Morning Report: Strong ADP numbers

Vital Statistics:

 

Last Change
S&P futures 2939 10.25
Eurostoxx index 384.7 2.78
Oil (WTI) 75.25 0.07
10 year government bond yield 3.08%
30 year fixed rate mortgage 4.78%

 

Stocks are higher after the ADP jobs report came in gangbusters. Bonds and MBS are flat as we head into a day with 5 Fed speakers.

 

The ADP jobs report came in stronger than expected, with 230,000 private sector jobs added in September. This is well higher than the 180,000 estimate the Street has penciled in for Friday’s report.  The market will be focusing on the wage data more than the payroll data with the employment situation report, however.

 

ADP jobs report

 

Mortgage applications were flat last week as we head into the seasonally slow Q4 and Q1 time of the year. “Rates were little changed last week, following the most recent [Federal Open Market Committee] meeting where the Fed announced another rate hike based on the health of the economy and job market as expected, “said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Short-term rates have been increasing but long-term rates have held steady, which should not pose too much of a headwind to home purchase activity, especially given the potential demand from demographic factors.”

 

The ISM Non-Manufacturing Index hit a record high last month (albeit only going back to 2008). We saw a huge jump in the employment index of almost 6 percentage points, and continued strength in new orders. Tariff worries have taken a step back, and prices are rising, but not uncontrollably. Labor shortages were mentioned as an issue.

 

Mortgage fraud risk is increasing, as higher home prices encourages buyers to pad their financial situation to qualify for a loan. There are online services which will produce fake pay stubs and answer VOE calls, (for “novelty” purposes of course). This is in addition to the other more typical ploys, which include holding out a rental as owner-occupied. Most of the risk in in the wholesale, not retail channel, and we are nowhere near the liar loans of the bubble days. Worst places for fraud risk: NY and NJ, where glacial foreclosure timelines add insult to injury.

 

They’re still worried about deflation. Charles Evans said that inflation hasn’t gone up as much as the Fed would like. Fiscal policy is very pro-cyclical at the moment, and the expansion is long in the tooth.

 

The Tesla saga has taken another interesting turn. The SEC thought they had a settlement with Musk over the infamous 420 tweet (where he tweeted that he was planning to take Tesla private at $420 a share price, and that he had financing lined up).  The SEC sued him for making false statements that impacted the share price, and he got off relatively light, with a fine to be shared with the company, and a requirement that he step down from the Board for 2 years. Now, Musk is telling the Board that he will quit the company if they don’t fight for him. One thing is for sure: getting into public spats with the SEC is generally not good for your stock price.

 

I am surprised Amazon stock is holding up given the announcement yesterday. Although the company declined to provide any financial guidance, it is hard to see how the company escapes without a significant bite in its earnings. To make matters worse for the company, cash flow will be impacted as employee bonuses for many workers will now be paid in cash versus stock. AMZN earnings last year: $3 billion. AMZN stock compensation last year $4 billion. I guess bulls on AMZN are betting that this holiday shopping season is going to be so great that the increased costs don’t matter. But a company trading at 78x expected earnings doesn’t have a lot of margin for error, especially if its cost structure is going to more closely mirror that of its bricks-and-mortar competitors. I am sure the politics behind the announcement will be a fascinating tale.

 

 

Morning Report: More anecdotal evidence of wage inflation

Vital Statistics:

 

Last Change
S&P futures 2926.5 -3.75
Eurostoxx index 381.96 -1.98
Oil (WTI) 75.37 0.07
10 year government bond yield 3.07%
30 year fixed rate mortgage 4.71%

 

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

 

Home prices rose 0.1% MOM and 5.5% YOY during August, according to CoreLogic. This growth rate was the slowest pace in two years, and reflects the decline in affordability due to higher rates and prices.  The areas of undervaluation are concentrated primarily in the Midwest, parts of the South and parts of inland CA.  One thing to keep in mind is that overvaluation / undervaluation is based on incomes and is therefore a moving target.

 

Corelogic overvalued

 

Speaking of incomes, Amazon has just increased its minimum wage to $15 an hour and will lobby Washington to increase the Federal minimum wage as well. Amazon has been under relentless pressure from the left, and finally gave in. Lobbying for a hike in the Federal minimum wage is interesting. Perhaps that was the price Amazon had to pay to get the left to leave it alone, however Amazon probably can afford to pay its workers higher wages than the brick and mortar retailers with which it competes. So it might make business sense for them to do that. Amazon already punches well below its weight margin-wise, so the Street might not like it so much.

