inflation – The Daily Tearsheet

Morning Report: Purchase applications are the highest in over a decade

Vital Statistics:

	Last	Change
S&P futures	3282	-5.25
Oil (WTI)	58.13	0.04
10 year government bond yield		1.79%
30 year fixed rate mortgage		3.87%

Stocks are lower this morning as China and the US sign a Phase I deal on trade. Bonds and MBS are up.

Note we will have some Fed-speak later this morning.

Trump characterized his Phase I deal with China as a “big, beautiful monster” and encouraged farmers to buy bigger tractors. China is agreeing to purchase an additional $200 billion of US goods over the next two years, which represents about half of the US trade deficit. Energy, agricultural, and industrial exports are all set to increase, while the US will cancel new tariffs on cellphones and laptops. Some other tariffs will be reduced while others will remain in place.

Mortgage applications increased 30% last week as purchases rose 16% and refis rose 43%. This was the first week after the holidays, so there is probably are some weird adjustments playing out. Rates fell 4 basis points to 3.87%. Most notably, purchase activity increased 8% from a year ago and is at the highest level since October 2009. A few homebuilders specifically mentioned on their earnings calls that they are seeing no season slowdown this year. At any rate, the Spring selling season is just around the corner. Note that while we are at a 10 year high on the purchase index, we are still well below bubble levels

Inflation at the wholesale level remains below the Fed’s target, with the headline producer price index up 0.1% MOM and 1.3% YOY. Ex-food and energy, it rose 0.1% and 1.1%. While the producer price index is not the preferred inflation index for the Fed, it confirms we are still not seeing much in the way of inflationary pressures.

Morning Report: The Fed maintains current interest rate policy

Vital Statistics:

	Last	Change
S&P futures	3140	-3.25
Oil (WTI)	58.90	-0.14
10 year government bond yield		1.79%
30 year fixed rate mortgage		3.97%

Stocks are flattish after the Fed maintained interest rates yesterday. Bonds and MBS are up.

The Fed maintained the Fed Funds rate at current levels and gave a generally upbeat assessment on the economy. The FOMC took down their future unemployment estimates by .2% and left all other projections unchanged. The biggest revelation was the dot plot, which was a bit more dovish than the September plot, but is still forecasting the possibility of a hike in 2020, along with no forecasts for a rate cut.

The Fed Funds futures, which have been (a) more dovish than the Fed’s dot plots and (b) more correct, went from forecasting a 50% chance of a cut in 2020 to a 70% chance of a cut. The bond market adjusted as well, with the 10 year bond yield falling about 4 basis points in the afternoon.

The Producer Price Index (PPI) was unchanged in November, and up 1.1% on a year-over-year basis. The PPI measures inflation at the wholesale level, and is a companion inflation index to the Consumer price index. Ex-food and energy, the index fell in November and was up 1.3% YOY.

Initial Jobless Claims jumped to 252,000 last week. This is a huge jump, and I am not sure what drove it. We have been hanging around in the low $200,000s for quite some time. FWIW, this jump in new jobless doesn’t necessarily comport with the other labor market indicators out there, but it is less of a lagging indicator than the others.

Morning Report: Fed Day

Vital Statistics:

	Last	Change
S&P futures	3139	3.25
Oil (WTI)	58.99	-0.24
10 year government bond yield		1.84%
30 year fixed rate mortgage		3.98%

Stocks are flattish as we await the FOMC decision. Bonds and MBS are flat as well.

Mortgage applications increased 3.8% from a week earlier, according to the MBA. The purchase index dropped 0.4%, while the refi index rose 9%. Interest rates rose one basis point.

The FOMC decision is set for 2:00 pm EST. Given that the Fed is on the sidelines for a while, there shouldn’t be anything market moving in it.

Consumer prices rose 0.3% in November, according to the BLS. Higher shelter and energy prices drove the increase. The index was up 2.1% on an annualized basis. Ex-food and energy, the index was up 0.2%. These numbers were a hair higher than street expectations.

The first time homebuyer is returning, according to the Genworth First Time Buyer report. The rebound in the third quarter was driven primarily by falling interest rates and increasing home affordability. Supply constraints, particularly at the affordable price points have been the issue. “The first-time homebuyer market rebounded this quarter and although the rebound was modest compared with the number of first-time homebuyers a year ago, and a quarter behind the broad rebound, it was a strong rebound from the previous quarter allowing first-time homebuyers to make up some lost ground,” said Tian Liu, Genworth Mortgage Insurance Chief Economist.

The report noted that repeat buyers (read move-up buyers) have increased as well. The lack of move-up buyers has depressed housing mobility, which may have been driven by lack of home equity from purchases made during the bubble years. Given the change in the house price indices over the past 10 years, negative equity is less of an issue than it was a few years ago.

Interestingly, the number of first-time homebuyers this quarter was comparable to the peak of the last housing boom in 2005 and 2006, and only modestly below the peak levels of 1999 and 2000. Still, the Millennial generation is bigger than Gen X by a large margin, so there should be more room to run here.

