All Things in Moderation

Stocks are mixed as economic data continues to come in. Bonds and MBS are up small. Lots of economic data today.

Existing Home Sales fell to 5.04 million in April from 5.21 in March, according to the NAR. Inventory is still low, however the situation is improving, with the unsold inventory increasing to 5.3 months’ worth from 4.6 months in March. The median home price rose to 219,400, which is up 8.9% year-over-year. Real estate prices are getting frothy, as the median home price to median income ratio is now 4x, which is higher than its historical range of 3.2x – 3.6x. Low interest rates are playing a part here. That said, home price appreciation will be tough to come by going forward until we get some more wage growth. At some point, the builders will begin pumping out supply.

Initial Jobless Claims came in at 274k, which is a very good number. The labor numbers continue to look okay, however it is a bifurcated market, where people with jobs are keeping them and the long term unemployed have given up.

Consumer Comfort fell to 53.8 from 54.1, however the big number was the steep drop in economic expectations: from 50 to 44.

The Chicago Fed National Activity Index improved in April from -.36 to -.15. The Markit US Manufacturing PMI fell to 53.8 from 54.1, the Philly Fed index fell to 6.7 from 7.5, and the Index of Leading Economic Indicators jumped from 0.4% to 0.7%.

The ECB threw a nickel to Greece yesterday, giving them the smallest aid rise ever. Greece is warning that it will default in June, unless it gets more aid. Whatever money they have is going to go to public sector workers and pensioners. While both sides want Greece to stay in the Euro, their left wing government is complicating things. Which means the bond market will be susceptible to violent swings as we sort this out.

The markets generally took the FOMC minutes to be dovish, and focused on the fact that only “a few” members of the Committee believed it would be appropriate to raise rates at the June meeting. They still believe that the first quarter weakness was “transitory” due to bad weather and the West Coast port strike. That said, the economy seems to not be exhibiting the same sort of rebound we saw last year, where we had a weak Q1 followed by a strong Q2 and Q3. We are definitely not seeing the same sort of rebound in economic activity this year. The Fed noted the additional volatility in the bond market (as has pretty much everyone in the mortgage business) and attributed it to the increasing presence of high frequency traders, lower dealer inventory, and the elevated holdings of bond funds. The minutes more or less confirmed the direction of market forecasts – a September hike is becoming more likely and a June hike less so.

Industrial Production fell .3% in April, the same as March. This is the fifth consecutive month of negative readings. On a year-over-year basis, industrial production was up 1.9%. While mining and energy extraction were down as expected, other categories like consumer goods, business equipment etc were down as well. Manufacturing Production was flat, and capacity utilization fell. The European QE-driven dollar rally that began about a year ago is probably a big reason for the continued weakness here. Here is an interesting take on the big bond market sell-off.

Consumer confidence slipped in May, according to the University of Michigan Consumer Confidence Survey. Consumers are coming to the realization that we aren’t getting the expected V-shaped recovery from the weak first quarter.

Markets are higher this morning as bonds are rallying and the dollar weakens

Initial jobless claims came in at 264k, another strong reading. The fear that there would be mass layoffs in the oil patch so far has not come true. Plus, oil is now rebounding as firms have adjusted to the new price levels.

Inflation remains nowhere to be found, with the producer price index falling 0.4% in April. Ex food and energy, prices are up .7% on a year over year basis. This is about 1/3 of the level the Fed would like to see.

The Bloomberg Consumer Comfort Index fell slightly to 43.5 last week. 1/3 think the state of the economy is positive, while 2/3 think it is negative. Personal finances, are a net positive however. So it seems the perception of the economy is a bit worse than people’ actual financial situations.

Former Maryland Governor Martin O’Malley is planning to enter the 2016 race, adding at least the appearance of a speed bump to Hillary’s coronation as the Democratic candidate. Both O’Malley and Bernie Sanders (I-VT) plan to run to Hillary’s left. So far, Hillary has managed to avoid taking any questions about the Trans Pacific Partnership, the trade deal that has become a litmus test on the left. The media doesn’t want to mess up Hillary’s candidacy, so they are leaving her alone on this one.

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

The week after the jobs report is usually pretty data-light and this week is no exception. The highlights will be retail sales on Wednesday and industrial data on Friday.

Bonds will be vulnerable to shifts in the wind due to a few big deadlines in Greece this week. To put the Greek situation in perspective, over the past 3 weeks, the German 10 year yield has gone from 7.5 basis points in yield to 77 basis points in yield intraday last week. This is what has been pushing down Treasuries. Last week the 10 year briefly traded over 2.3% in yield.

The Fed may not pursue a path of steady consecutive 25 basis point increases in the Fed Funds rate when they start hiking rates. Interestingly, the article posits that the Fed wants to learn the lesson of the last hike cycle – in which they tightened too predictably, and which some believe caused the real estate bubble. If the Fed truly believes that rate hikes caused the real estate bubble, and everything was fine in the markets before then, it shows we have learned absolutely nothing from 2008.

The FHFA is extending HARP and HAMP through 2016.

Stocks are down small as we get a few mixed signals on the job market. Bonds and MBS are holding in there despite another big sell-off in the German Bund, which now yields almost 65 basis points – this is an increase of 57 basis points in about two weeks. Welcome to the new QE normal, where sovereign debt trades with the volatility of tech stocks.

Note that the volatility in the Bund has hurt Bill Gross, who considers it “the short of a lifetime.” Unfortunately, it looks like Bill sold options against the Bund, betting it would trade in a narrow range, and is now taking some gas on his position given the furious sell-off Euro sovereign debt. Welcome to the wonderful world of negative convexity, which is the bane of mortgage bankers globally.

The volatility in bonds has hurt the mortgage REITs, the latest of which is Annaly Capital, which missed yesterday. American Capital Agency struggled with the volatility as well. Interestingly, American Capital Agency was responsible for some of the outperformance in FHA / VA pricing at the end of the quarter. Ordinarily, they don’t buy Ginnie Mae TBAs as Fannies offer higher returns, but they viewed the Ginnie Mae sell off due to the change in MI was overdone, and took a position the other way. Mortgage REITs are generally most active in the secondary market for MBS, however they do dabble in TBAs and can affect loan pricing at the margin.

We have some mixed employment data this morning, with Challenger and Gray announced job cuts increasing 53% to 61,582 in April, which is the highest number in 3 years. About a third of these cuts are in the oil patch, as Schlumberger, Baker Hughes, and Halliburton all announced layoffs. The other big category is retail, where you are seeing layoffs as well. Ordinarily, you would expect lower energy prices to translate into higher spending at the mall, but it isn’t working out that way this time around. Blame broke Millennials who can’t find jobs, Gen-Xers who drew the candy cane card as they were hitting their peak earning years, and Baby Boomers who had to retire a little earlier than they had planned.

On the plus side, initial jobless claims hit 265,000 last week, which is still flirting with 15 year lows. One thing to keep in mind between the initial jobless claims report and Challenger: Challenger looks at announced job cuts. Often, those cuts end up not happening because the business turns around first.

The Bloomberg Consumer Comfort Index fell to 43.7 last week as consumers still fret about the state of the economy. An index reading of 50 is considered “normalcy.”

Janet Yellen ventured into Alan Greenspan territory yesterday when she remarked stock prices are still “quite high.” It didn’t have the effect on markets that Alan Greenspan’s “irrational exuberance” comments did, as stocks largely ignored the warning. Memo to central bankers: You don’t have a bubble in stocks. You have a bubble in sovereign debt