 

Bottom line for rates: we are seeing enough anecdotal evidence of increasing wages that it is going to start showing up in the numbers. The big question is whether it throws the Fed off their planned normalization policy. Janet Yellen (who probably is representative of most of the FOMC voting members) wanted to let the labor market run hot for a while. I don’t think Powell is any different. Until we see a move up in the core PCE inflation ratings, I don’t think the Fed will deviate from its plan to wrap up this tightening cycle next year. We have had a lot of hikes already in 2018, and rate hikes act with a 3 month to 1 year lag.

 

Aside from labor, rising oil prices are something to watch as well. The Fed generally focuses on core inflation (ex-food and energy) but eventually higher commodity prices become embedded into other prices. Oil is trading at $75 right now, and OPEC seems happy to let the price run. There is talk of $100 oil again.

Morning Report: Out: NAFTA. In: USMCA.

Vital Statistics:

 

Last Change
S&P futures 2933 14.75
Eurostoxx index 384.63 1.45
Oil (WTI) 73.2 -0.09
10 year government bond yield 3.09%
30 year fixed rate mortgage 4.71%

 

Stocks are higher this morning after NAFTA was saved over the weekend. Bonds and MBS are down small.

 

Canada and the US reached an agreement late last night to keep Canada in NAFTA (which will be renamed). The biggest change in NAFTA makes it harder for automakers to build in Mexico, where labor is cheaper. Canada got to keep a trade dispute mechanism. The treaty will go to Congress for approval. “It is a great deal for all three countries, solves the many deficiencies and mistakes in NAFTA, greatly opens markets to our Farmers and Manufacturers, reduce Trade Barriers to the U.S. and will bring all three Great Nations closer together in competition with the rest of the world,” wrote Trump last night. There is a press conference scheduled for 11:00 am.

 

Manufacturing continues to impress, with the ISM survey coming in at 59.8. New orders decelerated, while production and employment accelerated. Tariffs continue to weigh on manufacturers, and the clarity of having NAFTA (sorry USMCA) off the table should help somewhat, but we still are nowhere near any sort of resolution with China. Still, the market is strong, and labor issues remain. Wages are going to increase. They have to.

 

The CFPB’s head of fair lending is under fire for blog posts in the past, where hate crimes were discussed. The blog post in question is a mock legal debate – hardly an inflammatory screed – and is largely a thought crime for entertaining the notion that hate crimes are often hoaxes. Still, some of the employees at the CFPB are having issues with it. Ultimately, most of the CFPB staffers are holdovers from the Cordray “push the envelope” days, and they are chafing under the new approach of the CFPB – “enforce the law as written and then stop.”

 

This should be a big week ahead with the jobs report on Friday and a lot of Fed-speak. The snapback rally in the 10 year appears to be over, and the new NAFTA agreement definitely points to more expensive cars in the future. That could be offset by lower ag prices, but we will see. Don’t know how lumber will be affected either, but building materials are big inputs to inflation, especially housing inflation.

 

Mortgage rates increased by 3 basis points during September, making this the 10th month in a row where they have increased. This is affecting affordability, and the share of homes selling above their listing price declined. The drop is mainly in the super hot markets on the West Coast, but there is no doubt that home price appreciation is moderating. Either wages have to catch up or home prices are going nowhere for a while. With rates pushing 5%, will we see a slowdown in housing? Probably not – Zillow estimates that 6% is the number to watch.

 

mortgage rate

 

Construction spending increased by a hair in August, increasing 0.1% MOM. On a YOY basis, we are still up 6.5%. Residential construction fell, and was up only 4.1% YOY. Where was the activity? Office and commercial.

 

The Atlanta Fed cut their third quarter growth rate estimate to 3.6% from 3.8%. Still think consumption could surprise to the upside for the year, but want to hear what the retailers report for back to school.

 

 

Morning Report: QE portfolio drops below $4 trillion

Vital Statistics:

Last Change
S&P futures 2909 -10.5
Eurostoxx index 382 -4.4
Oil (WTI) 72.1 0.02
10 year government bond yield 3.03%
30 year fixed rate mortgage 4.74%

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

Personal incomes rose 0.3% in August, as did personal spending. The inflation numbers came in a little tamer than expected, with the headline number up 2.2% and the core number up 2%, right in line with the Fed’s target.

The Fed’s holding of Treasuries and MBS (relics of the QE and Operation Twist days) have dropped below $4 trillion. Total Assets at the Fed are still around $4.2 trillion, compared to pre-crisis levels below $1 trillion.

Fed assets

Jerome Powell suggested that the Fed is going to return to its more typical opaque posture with respect to the markets. In the aftermath of the crisis, the Fed became very open about its intentions and policies, and often seemed to follow the markets. This is a sensible posture when the economy is fragile, but the financial crisis is probably far enough in the rear view mirror that the Fed can start returning to normalcy. If Janet Yellen’s handholding of the markets was one extreme, Alan Greenspan’s Fed raising the Fed Funds rate 50 basis points at a surprise Saturday meeting was the other.

