industrial production – The Daily Tearsheet

Morning Report: Retail sales take a dive

Vital Statistics:

	Last	Change
S&P futures	2776	-72.1
Oil (WTI)	20.03	0.29
10 year government bond yield		0.66%
30 year fixed rate mortgage		3.37%

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

It is April 15, and taxes are not due. People are starting to get their stimulus checks from the government. The Fed is beginning to advise on how to get the economy started again. On one hand, the economy cannot afford the roughly $25 billion a day in lost output the lockdown costs. On the other hand, if we re-open prematurely and have a second wave of infections, the economic costs could be worse. At the end of the day, people simply aren’t going to put up with this much longer. In places where there are few cases, people are simply going to ignore the edicts out of Washington and get back to work. The local governments are going to look the other way because they need the revenue as badly as people need their paychecks.

Mortgage Applications rose 7% as purchases fell 2% and refis increased 10%. Purchase activity will be muted as in-home showings and appraisal issues are a problem. Separately, the homebuilder sentiment index collapsed in April, from 60 to 30.

Retail sales fell 8.7% in March, as weakness in autos and gasoline was offset by an increase in TP and Purell.

Like the other big banks, Citi’s earnings took a hit as the company reserved $5 billion for expected defaults. Citi’s exposure is less in mortgages than, say Wells, but it is huge in credit cards and commercial real estate.

Industrial production fell 5.4% in March, while manufacturing production fell 6.3%. Capacity Utilization fell from 77% to 72.7%.

If you apply for forbearance, the initial negotiating position for most banks will be that the entire amount will be due immediately at the end of the forbearance period. For what its worth, I suspect this is to deal with the precautionary forbearance borrowers, those who are gaming the system by saying “I think I could get laid off, so I will suspend my mortgage payments for 90 days and keep them in the bank. At the end of the period, I will just send it all in at once.” At the end of the day, the government should have required some sort of proof of hardship. Given that the precautionary forbearance requests will compete with the people who actually need the help, servicers are overwhelmed with requests, and it seems forbearance will go to the borrowers who have the patience and free time to sit on hold for hours. The government really should have considered servicer capacity to handle requests (among other things) when it drafted the law.

Morning Report: Housing starts at a 12 year high

Vital Statistics:

	Last	Change
S&P futures	3200	3.25
Oil (WTI)	60.46	0.14
10 year government bond yield		1.87%
30 year fixed rate mortgage		3.97%

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

Housing starts posted a 12 year high, coming in at 1.365 million units. Building Permits also moved up, rising 11% YOY to 1.485 million units. While 12 year highs seem like something big to cheer, in reality, we are still below our pre-bubble historical averages. Shortages of available homes are still at acute levels, however. This homebuilding cycle has a long way to run, and its positive impact on the economy could be one of the big surprises of 2020.

Builder confidence is at a 20 year high, according to the NAHB. “Builders are continuing to see the housing rebound that began in the spring, supported by a low supply of existing homes, low mortgage rates and a strong labor market,” said NAHB Chief Economist Robert Dietz. “While we are seeing near-term positive market conditions with a 50-year low for the unemployment rate and increased wage growth, we are still underbuilding due to supply-side constraints like labor and land availability. Higher development costs are hurting affordability and dampening more robust construction growth.”

Echoing this number, Toll Brothers noted on their earnings conference call that traffic and orders were better in the November – mid December period compared to July-October. Impressive indeed, given that this is the seasonally slow period.

Industrial production surprised to the upside, rising 1.1% compared to expectations of a 0.9% increase. Manufacturing production and capacity utilization also rose.

You can get a mortgage for under 1% in many European cities. Unsurprisingly, house prices are rising as a result. According to the NY Times: “Prices jumped at least 30 percent in Frankfurt, Amsterdam, Stockholm, Madrid and other metropolitan hot spots, and are up an average of over 40 percent in Portugal, Luxembourg, Slovakia and Ireland.” Denmark has negative mortgage rates. This is bubble material, and shows how central banks are playing with fire when setting interest rates below zero.

Morning Report: Retail Sales strong

Vital Statistics:

	Last	Change
S&P futures	3019	5.35
Oil (WTI)	59.54	-0.07
10 year government bond yield		2.13%
30 year fixed rate mortgage		4.10%

Stocks are flattish as earnings season kicks off. Bonds and MBS are down.

June Retail Sales came in much higher than expectations. The headline number was up 0.4% MOM and 3.4% YOY. The control group, which excludes volatile products like autos, gas, and food was up 0.7%, well above the 0.3% Street estimate. May’s numbers were revised upwards as well. The upside surprise in retail sales pushed up the 10 year from 2.09% before the number to 2.13% after. Since consumption is such a big component of the economy, expect to see Q2 GDP estimates to be revised upwards.

