All Things in Moderation

Markets are lower this morning as oil continues to fall. Bonds and MBS are up, with the 10 year hitting lows not seen since June of 2013.

Lower energy prices means that inflation at the wholesale level is pretty much non-existent. The producer price index fell .2% in November. Ex food and energy, it was flat.

Declining gas prices pushed the University of Michigan Consumer Confidence level to 93.8 from 88.8 last month. We appear to be back to normalcy.

The left is still up in arms over the language in the CROmnibus (continuing resolution + omnibus spending bill) that allows banks to trade derivatives in their FDIC insured entity. I haven’t seen the specific language, but I think it allows the banks to use derivatives for hedging purposes. But there is so much posturing going on here that it is hard to tell exactly what it does. The spending bill did make it through the House, and it looks like a done deal in the Senate.

Net Worth fell by $140 billion in the third quarter, according to the Federal Reserve. Real estate was the bright spot of the report as it rose $167.8 billion.

Markets are lower worldwide after a big sell-off in China. Bonds and MBS are rallying.

The Chinese government instituted new regulations for local debt last night, which sent the markets reeling. Chinese stocks have been on a tear recently (up something like 30% since Nov 1) so the news was an excuse for some major profit-taking, which sent the indices down something like 5%.

Small business optimism picked up a bit in December, as the NFIB Small Business Optimism approached the historical average before the Great Recession began. A big increase in economic optimism drove the increase. Earnings trends are heading higher, and some are planning to increase employment, which is good news for the economy.

Another good data point for the market: Job openings rose to 4.834MM in October from 4.685MM in September. This almost matches August’s number, which was the highest since early 2001. Combine that with a steady diet of sub 300k initial jobless claims prints and the leading indicators of the labor market are looking strong. Now about that wage growth…

New 3% down loans are expected to have only a marginal effect on increasing credit availability. Separately, This is all part of an attempt to get the first time homebuyer back into the market, which has been the Achilles Heel of this housing recovery. The problem is that while a 3% downpayment isn’t necessarily daunting, the credit score the banks require is – something like 755. For young adults with student loan debt, that sort of score probably just isn’t in the cards. Here are the FAQs for the 3% down loans from Freddie Mac.

Obamacare Architect Jonathon Gruber heads to Capitol Hill today to discuss the obfuscation and white lies involved in the selling of Obamacare. In an unfortunate (for him and Obama) minute of candor, he discussed how the the plan relied on the “stupidity of the American voters” to get it through, and how the “Cadillac Tax” was a brilliant piece of wordsmithing that set in motion the eventual taxability of employer-provided health care benefits. Don’t expect much out of Gruber – he will probably apologize for the language he used and spend the rest of the time lawyered up and will simply relay previously prepared talking points. Note that the Medicaid subsidy issue is going to be taken up by the Supreme Court as well, which could throw the whole thing in peril.

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

The week after the jobs report is typically data-light, and this week is no exception. The highlights from a bond market perspective will probably be the JOLTS job openings on Tuesday and retail sales on Thursday. We will also hear from luxury home builder Toll Brothers on Wed morning.

The latest Black Knight Mortgage Monitor is out. Foreclosure starts dropped by 10.5% to 81,400 and the foreclosure inventory dropped to 3.6MM homes, which is down 18% year-over-year. They have a cool chart that illustrates the difference between the judicial and non-judicial states in terms of home price appreciation, both in terms of decline and rebound. You can see how the judicial states have experienced much lower rebounds off the bottom than the non-judicial states. It would be interesting to see compare the peak to trough price declines of judicial vs. non-judicial states. I suspect we would find that having tougher foreclosure requirements did not help support house prices.

Markets are lower as ECB President Mario Draghi addresses further action the ECB might take to boost growth. Bonds and MBS are flat.

It looks like Mario Draghi is kicking the QE can down the road a little more, and will address further stimulus measures in the first quarter. The Euro is rallying.

Initial Jobless Claims came in at 297k during the holiday shortened week. Announced job cuts fell 21% in November, according to outplacement firm Challenger, Gray and Christmas.

The ISM Non-Manufacturing Index rose to 59.9% in November as business activity and new orders surged. The employment index decreased however.

Completed Foreclosures fell to 41,000 in October, according to CoreLogic. This is a 26.4% decline from a year ago, and a 34% drop from September. The 12 month sum of foreclosures is at its lowest point since October 2000. Approximately 605,000 homes are in some stage of foreclosure compared to 875,000 a year ago. This represents about 1.6% of all homes with a mortgage. Unsurprisingly, the judicial states contain the highest inventory, with New Jersey at 5.5%, and New York and Florida at 4.1%.

The latest Beige Book shows that conditions improved overall during the months of October and November. The only disappointing news was that wage inflation remains “subdued.” Separately, Obama met with the Business Roundtable yesterday to push for wage increases. The Administration is also pushing for businesses to consider hiring the long-term unemployed. This is pretty much going to be an “either / or” type of situation.

Markets are flattish on no real news. Bonds and MBS are flat as well.

Mortgage Applications fell 7.3% last week, which isn’t a surprise given the holidays. Purchases rose 2.5% while refis fell 13.4%.

ADP is forecasting the payroll number will come in at 208k this Friday. The Street is forecasting 230k.

Productivity rose 2.3% in the third quarter, while unit labor costs fell 1%. Output increased 4.9% and hours worked increased 2.5%. Compensation rose 1.3% while productivity rose 2.3%, which means unit labor costs are -1%. These numbers do not suggest inflation is any sort of immediate or medium-term threat at all, which is bond bullish.

Speaking of bond bullish, Amazon.com just did a $6 billion (!) bond issue, which contained a $1.5 billion tranche of 30 year bonds yielding 4.95%. The funds will be used for general corporate purposes. If you look at their balance sheet, they already have $7 billion in cash vs. $3 billion in debt outstanding, so it isn’t like they need the money. 30 years at under 5%. 7 years ago, the 30 year yielded more than that.

The latest kerfuffle in Washington doesn’t involve immigration – it involves a bunch of expiring tax breaks. Many of them are for individuals – tax breaks for teachers, tuition, mortgage debt forgiveness, mortgage PMI, and mortgage forgiveness. There are a number of business breaks in there as well. The Senate came up with a two year extension, but Obama promised to veto it because it doesn’t address the earned income tax credit and child tax credits that expire in 2017. He wants them to be made permanent. It looks like a 1 year extension bill is in the works. If this doesn’t get resolved, it could make for an interesting start to the tax year.

From the polar vortex making November the coldest in decades to El Nino ushering in a mild December, natural gas investors have been taken for a ride over the past six weeks or so. Fun fact – on the NYSE, they have Bloomberg or CNBC on the big TV monitors. In the commodity pits, they have on the Weather Channel. This is why. Look at the volatility of nat gas over the past month. roughly $3.50 to $4.50 and back to $3.80. Pretty amazing.

Stocks are higher this morning on no real news. Bonds and MBS are giving back some of Friday’s big gain.

Construction Spending rose 1.1% in October, and September’s number was revised upward from – .4% to – .1%.  Private residential construction rose 1.3%. Federal construction spending rose 19.3% and overall public construction increased 2.3%. Construction spending is still 20% off its peak level in 2006. 3Q GDP was boosted by a 9.9% increase in government spending, and we see that the Federal Government increased construction spending by 19%. Perhaps someone was trying to influence the midterms by throwing a little money around…

Chart: Construction Spending 2000 – Present

Construction Spending as a percent of GDP: