How to get the Millennials to buy houses? NAR had a symposium on that recently, with HUD Secretary Julian Castro speaking. He lamented the tight credit in the mortgage market. The aftermath of the housing bubble has sent homeownership rates to the lowest levels in almost 50 years.