Despite the strong retail sales numbers, the street is still handicapping a 25% chance of a 50 basis point cut and a 75% chance of a 25 basis point cut at the July FOMC meeting. I can’t believe we are talking about rate cuts when the economy is this strong, but here we are…

In bank earnings, JP Morgan reported an increase in net income, but mortgage banking revenue was down 17% QOQ and YOY, driven by an unfavorable mark on the MSR portfolio. Volume increased 14% YOY to 24.5 billion. Wells also reported stronger earnings, with origination volume increasing to $33 billion. Margins fell from 105 basis points to 98, and it looks like they took a hit to their servicing portfolio as well.

Industrial Production was flat in June, driven by a drop in utility output. Manufacturing production was up 0.4%. Capacity Utilization increased as well, from 75.6% to 75.9%. So, despite all the concern about tariffs, we aren’t seeing it flow through to the numbers yet.

The FHA has been trying to figure out a way to bring more lenders back into the program after many exited in the aftermath of the housing crisis. The Obama administration aggressively fined lenders for minor errors which pushed banks largely out of FHA lending. The Trump Administration is changing enforcement policies and is working to bring more clarity to to the program. A number of trade groups however have argued that the reforms don’t go far enough, and don’t provide enough certainty to encourage banks to re-enter the business.

30 day delinquencies fell 0.7% YOY to 3.6%, according to CoreLogic. The only places that saw increases were due to hurricane-related issues. Flooding in the Midwest could boost these numbers in the future however. The foreclosure rate fell from 0.5% to 0.4% as well.

Morning Report: Shareholder activism and the banks

Vital Statistics:

	Last	Change
S&P futures	2767	-7
Eurostoxx index	368.05	-1.73
Oil (WTI)	56.06	0.47
10 year government bond yield		2.66%
30 year fixed rate mortgage		4.43%

Stocks are lower as investors return from a 3 day weekend. Bonds and MBS are flat.

We don’t have much in the way of economic data this week – the highlight will be existing home sales on Thursday and the FOMC minutes on Wednesday. Other than that, it should be a quiet week.

Industrial Production in January fell by 0.6%, while manufacturing production fell by 0.9%. Capacity Utilization fell to 78.2%, down from 78.8% the prior month. Volatile vehicle production largely accounted for the decrease. Note that December’s numbers were strong, which means the average for the two months was a modest gain.

Due to the government shutdown, Q4 GDP numbers have been delayed until Feb 28. Right now, the consensus seems to be for a high 1% / low 2% print – a definite slowdown from Q3, which would put 2018 annual growth around 2.8%. These forecasts are from Merrill, Goldman, and the NY / Atlanta Fed. Holiday retail sales disappointed, and some of the industrial data showed a slowdown as 2018 ended.

Mortgage delinquencies dropped to an 18 year low, according to the MBA. Fourth quarter DQs fell to 4.06%, which is down from 5.17% a year ago. The foreclosure rate ticked up to .25%. “The overall national mortgage delinquency rate in the fourth quarter was at its lowest level since the first quarter of 2000,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “What’s even more noteworthy, the delinquency rate dropped from the previous quarter and on a year-over-year basis across all loan types and stages of delinquency. With the unemployment rate near a 50-year low, wage growth trending higher and household debt levels relative to disposable incomes at a 35-year low, homeowners are in great shape, and mortgage performance is quite strong.”

HomeStreet Bank is greatly reducing its footprint in the mortgage business, and has retained Keefe, Bruyette to sell its retail mortgage operations. MountainView will auction off the MSR portfolio. HomeStreet will not exit mortgages entirely, but it will move to more of a traditional mortgage business built around its bank branches. Interestingly, the divestiture comes after pressure from an activist investor. Banks have historically been pretty immune from shareholder pressure – hostile takeovers in the banking sector are rare events. it will be interesting to see if this starts a trend of shareholder activism in the sector. One of the best trades ever was holding onto the pieces of AT&T when it was broken up by the government in the 1980s. With so many banking giants, I wonder what would happen if, say, Bank of America decided to spin off Merrill Lynch and its mortgage business. Could the 3 parts be worth more than the sum? As the banking sector deals with its first secular bond bear market in 40 years, it may turn out that the strategies that worked in the bull market (consolidation) won’t work in a rising interest rate environment. Note that the Elizabeth Warrens of the world would likely push in this direction as well, which makes it conceivable we could see a return of venerable names like Salomon Brothers or Smith Barney, Chemical Bank, or Manufacturers Hanover.

Morning Report: Building permits in the Northeast struggle

Vital Statistics:

	Last	Change
S&P futures	2794	-2.5
Eurostoxx index	383.01	-1.04
Oil (WTI)	68.12	0.06
10 Year Government Bond Yield		2.85%
30 Year fixed rate mortgage		4.51%

Stocks are lower after Netflix (one of the FAANG leaders of the market) missed earnings. Bonds and MBS are flat.

Industrial Production rebounded in June by 0.6% and manufacturing production increased 0.8%. Capacity utilization is 78%.

