Morning Report: Inflation is tame, gas is not

Vital Statistics:

 

Last Change
S&P futures 2708 9.25
Eurostoxx index 360.56 -1.71
Oil (WTI) 56.32 0.07
10 year government bond yield 3.11%
30 year fixed rate mortgage 4.94%

 

Stocks are higher as oil stabilizes. Bonds and MBS are up. The 10 year is trading at 3.11%, quite the drop from the 3.27% levels of last week.

 

Inflation remains largely under control according to the Consumer Price index. The CPI in October rose 0.3% MOM and 2.5% YOY, right in line with street forecasts. Ex food and energy, it was up 0.2% MOM and 2.1% YOY.

 

A couple of trade groups wrote letters of support for Kathy Kraninger as head of the CFPB. The agency has been led by Mick Mulvaney, who also head OMB, as Acting Director. Kraninger is the supposed replacement. If she isn’t confirmed by the Senate in the lame duck session, the nomination returns to the President and Mick Mulvaney stays in charge for another 210 days. Kraninger promises to reform the CFPB in the same way Mick Mulvaney is, by ending “regulation by enforcement” and being more transparent about what the rules actually are.

 

It usually pays to keep tabs on markets unrelated to your own. While people have been focusing on the oil market, and the bear market in oil, we are seeing the opposite effect in natural gas. Oil has lost about 24% over the past month. Natural gas gained more than that this week. Seriously. Natural gas closed last Friday at around $3.70 a contract and closed yesterday at around $4.70 a contract. Many commodities, especially natgas, is extremely sensitive to weather forecasts – if you go to the New York Stock Exchange, you’ll see CNBC on the trading floor. If you go to the a commodity exchange like the Chicago Mercantile Exchange, they have on the Weather Channel. So, if you get a forecast for an extra-cold winter, the price can skyrocket. As the link above explains, while we are the Saudi Arabia of natural gas, supply is not the driver here, storage is. And if we have an unusually cold winter, the amount of gas in storage can fall to dangerously low levels, which means higher prices. There are rumors going around of a hedge fund that is short Natgas and in trouble, but who knows? Regardless, it is something to watch.

 

natural gas

 

Speaking of keeping tabs on other markets, watch the corporate bond markets. General Electric has issues. While everyone is aware of what is going on the stock price, the bonds are down about 15 points since early October. In bond market terms, for a household name like GE, that is a lot. Bonds trading in the low 80s aren’t necessarily distressed, but this is GE we’re talking about. If this snowballs, we should see a tightening of credit overall. It probably won’t affect the MBS market and mortgage pricing, but it will almost inevitably act as a drag on interest rates overall, and it could keep the Fed at bay.

 

Chart: Financial Stress Index:

 

financial stress index

Morning Report: Oil stumbles badly, rates fall

Vital Statistics:

 

Last Change
S&P futures 2724 3
Eurostoxx index 362.85 -1.64
Oil (WTI) 55.92 0.23
10 year government bond yield 3.13%
30 year fixed rate mortgage 4.97%

 

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

 

Mortgage applications fell 3.2% last week as purchases fell 2.3% and refis fell 4.3%.  It has been a long, cold winter for the origination business over the past 6 quarters or so. You can look at the chart of the MBA mortgage application index to get an idea of just how tough it is out there right now.

 

MBA mortgage applications

 

Home prices rose 0.4% MOM and 5.6% YOY in September, according to the CoreLogic home price index. Prices rose the least in the hottest markets, as affordability issues bite. CoreLogic did a study of Millennial attitudes, and less than half think they would qualify for a mortgage, which is interesting given that FHA and GSE low down payment programs are targeted towards the first time homebuyer and are very forgiving in terms of FICO and downpayments. The industry can benefit from doing some education here.

 

30 day delinquencies fell 0.6 percentage points to 4% in August. The foreclosure rate fell 0.1% to 0.5%.  DQs are at the lowest level in 12 years. CoreLogic estimates that 1/3 of all MSAs are overvalued. Unfortunately, not all MSAs are created equal – there are a lot more people in the overvalued MSAs like San Francisco and Washington DC than there are in the some of the undervalued MSAs in the Midwest and Northeast. The overvalued MSAs will be most vulnerable to economic shocks.

 

Oil has been in a downward spiral, hitting the lowest levels in a year on fears of oversupply. It sounds like the hedge funds, CTAs and speccies have been long and wrong and are now capitulating. Note that commodity prices are often the canary in the coal mine with respect to global growth, and other cyclical commodities like lumber and copper are following suit.

 

Goldman sees unemployment falling to 3% within the next 18 months or so.  Goldman also sees another 125 basis points in Fed hikes during this cycle.

Morning Report: NFIB small business optimism continues streak

Vital Statistics:

 

Last Change
S&P futures 2746 18
Eurostoxx index 364 2.1
Oil (WTI) 58.73 -1.25
10 year government bond yield 3.17%
30 year fixed rate mortgage 4.98%

 

Stocks are rebounding after yesterday’s sell-off. Bonds and MBS are up small.

 

Slow news day as bond investors return from a long weekend. Neel Kashkari speaks at 10:00 am EST.

 

Small Business Optimism continued to hit record levels going back to the early 70s. The NFIB Small Business Optimism Index rose to 107.3 in October. Job creation was strong, with small business adding about .15 workers. 59% of businesses reported spending on expansion, while reports of sales and new orders continued their solid showing. Inflation remains on a slight upward path, while not exhibiting any rapid rises. As commodities fall (oil especially) the big source of inflation remains transportation (driven by labor costs) and anything tariff-related.

 

NFIB

Housing affordability dropped again, according to the NAHB / Wells Fargo Housing Opportunity Index. We are back at levels last seen around 2004 and 2009.

 

Lower affordability means that people are spending on their home improvement projects. The Despot reported earnings that easily topped analyst expectations. I guess when it is hard to move up, people fix up.

 

 

Morning Report: Commodity prices falling

Vital Statistics:

 

Last Change
S&P futures 2778 -30
Eurostoxx index 364.14 -1.6
Oil (WTI) 60.5 0.31
10 year government bond yield 3.19%
30 year fixed rate mortgage 4.98%

 

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

 

Markets are open today, however many people are taking the day off in observance of Veteran’s Day.

 

There won’t be much in the way of market-moving data this week (CPI on Wednesday and retail sales on Thursday are the only potential market movers), however we do have a lot of Fed-speak, with Jerome Powell speaking on Wednesday.

 

Inflation at the wholesale level was a little hotter than expected, rising 0.6% MOM and 2.9% YOY. Ex food and energy, it rose 0.5% / 2.8% and ex food, energy and trade services (the core rate) it rose 0.2% / 2.8%. Inflation using the PPI metric is higher than the Fed’s 2% target, but the PPI isn’t the measure they target. We will get inflation at the consumer level on Wednesday.

 

Consumer sentiment improved in the first reading of the November numbers, according to the University of Michigan sentiment survey.

 

Amazing statistic: 20% of China’s apartments are vacant. That works out to be 50 million apartments. One of the biggest symptoms of a bubble is oversupply, and a 20% vacancy rate would qualify. In the big cities, apartments are ridiculously expensive, trading for something like 40 – 50 times income. For reference, prices in the US topped out at just under 5 times income in 2006. Chinese economic statistics are heavily massaged by government, but there is no doubt that they have the sort of real estate bubbles that seem to occur after decades of rapid growth, similar to the US in the 20s and Japan in the 80s. Once their bubble bursts, China will try and export their way out of it, which will probably spark more trade tensions, but will also put downward pressure on inflation and interest rates globally. The US could go through another period of having its cake and eating it too – a period where they go through strong economic growth without inflation worries.

 

Speaking of inflation, oil has been getting shellacked over the past month, losing over 20% from mid-October. Part of this has been driven by the US allowing 8 companies to buy Iranian oil despite sanctions. OPEC is now entertaining production cuts, which has stabilized prices at least today.

 

Also note that lumber prices (which have been soaring due to Canadian tariffs) have now reversed and are heading lower. This should help lower new home construction costs, although the biggest bottleneck remains labor and affordable lots.

 

lumber

 

So, while we are seeing inflationary pressures building in the labor market, commodities are going the other way.

 

California passed a couple of housing affordability initiatives last week, which were mainly targeted to the Bay Area. Similar measures in Oregon and Florida also passed.

 

 

Morning Report: An anticlimactic Fed decision

Vital Statistics:

 

Last Change
S&P futures 2794 -14.75
Eurostoxx index 364.5 -2.58
Oil (WTI) 59.81 -0.86
10 year government bond yield 3.21%
30 year fixed rate mortgage 4.98%

 

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

 

As expected, the Fed made no changes to monetary policy yesterday. The language in the statement was almost identical to the September release, with some small changes regarding the deceleration in business fixed investment. Bonds didn’t have much a of reaction to the decision. The December Fed Funds futures contracts are handicapping a 76% chance of another 25 basis points next month.

 

Initial Jobless Claims ticked up slightly to 214k last week. The labor economy continues to plug along.

 

A lack of housing inventory translates into a “new normal” for home sales, which is about 1 million units less per year than the pre-bubble days – in other words, the early 2000s, before the big jump in sales driven by the bubble years. The problem is that household formation has outstripped homebuilding for over a decade, and if you correct for population growth, we are still way below what is needed.

 

home sales

 

D.R. Horton reported earnings yesterday that missed street estimates and the stock was rocked to the tune of 9%. Earnings were up 41%, but on the call, DHI CEO David Auld said the market was “choppy” and noted some “momentum slipping from the market.” D.R. Horton focuses on starter homes, so this is worrisome given that luxury is already struggling a bit. The whole sector is struggling this year, with the homebuilder ETF down 25% from its high set earlier this year.