Morning Report: Fannie / Freddie sale by 2022?

Vital Statistics:

	Last	Change
S&P futures	3088	-6.25
Oil (WTI)	57.59	0.44
10 year government bond yield		1.83%
30 year fixed rate mortgage		4.00%

Stocks are lower this morning on weak overseas economic data. Bonds and MBS are up.

Initial Jobless Claims rose to 225k last week. We are still at extremely low levels historically. Jerome Powell will be testifying today at 10:00 am. Nothing earth-shattering came out of his testimony yesterday, although he pushed back on Trump’s suggestion that the Fed should cut rates below zero.

Inflation at the wholesale level came in a little hotter than expected, with the Producer Price Index rising 0.4%% MOM and 1.1% YOY. Ex-food and energy, it rose 0.3% MOM and 1.6% YOY. These readings are still well below what the Fed would like to see, which is inflation at 2%.

Mark Calabria said that Fannie and Fred could be ready to exit government conservatorship by 2022. “If all goes well, 2021, 2022 we will see very large public offerings from these companies,” Calabria said at an event sponsored by the American Association of Residential Mortgage Regulators and the Conference of State Bank Supervisors. “The consent decree will be able to give that window where they can go to market, do an offering and still operate under a way where we’ve got some prudential safeguards.” Fannie and Fred stock fell on the news. Fannie’s stock has been a trader’s dream, with plenty of volatility to play with.

Morning Report: Jerome Powell testifies at 11:00 am.

Vital Statistics:

	Last	Change
S&P futures	3082	-9.25
Oil (WTI)	56.59	-0.24
10 year government bond yield		1.88%
30 year fixed rate mortgage		4.03%

Stocks are lower this morning after overseas weakness due to the protests in Hong Kong. Bonds and MBS are up.

Jerome Powell will testify in front of Congress at 11:00 am today. It probably won’t be market-moving, but you never know. With the Fed in a holding pattern and the 2020 election coming up, the central bank will probably fade into the background.

Inflation at the consumer level increased 0.4% MOM in October and 1.8% YOY, driven by increasing housing and medical costs. The core number (ex-food and energy) was up 0.2% MOM and 2.3% YOY. We will get wholesale inflation numbers tomorrow.

Mortgage applications increased 10% last week as purchases rose 5% and refis increased 13%. “Mortgage applications increased to their highest level in over a month, as both purchase and refinance activity rose despite another climb in mortgage rates,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Positive data on consumer sentiment and growing optimism surrounding the U.S. and China trade dispute, were behind last week’s rise in the 30-year fixed mortgage rate to 4.03 percent. Refinance applications jumped 13 percent to the highest level in five weeks, as conventional, FHA and VA refinances all posted weekly gains. With rates still in the 4 percent range, we continue to expect to see moderate growth in refinance activity in the final weeks of 2020.”

Bidding wars for real estate have hit a 10 year low, driven by flattening prices on the Left Coast. Nationally, the percentage of houses with bidding wars fell to 10.1%, a drop from 38% a year ago. This was almost certainly driven by home price appreciation failing to keep up with wage inflation, along with rising interest rates. San Francisco was probably affected by a disappointing IPO market. The supply / demand imbalance is still there however, so if interest rates remain at these levels, we could see bidding wars return when the spring selling season hits.

Google is getting into the banking business by offering checking accounts. As if Google doesn’t already know enough about us…

Morning Report: Mortgage rates and the 10 year.

Vital Statistics:

	Last	Change
S&P futures	2915	-6.25
Oil (WTI)	53.07	0.54
10 year government bond yield		1.61%
30 year fixed rate mortgage		3.84%

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

Consumer inflation was flat in September, and is up 1.7% YOY. The core rate, which excludes some volatile commodities, rose 0.1% MOM and 2.4% YOY. Inflation continues to sit right in the range it has been historically.

Job openings fell from a downward-revised 7.17 million to 7.05 million, while initial jobless claims ticked up to 214k.

Mortgage Applications rose 5.2% last week as purchases fell 1% and refis rose 10%. The rate on a 30 year fixed conforming loan fell 9 basis points to 3.9%. Weaker-than-expected economic data drove the decrease.

Good news for the financial community: Trump is planning to sign a couple of executive orders, which will bring more sunlight on rulemaking, and will permit more public input in the federal guidance. Much of this guidance had been “rulemaking in secret” and this will give companies more of a head’s up when the regulatory agencies plan major changes in guidance. The CFPB sprung a nasty surprise on auto lenders during the Obama Administration, where they determined that any lenders who provide auto loans through dealerships are responsible for “discriminatory pricing.” It is this sort of the thing the order intends to limit.