The SEC has is suing Elon Musk for issuing “false and misleading statements” and failing to notify regulators of material company changes relating to the ill-fated 420 tweet. On August 7, Elon tweeted “Am considering taking Tesla private at $420. Funding secured.” Tesla stock rallied on the announcement and then sold off as investors figured out it wasn’t as solid as it initially appeared. The SEC complaint is fascinating reading – the Board of Directors was blindsided by this, and I think it never dawned on Elon what the implications of that tweet would be. Essentially, he had initial talks with a large Middle Eastern investor who was interested in taking a strategic stake in Tesla. No price, percentage stake or other specifics were mentioned. Elon arrived at the $420 price by applying a 20% takeover premium to Tesla’s existing share price (which came to $419) and then rounded up to $420.

From the complaint: “According to Musk, he calculated the $420 price per share based on a 20% premium over that day’s closing share price because he thought 20% was a “standard premium” in going-private transactions. This calculation resulted in a price of $419, and Musk stated that he rounded the price up to $420 because he had recently learned about the number’s significance in marijuana culture and thought his girlfriend “would find it funny, which admittedly is not a great reason to pick a price.”

Elon never thought through any of the regulatory conditions, financing conditions, legal issues, how retail investors would have to be treated, etc before making the tweet, which was probably meant to stick it to short sellers. Tesla’s stock is down about 30% from its peak, and is a classic example of what happens when cult stocks stumble. As an aside, when company CEOs get into public wars with short sellers, that is generally not a bullish sign.

One of the remedies will be to ban Musk from ever serving on the Board of Directors of a public company, and he will certainly face civil suits from people who bought TSLA in the aftermath of the tweet, before the relevant information came out. Suffice it to say, this is one of the biggest corporate brain farts I have seen since Martha Stewart went to the big house (and lost about $1 billion in wealth from MSO’s stock decline) in order to prevent $60,000 in losses on IMCL stock.

In the aftermath of the US housing bubble, massive coordinated central bank easing has led to bubble conditions in six large cities: Hong Kong, Munich, Toronto, Vancouver, London and Amsterdam. Extreme overvaluation exists in Stockholm, Paris, San Francisco, Frankfurt and Sydney. Who knows when these bubbles will burst, but when they do, it will tend to pull rates lower, despite what the Fed is doing to short rates.

Morning Report: The Fed hikes as expected

Vital Statistics:

 

Last Change
S&P futures 2914 2.75
Eurostoxx index 385 0.05
Oil (WTI) 72.35 0.77
10 year government bond yield 3.06%
30 year fixed rate mortgage 4.79%

 

Stocks are higher after the Fed hiked rates yesterday. Bonds and MBS are flat.

 

As expected, the Fed raised the Fed Funds rate 25 basis points and removed the term “accomodative” from their statement. The decision was unanimous. The biggest change in the projection materials was an upward bump in GDP estimates for this year and next. The dot plot showed a slight uptick in forecasts (about 7 basis points for this year and next). The dot plot says we are probably looking at another hike in December, 2 more hikes in 2019, and one more in 2020. In other words, the heavy lifting of this tightening cycle has already been done. That said, monetary policy acts with a lag, so the 2018 hikes probably won’t be felt until mid-to-late 2019.  The 2s-10s spread fell to 22 basis points.

 

dot plot comparison jun vs. sep 2018

 

Bonds rallied (rates fell) on the FOMC announcement, which was probably attributable to the largely unchanged dot plot and the fact that rates rose so much leading into the FOMC announcement. Classic “buy the rumor, sell the fact” situation.

 

Durable goods increased 4.5%, driven by a big jump in aircraft orders. Ex-transportation, durable goods orders were roughly flat. Core Capital Goods (a proxy for business capital expenditures) fell 0.5%. Note the Fed mentioned strong business capital investment in the statement yesterday.

 

The final estimate for second quarter GDP was unchanged at 4.2%. The price index and consumption estimates were unchanged as well. This is the fastest pace in 4 years. Meanwhile, corporate profits for the second quarter were revised downward from 6.7% to 6.4%.

 

Initial Jobless claims inched up to 214k last week. Remember these are 50 year lows, and if you consider the fact that the population was 2/3 of current levels back then (along with a military draft) these numbers are astounding.

 

Pending Home Sales fell in August, according to NAR.  Lawrence Yun, NAR chief economist, says that low inventory continues to contribute to the housing market slowdown. “Pending home sales continued a slow drip downward, with the fourth month over month decline in the past five months,” he said.

