Morning Report: The CFPB wants to define the term “abusive.”

Vital Statistics:

 

Last Change
S&P futures 2810 2.75
Eurostoxx index 364.61 -0.6
Oil (WTI) 71.52 -0.5
10 year government bond yield 3.18%
30 year fixed rate mortgage 4.95%

 

Stocks are flattish this morning after yesterday’s huge rally. Bonds and MBS are down.

 

We will get the minutes of the September FOMC meeting today at 2:00 pm. Be careful locking around that period. They usually aren’t market-moving, but you never know.

 

Lots of people are returning from the MBA conference in Washington, DC, so let’s catch up on the economic data from the past couple of days.

 

Job openings hit a record (going back to 2000) last month as 7.1 million positions went unfilled. The quits rate was unchanged at 2.4%. The quits rate has been steadily inching upward and we are back to early 2001 levels. The quits rate is generally considered to be a predictor of wage inflation.

 

quits rate

 

Retail sales for September disappointed at the headline level, rising only 0.1%. The control group, which strips out autos, gas stations, and building materials rose 0.5%, which was towards the higher end of expectations. Department Stores were especially weak, which isn’t surprising given that Sears just filed for bankruptcy. Overall, consumption for the third quarter looks to have been strong, which will support a good GDP number.

 

Industrial production rose 0.3% last month, and manufacturing production rose 0.2%. Capacity Utilization was steady at 78.1%. Manufacturing was up about 3.5% YOY, which is an inflation-adjusted number. If you add back 2.5% inflation, we are looking at 6% nominal growth, which is a very respectable number. Suffice it to say that whatever trade wars seem to be occurring have yet to show up in the numbers. Also, with capacity utilization stuck below 80%, we don’t have inflationary pressure from more marginal (and costly) production being used.

 

Mortgage applications fell 7% last week as purchases fell 6% and refis fell 9%. Seasonal adjustments are primarily responsible; unadjusted applications were more or less flat, which is kind of impressive given that rates rose about 16 basis points in the previous two weeks.

 

CFPB Chairman Mick Mulvaney told the MBA conference that regulation by enforcement is dead. Regulation by enforcement was a prime tactic of the Cordray regime, which was characterized by intentionally vague rules. Dodd-Frank inserted the term “abusive” into the vernacular, and while words like “fair” and “unfair” have been litigated over the past century such that we all have a pretty good legal idea of what they mean, “abusive” is still pretty much a blank canvas. The CFPB is working on a definition of what the term actually means.

 

“We know what ‘unfair’ is,” Mulvaney said. “We know what ‘deceptive is; I’m not sure we know how to define ‘abusive.’ This is an example of how we are looking at issues….”We are still Elizabeth Warren’s child, for better or worse. We’re not the FDIC; we’re not the SEC…I want the Bureau to get there, to where we are associated with other regulators and not controversial because of its partisan circumstances, which colors what half of Americans think of it.”

 

“Partisan” is a good description of how the agency was initially staffed. Here is one lawyer’s description of how things went. The agency ensured that only Democrats who were inherently hostile to the financial industry were hired to staff out the agency. Mulvaney may have different goals than Richard Cordray, but the rank-and-file of the agency do not.

 

Trulia noted that price reductions at the high end of the market accelerated in July and August. Over 17% of US listings had a price cut during August. Between tax reform, higher rates, and higher prices it was only a matter of time before we started seeing an impact at the higher price points. Don’t forget that in the aftermath of the crisis, luxury real estate was about the only sector that was working for homebuilders. While the West Coast has been able to absorb that inventory, the East Coast definitely has not. Indeed, tony NYC suburbs are swollen with $1 million + properties for sale, and some have gone as far as to ban “for sale” signs.

 

Trump continued to jawbone the Fed, calling it his “biggest threat.” FWIW, there isn’t a politician on the planet that actually likes tightening cycles, but most have the common sense not to say anything about.

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: Jerome Powell speaks at Jackson Hole

Vital Statistic:

Last Change
S&P futures 2865 6.75
Eurostoxx index 383.72 0.32
Oil (WTI) 68.91 1.08
10 Year Government Bond Yield 2.85%
30 Year fixed rate mortgage 4.58%

Stocks are higher this morning on no real news. Bonds and MBS are down.

Another slow news day. Low level talks between China and the US over trade didn’t really go anywhere.

Durable Goods orders fell 1.7% in July on weak aircraft orders, but the core capital goods rate jumped 1.4%, which shows another month of strong business investment, particularly business equipment. Many economists had been skeptical that cutting corporate taxes would increase capital expenditures, but it looks like it has. Theory certainly predicted it would.

