Morning Report: Changes happening at the CFPB

Vital Statistics:

Last Change
S&P futures 2774 1.75
Eurostoxx index 386.72 -0.16
Oil (WTI) 65.25 0.52
10 Year Government Bond Yield 2.98%
30 Year fixed rate mortgage 4.58%

Stocks are higher this morning as trade tensions with China ease. Bonds and MBS are lower.

Initial Jobless Claims fell to 222k last week. We are still bouncing around lows that we haven’t seen since the Vietnam War.

Changes are afoot at the CFPB. First, Mick Mulvaney dismissed all 25 members of the Consumer Advisory Board in order to cut costs and increase the diversity of voices. The Community Bank Advisory Board and the Credit Union Advisory Board were also terminated. Apparently, these committees were traveling to DC on taxpayer expense. Many of these people are simply professional political activists in the business of raising money for liberal candidates, and were often given funds from settlements – in other words, it was a bit of a political money-laundering operation. So, there is no reason for an agency under a Republican Administration to fund the Democratic political machine. Also, the Obama / Cordray CFPB was one-sided – they listened only to consumer advocates and had zero interest in input from the industry. For better or worse, you make better policy when you have input from the people who will be affected by your rules and regulations.

Separately, the CFPB is prepared to dismiss its case against PHH. The PHH case is a tricky one, where the CFPB unilaterally increased a judge’s $6 million penalty to $106 million. PHH won a big victory last January when an appeals court threw out the judgement. There structure of the Agency was also brought into question during this case, which helps explain why the CFPB is anxious to make this case go away.

Independent mortgage bankers lost money on average in the first quarter, according to the MBA. Net production losses were $118 per loan (or about 8 basis points). The last time we saw something similar was the first quarter in 2014. The first quarter is always a seasonally weak period.  Declining volumes, increasing costs, and thinner margins are driving the losses. Net secondary marketing income was more or less flat, and purchases accounted for 71% of the volume. Pull-through rates fell to 70% from 74% in the fourth quarter. Production expenses and personnel expenses increased quite a bit, to almost $9,000 a loan. That number has been closer to $6,200 since 2008. Productivity also fell to 1.9 loans per employee from 2 loans in the fourth quarter.

Chinese money has been pushing up real estate prices in many cities, from Vancouver to Seattle, to Sydney. Local governments are finding more and more of their citizens are being priced out of the market and are trying to do something about it. In Vancouver, prices were appreciating at an annual rate of 30% before the government imposed a foreign investments tax. The money then left and moved to Toronto. Ultimately probably nothing will change until the Chinese real estate bubble bursts, and no one has any idea when that will happen. One thing is for sure, however. When the bubble does burst, these cities will get hit first. In a financial crisis, you sell what you can, not what you want to.

Chinese money

How easy is credit these days? Twitter is offering $1 billion in convertible bonds paying 25 basis points of interest that convert into Twitter stock at a 44% premium to the current share price. That is as close to free money as you are going to get.

Apparently the market cap of the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) is now higher than the GDP of Germany. Most crowded trade since the Nifty 50 in the 1970s.

Morning Report: Spending / Incomes up, PCE inflation at target

Vital Statistics:

Last Change
S&P futures 2679 7.6
Eurostoxx index 385.1 0.46
Oil (WTI) 67.48 -0.62
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.56%

Stocks are higher after a slew of new mergers were announced. Bonds and MBS are up small.

We have a big week ahead with the FOMC meeting starting tomorrow and the jobs report on Friday. The Street isn’t looking for any changes in interest rates at the May meeting, but will focus as usual on the language of the statement. For the jobs report, the expectation is 190k new payrolls and 2.7% annual wage inflation.

Pending Home Sales were up marginally from February, but were still down on an annual basis, according to NAR’s Pending Home Sales Index. Bad weather in the Northeast pushed down pending sales, however all parts of the country were down. Again, blame low inventory and falling affordability.

Personal Incomes rose 0.3% in March, while personal spending rose 0.4%, in line with expectations. The PCE index was up 2% YOY and the core PCE index was up 1.9%. This is the Fed’s preferred measure of inflation and it is right where they are targeting. Income growth was the weakest since last Fall, however.

The big debate right now is whether there is any slack in the labor market. Anecdotal evidence abounds that companies are struggling to find qualified workers. However, Econ 101 says that we should be seeing higher wage inflation as a result and that isn’t happening (at least not yet). Some theories are claiming this is a market failure and that employers are artificially holding down wages (which is then used as an argument for more government intervention in the labor market). I suspect the issue is that there are three big forces holding back wage growth. First, inflation is low – if companies cannot pass along price increases to their customers, they aren’t going to be raising wages. Second, lower wage jobs are competing with technology which is only getting better and cheaper. And finally, the long-term unemployed represent a reservoir of slack that companies know they can tap if needed. FWIW, I think the first and third explanations explain it, and find the idea that employers are somehow colluding to keep wages low to be wholly unconvincing. Take a look at the chart below, which shows wage increases versus inflation. You are seeing actual wage growth.

wages vs inflation

For now it looks like the 3% level in the 10 year has held. What drove the sell-off – it wasn’t like there was anything data-wise to support it. JP Morgan blames CTAs using momentum strategies to short the 10-year. Chinese selling has also been rumored to be a factor. We won’t be able to confirm or deny that theory for a couple of months. CTA funds have been net short Treasuries since September, however a momentum signal in mid-April caused people to pile into the trade and that apparently drove the late month sell-off.

Steve Mnuchin is “cautiously optimistic” on trade talks with China. The subject will include intellectual property and joint ventures.

Defect risk decreased on a MOM basis but was up on a YOY basis, according to the First American Loan Defect Index. The biggest risk was in the sand states, while the lowest risk was in the Rust Belt.