 

“Contract signings also fell backward again last month, as declines in the West negatively impacted overall activity,” he said. “The greatest decline occurred in the West region where prices have shot up significantly, which clearly indicates that affordability is hindering buyers and those affordability issues come from lack of inventory, particularly in moderate price points.”

Morning Report: Fed Decision Day

Vital statistics:

Last Change
S&P futures 2924.75 3.5
Eurostoxx index 384.06 0.14
Oil (WTI) 71.82 -0.45
10 Year Government Bond Yield 3.08%
30 Year fixed rate mortgage 4.79%

Stocks are up small as we head into the FOMC decision. Bonds and MBS are flat.

The FOMC decision will be announced at 2:00 pm EST today. Be careful locking around that time. Given how much rates have increased ahead of the decision, the bond market is probably set up for a rally if the statement and / or supporting materials contain a dovish surprise. TBAs (and therefore mortgage rates) will be slower to respond to a sharp move in rates however and take a few days to fully react.

One thing to look for: whether the Fed considers its policy stance to be “accomodative.” There has been debate at the Fed whether that term is outdated. FWIW, sub 3% Fed Funds and a continuing bond purchase program sounds pretty accomodative to me, at least compared to Federal Reserve history.

Mortgage applications rose 3% last week. Both purchases and refis rose by the same amount. This is in spite of a big jump in rates, with the 30 year fixed conforming rate pushing 5%. 5/1 ARMS hit 4.22%, the highest since the survey began.

New home sales increased to an annualized pace of 629k in August, according to Census. This is an increase of 3.5% MOM and 12.7% YOY.  Inventory sits at 6.1 months’ worth.

Housing demand was unchanged in August, according to Redfin. You can see the effect rising rates and home prices have had on demand. Unfortunately the series doesn’t go back far enough to give much of a historical perspective, but it certainly indicates that the last year has had a marked negative effect on buyers. What will change that? Wage inflation.

housing demand

Mark Zandi looks at what expanding the housing trust fund might do to alleviate the supply / demand imbalance. He notes that most of the post-bubble building was at the high end price points (urban apartments and McMansions especially), and that entry-level / affordable housing has been neglected. Whether that is a case of NIMBY-ism or higher regulatory costs is open for debate.  Zandi estimates that increasing the housing trust fund could add an additional 200k units next year.

Morning Report: Home price appreciation is slowing.

Vital Statistics:

Last Change
S&P futures 2929.5 4
Eurostoxx index 383.66 1.52
Oil (WTI) 72.54 0.46
10 Year Government Bond Yield 3.09%
30 Year fixed rate mortgage 4.86%

Stocks are higher as the Fed begins their 2 day meeting. Bonds and MBS are down small.

Home prices rose 0.2% MOM  / 6.4% YOY according to the Case Shiller House Price Index. Prices are appreciating at a slower rate than last year (the second derivative has flipped to negative) and we are seeing less dispersion between geographic areas. The yellow highlighted portion of the graph shows the derivative flipping. The convergence is happening at both extremes – the red-hot Western markets are cooling a little, and some of the laggards in the Northeast and Midwest are picking up a little.

FHFA cumulative

Separately, the Case-Shiller HPI reported that prices rose 0.1% MOM / 5.9% YOY. The index showed the same slowdown that FHFA reported, although Las Vegas and Seattle are still super-strong.

JP Morgan is out with an aggressive call this morning: The Fed will raise rates every quarter through June 2019, taking the Fed Funds rate up to 3.0%. FWIW, the Fed funds futures are predicting only a 6% probability of that forecast, which would have to include an off-meeting hike or a 50 basis point hike at one of the meetings to play out. IMO, the Fed would need to see inflation accelerate meaningfully from here to do that, but the dot plot forecast tomorrow will tell a better picture.

The jump in the 10 year over the past month is setting up for a “buy the rumor, sell the fact” situation if the FOMC statement and dot plots are not sufficiently hawkish. In other words, if the statement is hawkish, the move up in rates has kind of already been made. And if it is dovish, we should see a retracement back down in rates.

Regardless of the increase in rates, the consumer remains ebullient, with the Consumer Confidence index increased in August and is sitting close to an 18 year high. Retailers are noticing as well, as same store sales rose 5.8%. This is despite a run up in gasoline prices. Q4 GDP should be well-supported by strong consumption numbers. It is surprising to see the jump in oil prices have pretty much no effect on confidence or spending. It could be an indication of rising wages.

Fascinating statistic: It can cost $750,000 to build a unit of affordable housing in California. Obviously it is hard to come up with a business model that supports it at those sort of pricing levels.