Jerome Powell is speaking in Jackson Hole this morning. There probably won’t be anything market moving, but just be aware. The conference will focus on a academic papers for the most part. The agenda is here. One of the papers argues that the Fed should continue to hike rates, even in the absence of current indications of inflation, if the unemployment rate is below the long-term sustainable rate. Since monetary policy acts with a lag, a low unemployment rate can increase inflationary pressures before monetary policy takes effect.

The Fed faces two major risks of “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating,” said Mr. Powell. “I see the current path of gradually raising interest rates as the [Federal Open Market Committee’s] approach to taking seriously both of these risks. In other words, expect maybe 2 more hikes this year, and maybe one or two more next year.

The Fed funds futures increased their handicapping of a Dec hike slightly, to 68% (Sep is a given). Longer term, the September 2019 futures predictions look like this:

fed funds futures

The central tendency seems to be 2 more hikes this year, one more next year, and then the Fed takes a break. Slightly more people think the Fed stops after 2 hikes than those who think the Fed does 4 or more.

St. Louis Fed President James Bullard would vote to maintain the current Fed Funds rate through the end of the year. “If it was just me, I’d stand pat where we are and I’d try to react to data as it comes in,” he said Friday in an interview with CNBC’s Steve Liesman. “I just don’t see much inflation pressure. … I’m an inflation hawk, but I just don’t see that developing. … I just don’t think this is a situation where we have to be pre-emptive.” He also sees the economy slowing next year, and in 2020.

The Senate Banking Committee voted 13-12 along party lines to advance the nomination of Kathy Kraninger to run the CFPB. Remember if Kraninger is rejected, Mick Mulvaney continues to run the agency, which was probably the plan all along.

Morning Report: No surprises in the FOMC minutes

Vital Statistics:

Last Change
S&P futures 2858 -2.75
Eurostoxx index 384.09 0.07
Oil (WTI) 67.46 -0.4
10 Year Government Bond Yield 2.81%
30 Year fixed rate mortgage 4.58%

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

The FOMC minutes didn’t offer anything too surprising. Most participants said it would be appropriate to raise rates soon, which wasn’t a surprise – the Fed Funds futures have a Sep hike as pretty much a sure thing. They worried about how trade could be a downside risk to the economy, especially if it affects business sentiment, investment and employment. They mentioned that in the “not too distant future” monetary policy will no longer be viewed as accomodative. This statement seems to hint that rate hikes should wind up next year, provided inflation remains around these levels. Note that the head of the Dallas Fed suggested that the tightening cycle might be done once we get 75 – 100 basis points higher on the Fed Funds rate.  Bonds didn’t react to the minutes at all, and the Fed Funds futures didn’t budge either.

There wasn’t much talk about reducing the size of the balance sheet, which is more or less on autopilot right now. As the yield curve flattens, you would think the Fed would consider getting more aggressive on the balance sheet unwind. Maybe not on the mortgage backed securities side, but on the Treasury side. If credit is still widely available and the demand is there, why not? If the ducks are quacking, feed ’em.

Central Bankers are meeting in Jackson Hole today. There usually isn’t much in the way of market-moving statements out of these things, but just be aware.

Initial Jobless Claims fell to 210,000 last week. We are bumping around levels not seen since 1969. When you consider the fact that the US population was only 200 MM back then (compared to 325 MM today), it is even more impressive. It certainly has economists scratching their heads.

Home prices rose 0.2% in June and 1.1% for the second quarter, according to the FHFA House Price Index. The second quarter’s pace was the slowest increase in 4 years, which shows that higher interest rates are beginning to have an effect on prices. Prices did rise in all 50 states and 99 out of 100 MSAs. 5 states (NV, ID, DC, UT, and WA) had double digit increases. The Las Vegas MSA had the biggest increase – almost 19%. The laggards were CT, AK, ND, LA, and WV.

FHFA by state

Heidi Heitkamp, a moderate Democrat from North Dakota says she will not support Kathy Kraninger to run the CFPB. She said she was inclined to vote yes, however she is concerned about Kraninger’s experience in consumer protection and also felt she “lacked empathy” for consumers and didn’t believe in the Bureau’s mission. Heitkamp has been supportive of regulatory relief, which means she was a gettable vote. Kraninger’s nomination looks largely to fall along partisan lines now.

New Home Sales fell 1.7% MOM to 627,000, which was below the Street estimate of 649,000. It is up 12.8% on a YOY basis however. The new home inventory situation is getting more balanced, with 5.9 month’s worth of supply. As always, the question is whether that inventory represents the oversupplied luxury market or the undersupplied starter market.

Morning Report: Existing home sales fall, financial stress increases in Europe

Vital Statistics:

Last Change
S&P futures 2798.25 -2
Eurostoxx index 384.88 -0.74
Oil (WTI) 68.98 0.72
10 Year Government Bond Yield 2.89%
30 Year fixed rate mortgage 4.51%

Stocks are flattish this morning as earnings continue to come in. Bond and MBS are down.

