Morning Report: James Bullard says no further rate hikes are warranted

Vital Statistics:

Last Change
S&P futures 2722 3.75
Eurostoxx index 392.17 0.2
Oil (WTI) 71.3 -0.06
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.56%

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

Import prices rose 0.3% MOM and 3.3% YOY, driven by oil. Ex-energy import prices were flat.

St. Louis Federal Reserve Head James Bullard said that interest rates may already be at the level where they are no longer stimulating the economy. There are “reasons for caution in raising the policy rate further given current macroeconomic conditions” he said in his prepared remarks. Bullard has generally been considered a dove, so this is not much of a surprise. He is also a non-voter. He believes that there is little in the inflationary pressures being signaled in the market.

With respect to inflation signalling, he has a point. The spread between the 30 year bond and the 5 year bond is now the narrowest since 2007. Note that the yield curve generally flattens during tightening phases and is probably not signifying the type of deflationary period that 2007 did. Given all of the QE over the past decade, the signals from the bond markets are heavily distorted and should be taken with a grain of salt. Note short Treasuries is one of the biggest hedge fund trades on the Street.

flat yield curve

Are the homebuilders set to outperform going forward? They have suffered more than the market during the recent declines, but the environment should be favorable for the sector going forward. With a shortage of housing, high demand and rising prices, the sector should be in good shape. The problem for investors? The sector is highly cyclical, and the stock behavior reflects that. In other words, earnings will rise and fall, and the multiple will expand and contract, dampening the effect. So, if the average multiple is typically mid-teens, don’t be surprised if P/E ratios fall to the high single digits during boom times.

Q2 GDP is currently tracking at 3.7%.

Sen Pat Toomey says that the Trump Administration doesn’t have the authority to pull out of NAFTA, since it was passed by Congress. On the other hand, the Admin does have the authority to pull out of the Iran Deal, as well as the Paris Accords because they were only deals with the Obama Administration and not the US – never ratified by Congress.

Morning Report: Number of unemployed equals number of job openings

Vital Statistics:

Last Change
S&P futures 2680 9.75
Eurostoxx index 390.81 0.81
Oil (WTI) 70.9 1.84
10 Year Government Bond Yield 3.00%
30 Year fixed rate mortgage 4.63%

Stocks are higher this morning after the US pulled out of the Iran deal. Bonds and MBS are down, with the 10 year trading over 3% again.

The Iran deal was never ratified by the Senate, so it never reached the level of “treaty.” It was basically a deal with the Obama Admin and Iran.

Oil had a volatile day yesterday and is rallying again. China is the biggest customer of Iranian oil, so in theory it shouldn’t affect the US all that much, but WTI will follow Brent on the relative value trade. Note that a sustained oil price over $70 is estimated to be about a 0.7% drag on GDP growth.

Inflation at the wholesale level moderated last month, with the producer price index rising 0.1% MOM and 2.6% YOY. Ex-food and energy, the index rose 0.1% / 2.3% and the core rate rose 0.1% / 2.5%.

Job openings hit 6.6 million last month, which is a new record for the index, which goes back to early 2000. The quits rate increased to 2.3%. The quits rate has been stuck in a 2.2% – 2.3% range for what seems like forever. Fun fact: The number of job openings has hit the number of unemployed for the first time.

JOLTs vs unemployed

The labor shortage is particularly acute in construction, which is part of the reason why housing starts have been short of demand. This shortage has extended to home remodeling as well.

While everyone seems to focus on the CPI / PPI / PCE inflation measures and imagines that a single point estimate accurately reflects the cost of living, it doesn’t. First the relative weights of different goods and services differ. For example, PCE and CPI will weight healthcare differently, as well as owner-equivalent rent. The St. Louis Fed notes that the differences in inflation between regions of the US can be substantial as well.

Mortgage Applications fell 0.4% last week as purchases fell 0.2% and refis fell 1%. Tough times for the smaller originators.

