Morning Report: Job openings fall

Vital Statistics:

 

Last Change
S&P futures 2890.5 8
Eurostoxx index 386.66 0.98
Oil (WTI) 64.39 0.06
10 year government bond yield 2.50%
30 year fixed rate mortgage 4.16%

 

Stocks are higher this morning on overseas strength after the ECB maintained interest rates. Bonds and MBS are up.

 

The Fed will release the minutes from its March meeting this afternoon at 2:00 pm. Given the magnitude of the shift in their Fed Funds forecasts, it should make interesting reading. There is a chance that it could be market-moving, especially since rates have moved back up.

 

Inflation at the consumer level rose 0.4% MOM in March, and increased 1.9% YOY. Ex-food and energy, it rose 0.1% MOM and increased 2.0% YOY. Energy prices are increasing again, so expect to see more upward pressure on prices. The 0.4% increase was the biggest in 14 months.

 

Job openings fell in February by about 500,000. Job openings had a big growth spurt in 2018 and now appear to be pulling back a little. Job openings fell in most sectors, with hotels and accomodation leading. Hiring fell in several sectors as well, including construction. The most important number – the quits rate – was stuck again at 2.3%. The quits rate is a leading indicator for wage growth, and is a number the Fed watches closely. Between the latest payroll numbers and this report, we can see evidence that the labor market is cooling a bit. That said, the number of job openings (7.1MM) are still larger than the number of unemployed (6.2MM).

 

JOLTs

 

The IMF cut its forecast for 2019 global growth from 3.5% to 3.3%, with the risks solidly to the downside. “The balance of risks remains skewed to the downside,” the IMF said. “Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.”

 

Mortgage Applications decreased 5.6% last week as purchases rose 1% and refis fell 11%. “Mortgage rates inched back up last week, but remain substantially lower than they were in the second half of last year,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “As quickly as refinance activity increased in recent weeks, it backed down again in response to the rise in rates. However, this spring’s lower borrowing costs, coupled with the strong job market, continue to push purchase application volume much higher. Purchase applications are now up more than 13 percent compared to last year at this time.”  Government loans (FHA / VA) increased their share of the market, and the average contract interest rate rose 4 basis points to 4.4%.

 

The CEOs of major banks head to the House for what promised to be a tongue-lashing from Democrats. Bank of America attempted to head off criticism by raising the minimum wage for its employees. There will almost certainly be kvetching about CEO pay, and the financial system will almost certainly be Enemy #1 for the Democrats running in 2020.

Morning Report: Getting ready for earnings season

Vital Statistics:

 

Last Change
S&P futures 2887.25 -1
Eurostoxx index 372.16 -0.77
Oil (WTI) 74.82 -0.14
10 year government bond yield 3.23%
30 year fixed rate mortgage 4.95%

 

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

 

Mortgage Applications fell 1.7% last week as purchases fell 1% and refis fell 3%. The average contract interest rate for conforming loans increased to 5.05% from 4.96% last week. This is the first print over 5% since 2011.

 

Donald Trump jawboned the Fed a little yesterday, saying “I think we don’t have to go as fast” referring to the Fed’s pace of tightening. Politicians universally love loose central banks and loathe hawkish ones. Ronald Reagan tolerated Paul Volcker’s tightening campaign, which caused the worst recession since the Great Depression only because the inflation of the 1970s was so bad that a recession was preferable. Inflation isn’t bad right now, and if we weren’t retreating from the zero bound, the Fed probably wouldn’t need to be as aggressive as it is being. Jerome Powell said we were “a long way from neutral” last week, but what “long way” means is anyone’s guess. The market thinks another 75 bps in the Fed Funds rate and then a pause.

 

Fannie Mae reported that serious delinquencies (90+) fell to 0.82% in August, down .06% from July and down from 0.99% a year ago. DQs are back to 2007 levels, and more or less are sitting at historical pre-crisis averages. DQs will probably increase due to Hurricane Florence (those loans won’t go down 90 days until the holiday period), but for now the strong labor market has DQs back to normal.

 

seriously delinquent rates

 

Venerable retailer Sears is expected to file for bankruptcy this week. Fun fact: in the late 1960s, the 5 biggest retailers in the US were the 5 geographic divisions of Sears. The company has been kept on life support by hedge fund manager Eddie Lampert, but he wants to see a bigger reorganization of the company.

 

Earnings season starts in a couple of weeks, and the banks are the first to report. Generally speaking, analysts expect the third quarter to be the strongest for the sector since the crisis, largely driven by volatility and tax effects. The bigger question is what will drive growth going forward, especially if rising rates lowers borrowing demand. We certainly see it in mortgage banking, but it could be an issue for corporate borrowers as well. Corporate borrowers took advantage of the ZIRP years to refinance existing high coupon debt and borrow at cheap rates for general corporate purposes. That may crimp borrower demand going forward. Note that the banking sector has been underperforming the market over the past 6 months or so:

 

xlf vs spy

 

Speaking of banks, HSBC reached a settlement with the Justice Department for $756 million relating to MBS issued during the bubble years. HSBC (a UK bank) bought Household Financial in the early 00s to enter the US residential real estate lending market.

 

The mortgage industry is a boom and bust business, and we are seeing layoffs at places like Movement, Wells, and JP Morgan. Fannie Mae’s Chief Economist thinks this is still in the early innings. “I do believe you will see more layoffs…We are at the beginning of that I would say,” he said. “It is a cyclical business and it is driven by the cyclical behavior of interest rates. So, none of that should be a surprise to anyone. The only thing different in this cycle was that it was policy that drove rates, so they were so low for so long.” We are headed into the lean Q4 and Q1 time of year – I wouldn’t be surprised to see more announcements, especially at the banks during earnings calls.