This should generally be a quiet week with regards to market-moving data, although we will get the first estimate of Q2 GDP on Friday. Aside from that, we do get some real estate data with existing home sales today and the FHFA House Price Index tomorrow.

Existing home sales fell 0.6% in June, according to NAR. They are down 2.2% on a YOY basis. Blame low inventory. Lawrence Yun, NAR chief economist, says closings inched backwards in June and fell on an annual basis for the fourth straight month. “There continues to be a mismatch since the spring between the growing level of homebuyer demand in most of the country in relation to the actual pace of home sales, which are declining,” he said. “The root cause is without a doubt the severe housing shortage that is not releasing its grip on the nation’s housing market. What is for sale in most areas is going under contract very fast and in many cases, has multiple offers. This dynamic is keeping home price growth elevated, pricing out would-be buyers and ultimately slowing sales.”

Other stats from the report:

  • median home price 276,900 (up 5.2%)
  • Inventory 1.95 MM homes (4.3 month’s worth)
  • Days on market 26 days (down from 28 last year)
  • First time buyers 31% of sales
  • All-cash transactions 22% (up from 18% last year)
  • Sales rose in the Northeast and Midwest, fell in the South and West

Manufacturing activity picked up in June, according to the Chicago Fed National Activity Index. May’s abrupt downturn appears to have been a spurious data point, and not an indication of a change in trend. Employment and production-related indicators drove the increase in the index. So far, we aren’t seeing trade issues reflected in the production indices, however there is the possibility that manufacturers are stockpiling inventory and accelerating some production ahead of sanctions which is masking the effect. That said, we would expect to see a drop in the employment indicators, which isn’t happening.

Liquidity in the bond market is starting to dry up, at least if you measure by bid/ask spreads. Dodd-Frank rules were intended to curb proprietary trading but not market-making. Markets continued to function after the law was implemented, which gave some comfort to regulators that they were on the right track. Now that QE is ending, some of the market structure problems are getting exposed. Banks are less involved in market making and we are seeing bid / ask spreads increase in many markets. This is so far largely a European problem, however an anecdote from one fund who had trouble unwinding an Italian bond position is worrisome. They had a position in Italian sovereign debt and had trouble getting bids larger than $10 million, which is a miniscule trade – especially for G7 sovereign debt. So far it hasn’t had a huge effect in the US, but this is something to watch, especially the next time we get a credit crunch. Investors may find entire swaths of the bond market go no-bid, which will include the ETFs linked to these bonds. Tight bid-ask spreads and regulations might be good news for investors and taxpayers in normal times, but they aren’t free.

Despite the issues in the Euro bond markets, stress in the financial system did decrease slightly last month, according to the St. Louis Fed. Historically we are at very low levels, however the Fed is still employing extraordinary measures to support the market, so the past isn’t really all that comparable.

financial stress index

Interesting concept for real estate investors: Now there are a couple of online platforms that allow people to bid on single-family rental properties on line. Not sure what the fee is to transact, but the company also helps connect the investor with a mortgage lender and a property manager.

CFPB nominee Kathy Kraninger took a lot of heat from Democrats on Friday regarding her role in the Trump Administration’s border family separation policies. Not sure how much OMB (her current role) has in DOJ and DHS policy making but Democrats spent a lot of time on the issue. There is a lot of concern that she doesn’t have the financial regulatory background to run the agency, however her nomination does allow the Administration to reset the clock on Mulvaney’s tenure and he gets to stay if she doesn’t get confirmed by the Senate. Either way, the CFPB is getting reined in.

Morning Report; LEI shows strong growth ahead

Vital Statistics:

Last Change
S&P futures 2808 -8.25
Eurostoxx index 386.86 -18
Oil (WTI) 68.23 -0.53
10 Year Government Bond Yield 2.87%
30 Year fixed rate mortgage 4.51%

Stocks are lower as earnings continue to come in. Bonds and MBS are down.

Initial Jobless Claims fell to 207,000 last week, which is the lowest level since 1969. Despite the tightness of the labor market, wage growth is tough to come by.

I have discussed at length the disconnect between the Northeast and the rest of the country when it comes to the real estate market. It turns out that not only does the real estate market lag, so does mortgage banking. Last year was a rough year for mortgage banking, and the typical profit per loan was about 31 basis points. That varied by region, with the Midwest in the lead at 39 basis points while the Northeast lagged at 8.

profits by region

The Fed’s Beige Book characterized the economy as strong, and said that labor shortages are beginning to impede growth. Engineers, skilled construction workers, truck drivers, and IT professionals are in short supply. So far increasing input prices are not translating into higher inflation – corporate margins are taking the hit. Residential housing continues to improve ever so slowly, and commercial real estate is flat. Overall, the picture points to a strong economy, with room to run. The lack of pricing pressures gives the Fed the leeway to go slow as they get off the zero bound.