Despite the slim pickings out there, mortgage credit has contracted a bit this year. Overall, it was a mixed bag, as government credit contracted on less streamlines while conventional increased as jumbos rose. Government credit has been tightening since early 2017, when the government began to crack down on serial VA IRRRL shops.

How have things changed at the CFPB or the (BCFP) under Mick Mulvaney? Despite the ululating in the press, not that much. One of the panelists warned industry lawyers not to advise their clients that the CFPB is relaxing its enforcement activities. So far, the biggest change we have seen is that the name has been changed back to the Bureau of Consumer Financial Protection, which was the way it was written into Dodd-Frank.

Fair Housing groups are suing HUD over Ben Carson’s delay of the Obama-era re-interpretation of AFFH – affirmatively furthering fair housing. Their complaint is that HUD didn’t provide advance notice before suspending the rule,. which would have required communities to “examine and address barriers to racial integration and to draft plans to desegregate their communities.” HUD delayed the compliance deadline until 2024. In practice, this means that HUD wants communities to change or eliminate their zoning ordinances to include more multi-family housing in wealthier neighborhoods.

Morning Report: Goldilocks moment with unemployment and inflation

Vital Statistics:

Last Change
S&P futures 2670 6.9
Eurostoxx index 388.46 1.44
Oil (WTI) 70.62 0.89
10 Year Government Bond Yield 2.94%
30 Year fixed rate mortgage 4.54%

Stocks are higher this morning as oil tops $70 a barrel. Bonds and MBS are flat.

Jobs report data dump:

  • Nonfarm payrolls 164,000 (lower than estimates)
  • Unemployment rate 3.9%
  • Average hourly earnings +.1% MOM / 2.6% YOY
  • Labor force participation rate 62.8%

This was the second month in a row where the labor force participation rate fell. The labor force fell by 236k, while the population increased by 175k. Wage inflation remains present, however it is still unlikely to drive higher inflation in the overall economy. The unemployment rate fell to the lowest since early 2000. This report takes some pressure off the bond market, and makes another run at 3% for the 10 year less likely.

unemployment rate

The drop in the unemployment rate along with moderate wage growth is somewhat of a Goldilocks moment for the Fed. The Philps Curve is an older economic model which suggests that inflation should rise as unemployment falls, which makes sense: Unemployment falls -> workers become scarce -> wages rise -> those costs get passed on to consumers. In reality, the relationship between unemployment and inflation has been weak (R^2 = .27). The low r-squared gives away the weakness of the model – it is too simplistic, plus the unemployment rate might not be the best measure of employment strength since it ignores the long term unemployed. However, if you look at the plot below, you can see we are at a very “Goldilocks” point, which is denoted by the yellow star.

Phillps Curve

The upcoming week will have the consumer price index and the producer price index, but that should be the only market-moving data. We will have some Fed-speak as well today and Wednesday.

Donald Trump has until May 12 to renew the Iran deal. Israel calls the deal fatally flawed, while Iran says the US will regret not renewing it. West Texas Intermediate is trading over $70 on fears the deal will not be renewed.

Doctors tend to have difficulties getting a mortgage early in their careers – they usually have a high level of student loan debt, no savings and the earnings early on can be low. Mortgages that carry a higher interest rate but don’t require downpayments are becoming more popular for this market. These loans can carry an interest rate 25 -100 basis points over prevailing rates. although they usually don’t require PMI. One catch – the prepay speeds on these mortgage will almost certainly be high.

The CFPB dodged a bullet – PHH will not appeal the DC Circuit’s ruling that rejected their claim that the single-director structure is unconstitutional. There are other cases in the process that also use that claim, so it is possible the question may come to SCOTUS. If one of these cases makes it to SCOTUS, the only one with standing to defend the agency is the Administration, who probably won’t defend it.

Merger news: Mutual of Omaha is buying Synergy One. Synergy One will be a wholly-owned subsidiary and will continue to operate out of San Diego.