Morning Report: Fed Day

Vital Statistics:

 

Last Change
S&P futures 2805 -11
Eurostoxx index 367.48 1.08
Oil (WTI) 61.92 0.45
10 year government bond yield 3.22%
30 year fixed rate mortgage 4.96%

 

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

 

The FOMC announcement will come out at 2:00 pm EST today. No changes in rates are expected, and it should be a nonevent. Don’t expect to see any discussion of the recent sell-off in the stock market. About the only thing that could be interesting would be any discussion of how to quickly to shrink the Fed’s balance sheet, which is sitting at $4.1 trillion in assets, down from a peak of $4.5 trillion. That is still much lower than pre-crisis levels of below $1 trillion.

 

Fed assets

 

Donald Trump indicated that he would entertain an increase in the corporate tax rate if it was used for middle class tax relief. Democrats have complained that the middle class didn’t get a big enough tax cut, and the wealthy / corporations got too big of one. Don’t expect Democrats to bite, however. They want more healthcare entitlement spending and to raise taxes. Republicans aren’t going to vote to raise taxes, period.

 

UBS said it will fight an expected Justice Department civil suit over mortgage backed securities from 2007. They say they weren’t a “significant originator” of these mortgages.

 

The Fannie Mae Home Purchase Sentiment Index dipped in October. Affordability concerns are having an effect, as are higher mortgage rates. Despite the recent strong jobs numbers, more people are beginning to have job security worries. This is even more surprising when you consider that the number of respondents who said the economy is on the right track is at a record high.

Morning Report: Mortgage Applications fall, Blue Wave never materializes

Vital Statistics:

 

Last Change
S&P futures 2782 25
Eurostoxx index 366.66 0.41
Oil (WTI) 62.93 0.71
10 year government bond yield 3.20%
30 year fixed rate mortgage 4.96%

 

Stocks are higher this morning after Midterm elections. Bonds and MBS are flat.

 

Democrats took a narrow 7 seat majority in the House last night, while Republicans increased their majority in the Senate. There were largely no surprises last night – urban voters stayed reliably Democrat, rural voters stayed reliably Republican, however some suburban voters flipped from Republican to Democrat. That change could have been due to either (a) the tendency of educated voters to skew more Democrat, or (b) tax reform. I wonder if tax reform played a part, since higher income suburban voters probably got hit the hardest from the deduction limits on property taxes and state / local taxes.

 

One takeaway from the election: Progressive darlings flopped. Beto O’Rourke, Richard Cordray, and Andrew Gillum all lost. So while the energy in the D party is with the resistance, that doesn’t necessarily mean the voters are there too. The Blue Wave never materialized. The other takeaway: The Never Trump Republicans (the John McCains and the Bob Corkers) are gone as well. So DC is going to be more polarized than ever.

 

What will the election mean for markets? Nothing. Gridlock is generally positive for the stock market, and the bond market is being driven by the Fed. Oh, by the way there is a Fed FOMC meeting starting today.

 

There were about 7 million job openings at the end of September, according to the JOLTs report. This is a decrease of about 285k jobs from August’s record 7.3 million number. The quits rate was flat at 2.4%. While anecdotal evidence abounds regarding the inability of companies to fill positions and retain workers, that has yet to really show up in the government’s numbers.

 

Home prices rose 5.6% MOM in September, according to CoreLogic. They estimate that 38% of all MSAs are now overvalued, when looking at home prices versus incomes. Just under 20% were undervalued. Of course overvaluation / undervaluation is a moving target, so that can all change if incomes rise, especially if mortgage rates stay the same. Betting on a flattening yield curve late in an economic cycle is usually a decent bet, especially after the Fed finishes a round of monetary tightening.

 

Mortgage credit availability increased in October according to the MBA Mortgage Credit Availability Index. “Credit availability increased in October, driven largely by an expansion in the supply of conventional credit, while government credit fell slightly over the month,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “Reversing a trend from last month, lenders made more conventional and low down payment programs available to prospective borrowers. This increase in supply was likely in response to a growing number of first-time home buyers in the market, as home price appreciation has slowed and wage growth has picked up. Jumbo credit availability also expanded last month, with the jumbo index increasing again to its highest level since the survey began.”

 

MCAI

 

Last week’s drop in interest rates didn’t have much of an effect on mortgage applications, as the MBA’s index fell 4%, driven by a 3% drop in refis and a 5% drop in purchases. Activity hit a 4 year low.

 

Zillow is getting into the home buying business in Houston, by making cash offers for homes from qualified sellers and then listing the home for sale. It looks like Zillow is selling this as a service to make it easier to sell a home rather than just real estate speculation, but who knows? We do know that Z-estimates are often wildly inaccurate, so Zillow might not have such a big edge.