The Conference Board echoed this assessment, with the Index of Leading Economic Indicators increasing 0.5% in June. The LEI is still rising faster than the CEI (basically the future indicators are showing that growth should accelerate) which means we have no sign of a slowdown.

Leading economic indicators

Kathy Kraninger, the Administration’s nominee to run the CFPB, will appear before the Senate Banking Committee today. Little is known about her views on financial regulation. Congressional aides have said that she will have enough support to pass the Committee on a party-line vote. In her prepared remarks, she said she will continue Mick Mulvaney’s work of balancing the need for consumer protection with the need to treat the financial sector fairly. Suffice it to say, having come from OBM, she doesn’t really fit the type of bureaucrat who would normally be tapped to run the CFPB, and that may be the point. If her nomination bogs down, Mick Mulvaney can continue to run the agency.

Interesting stat: 70% of the Millennials who own a home have buyer’s remorse. Many used their retirement savings to fund the down payment, which is generally a bad move. Many first time home buyers completely underestimate closing costs as well. Others underestimated the costs of upkeep, which is around $16,000 a year. I suspect many of these lessons are learned by every generation who buys their first home.

The CoreLogic Mortgage Fraud Risk Index rose 12% in the second quarter compared to a year ago. An increase in borrowers taking on loans for multiple properties (i.e more professional investors) appeared to drive the increase.

Morning Report: Quits rate jumps in May

Vital Statistics:

Last Change
S&P futures 2781 -11
Eurostoxx index 382.05 -4.2
Oil (WTI) 73.29 -0.82
10 Year Government Bond Yield 2.85%
30 Year fixed rate mortgage 4.53%

Stocks are lower this morning after Trump threatened tariffs on $200 billion worth of Chinese goods. Bonds and MBS are flat.

China has vowed to retaliate if the Trump Administration follows through on its threat to impose 10% tariffs on about $200 billion worth of Chinese goods. Since China imports far less than $200 billion from the US, they may have to come up with other measures to retaliate – anything from denying visas to limiting tourism and increasing regulatory measures. Strategists are beginning to warn that the trade war could derail the recovery.

Inflation at the wholesale level increased in June, according to the PPI. The headline number rose 0.3% MOM / 3.4% YOY. Ex food and energy, it was up 0.3% / 2.8% and ex food energy and trade services 0.3% / 2.7%. Services and motor vehicles drove the increase.

Donald Trump nominated Brett Kavanaugh to the Supreme Court yesterday. He is generally a regulatory skeptic, and has ruled against overreach in the past. He has already weighed in on the CFPB, which he believes is unconstitutional. From CFPB vs PHH, writing for the majority: “The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency. The overarching constitutional concern with independent agencies is that the agencies are unchecked by the president, the official who is accountable to the people and who is responsible under Article II for the exercise of executive power.” That said, Kennedy was already considered a vote against the CFPB, so the nomination won’t move the needle there.

Kavanaugh has also ruled against the EPA, which generally ignored the “cost” side of the “cost / benefit” analysis of regulations during the Obama Administration. Overall the regulatory environment for the financial industry could get a little easier with Kavanaugh on the Court.

Speaking of the CFPB, Brian Johnson has been tapped to be the #2 of the agency. He replaces Leandra English, who resigned last week.

Small business optimism remains elevated despite trade concerns, according to the NFIB Small Business Optimism Survey.  Employment continues to grow, with 1 in 5 firms adding employees in June on net. Sales are up overall, but margins appear to be facing pressure from higher labor and input prices. Credit needs are being fully met.

Job openings fell to 6.6 million in May, which was just off the record high of 6.8 million set in April. Hires were strong at 5.8 million, led by health care and social assistance. The big number was the quits rate, which is one of the best leading indicators of wage inflation. It rose to 2.4%.

quits rate

The big question remains: how much slack is there really in the labor market? Most of the official numbers imply there is none. Yet, there is only modest wage inflation. I suspect the employment-population ratio tells the real story, and that number has yet to really recover from the Great Recession. Demographics are part of the story, but as people work longer, the assumption of 65 = retirement might have to change. I suspect many of those who are retired would gladly take a job if offered.

For the construction sector, the number of unfilled jobs hit a record high. That sector has been facing labor constraints for quite some time, and this partially explains why housing starts have been so far below what is needed to meet demand.

construction labor market

Mortgage Applications increased 2.5% last week as purchases rose 7% and refis fell 4%. Last week included the 4th of July, so there are all sorts of adjustments baked into that number. Refis fell under 35%, the lowest number since August 2008. ARMS decreased to 6.3%. Overall rates fell about 3-4 basis points last week.

Meanwhile, the MBA’s mortgage credit availability index improved last month as increases in conventional and jumbo availability offset a contraction in government.