Jerome Powell heads to Capitol Hill today to begin his semiannual testimony in front of Congress. Expect a lot of questions regarding wage growth, trade wars, and regulation. Overall, he is expected to say that the economy is in good shape overall with above-trend growth and a strong labor market. He will face some questions from Democrats on regulation, especially since the Fed approved Goldman and Morgan Stanley’s capital plans despite the fact they were technically failed their stress tests. The Fed Funds futures continue to move in a hawkish direction, with the Sep futures pricing in a 88% chance of a hike and the Dec futures pricing in a 63% chance of 2 hikes.

Despite trade tensions, the IMF still expects the global economy to grow 3.9% this year and next. Trade remains a threat, however the impact is relatively small: a decrease of 0.5% in global growth by 2020. They forecast the US economy will grow 2.9% this year. Note many strategists took up their Q2 numbers on the strong retail sales print yesterday.

The Fifth Court of Appeals ruled yesterday that the structure of the FHFA is unconstitutional. Not sure how that is going to play out. Separately it also ruled that the FHFA was within its authority to sweep the profit from the GSEs, which is bad news for shareholders. FNMA stock was hit to the tune of 6% after the ruling.

The difference in sentiment between Northeastern real estate markets and the West is night and day. Growth in single family permits was actually negative for the first 5 months of this year. Compare that to the West, where they are up almost 18%.

The Northeast still has yet to really recover from the Great Recession, although some of that has more to do with secular trends in banking and the securities industry than it does with the real estate bubble. The securities industry has been hit by secular trends (falling commissions, ETFs) that have been great for investors but not great for employment in the industry. 5 cent commissions and 2%/20% hedge fund fees supported a lot of jobs which supported a lot of $1MM + homes. Towns like New Canaan have banned For Sale signs and the only part of the real estate market that is moving is in the sub-$750k segment. Million dollar plus listings languish. It is amazing – we have a housing shortage in the US overall, but you would never know that if you looked at the NYC suburbs.

Morning Report: Housing starts disappoint again

Vital Statistics:

	Last	Change
S&P futures	2705	-3.5
Eurostoxx index	393.19	0.82
Oil (WTI)	70.93	-0.38
10 Year Government Bond Yield		3.06%
30 Year fixed rate mortgage		4.65%

Stocks are lower this morning after North Korea pushed back on the proposal to end their nuke program. Bonds and MBS are higher after the the 10 year decisively pushed through the 3% level yesterday.

The 10 year hit 3.10% yesterday on no real news. If the inflation numbers aren’t all that bad, why are rates increasing? Supply. The government will need to issue about $650 billion in Treasuries this year compared to $420 billion last year. Note that one of the downsides of protectionism will be seen here – when the US buys imports from China, they usually take Treasuries in return. Less trade means less demand for paper.

Rising rates may present problems for active money managers. The average tenure is 8 years, so this is the first tightening cycle they have ever seen. For the past decade, cash and short term debt have not been any sort of competition for stocks and long term bonds. Note that the 1 year Treasury finally passed the dividend yield on the S&P 500. Stocks and bonds are going to see money managers allocate more to short term debt.

Despite rising rates, financial conditions continue to ease. The Chicago Fed National Financial Conditions Index is back to pre-crisis levels. Note that doesn’t necessarily mean we are set up for another Great Recession – the index can stay at these levels for a long time, and we don’t have a residential real estate bubble. That said, this index can be one of those canaries in a coal mine for investors – at least selling when it goes from negative to positive.

Mortgage Applications fell 2.7% last week as purchases fell 2% and refis fell 4%. The refi index is at the lowest level in almost 10 years, and the refi share of mortgage origination is at 36%. The typical conforming rate fell a basis point to 4.76%.

April Housing starts came in at 1.29 million, down 4% MOM but up 11% YOY. The Street was looking for 1.32 million. Building Permits 1.35 million which was right in line with estimates. Multi-family was the weak spot. Note that March’s numbers were unusually strong (relative to recent history), so April was a bit of a give-back.

Industrial production rose 0.7% last month while manufacturing production rose 0.5%. Capacity Utilization rose to 78%.

New York State is suing HUD to force them to continue to use the Obama-era standard of enforcing AFFH. HUD delayed the rule after numerous local governments were unable to implement policies in time. Andrew Cuomo’s statement: “As a former HUD Secretary, it is unconscionable to me that the agency entrusted to protect against housing discrimination is abdicating its responsibility, and New York will not stand by and allow the federal government to undo decades of progress in housing rights,” Cuomo said in a statement. “The right to rent or buy housing free from discrimination is fundamental under the law, and we must do everything in our power to protect those rights and fight segregation in our communities.” Of course overt housing discrimination hasn’t existed for half a century, but that isn’t what this is about. The issue is zoning ordinances and multi-fam construction. Expect to see more of this sort of thing in blue states as the housing shortage gets worse.