“CNBC is saying the 10 year bond yield is way lower, but I just ran a scenario and my borrower still has to pay a point and a half. What is going on?” This is a common observation these days, and it can be frustrating for both loan officers and borrowers. As the Wall Street Journal notes, that the difference between the typical mortgage rate and the 10 year bond is at a 7 year high. What is going on? First, and most important, mortgage rates are not determined by the 10 year. They are determined by mortgage backed securities, which have entirely different financial characteristics than a government bond. When rates are volatile (i.e. changing a lot in a short time period) mortgage backed security pricing will be negatively affected. In practical terms, it means that when the 10 year bond yield abruptly moves lower, it will take a few days for mortgage rates to catch up, while the time it takes to adjust to big upward moves in Treasury rates is often shorter. It also explains why it can be hard to get par pricing when you have a lot of loan level hits from Fannie (i.e. investment property, cash out refinancing, etc). The “rate stack” gets compressed and MBS investors are wary of buying high coupon securities. Bond geeks have a term for this – negative convexity – but in practical terms it means that moves in the 10 year don’t directly carry over to mortgage rates.

Morning Report: Housing affordability improves

Vital Statistics:

	Last	Change
S&P futures	2919	-16.25
Oil (WTI)	52.07	-0.64
10 year government bond yield		1.53%
30 year fixed rate mortgage		3.83%

Stocks are lower this morning on trade concerns and lower than expected inflation readings. Bonds and MBS are flat.

Inflation at the wholesale level came in well below expectations, with the headline producer price index falling 0.3%. Ex-food and energy, it fell by the same amount. On a year-over-year basis, the headline rose 1.4% and ex-food and energy it rose 2%. While the Fed doesn’t pay too much attention to the CPI and PPI, it will certainly fuel fears that they are losing the battle against deflation.

Small business optimism fell in September, according to the NFIB. “As small business owners continue to invest, expand, and try to hire, they’re doing so with less gusto than they did earlier in the year, thanks to the mixed signals they’re receiving from policymakers and politicians,” saidNFIB President and CEO Juanita D. Duggan. “All indications are that owners are eager to do more, but they’re uncertain about what the future holds and can’t find workers to fill the jobs they have open.” The point about jobs is crucial to understanding the current economic environment. While there are fears that we may enter a recession, they are rare when the labor market is this tight, and we are more likely to see increasing wage growth and consumer spending. Not a recipe for a recession.

NFIB

Home prices rose 0.4% MOM and 3.6% YOY, according to CoreLogic. They anticipate that home price appreciation will approach 6% in the next year, driven by lower rates. Of the top 100 metro areas, 37% are overvalued, while 23% were undervalued. The Rust Belt, interior California, and parts of the Northeast are the most undervalued.

Corelogic overvalued

Speaking of home price appreciation. California has enacted statewide rent control, which limits rent increases to 5%, and makes it harder to evict non-payers. Of course when you have a dearth of housing, artificially depressing the rate of return on that investment is a strange way of encouraging it. But this law is all about messaging, not substance. Notwithstanding the state of CA, housing affordability is at a 3 year high right now, according to Black Knight, driven by lower interest rates. This is quite the reversal from November last year when affordability was at a 9 year low.

Morning Report: 30 year treasury yield near a record low

Vital Statistics:

	Last	Change
S&P futures	2871	-14.5
Oil (WTI)	54.49	-0.44
10 year government bond yield		1.69%
30 year fixed rate mortgage		3.85%

Stocks are lower this morning after the Argentinian markets blew up overnight and the Hong Kong airport remains occupied by protesters. Bonds and MBS reversed their rally and are down after the Trump Administration announced they would delay the tariff increases on Chinese goods until mid-December. They were scheduled to take effect September 1.

The German Bund yield has hit a record low at negative 61 basis points. While the 10 year bond yield is still some 30 basis points from a record, the 30 year bond is getting close at a yield of 2.13%. Note that with the 10 year yield of 1.63% is lower than the dividend yield of the S&P 500.

Some economic data this morning: the consumer price index rose 0.2% MOM / 1.8% YOY, which was a touch higher than the Street forecast. Ex-food and energy, it rose 0.3% / 2.2%. The CPI remains pretty much where the Fed wants it, and is not going to be the driver of Fed policy, at least in the near term. Like it or not, the Fed is watching the markets and following them even if the signal-to-noise ratio is heavily distorted.

Small Business Optimism continued to increase as the index improved in July. Despite all of the handwringing in the business press over growth small business continues to grow and invest. Biggest headwind? Labor. The top concern of business was finding quality labor at 26%, which is a record. 57% reported capital expenditures, which means they have enough confidence to invest in infrastructure to grow their businesses. Only 3% of businesses reported not having their credit needs met, which is close to historical lows and kind of begs the question of what the Fed hopes to accomplish with lowering rates.

Mortgage delinquency rates continued to fall, hitting 20 year lows for most of the country. 30 day DQs fell to 3.6% and the foreclosure rate fell to 0.4%. The only areas with elevated DQ rates are in the Midwest and Southeast and are the result of flooding.

Fitch is out saying that GSE reform will probably not result in near-term downgrades.

Morning Report: Mortgage credit expands

Vital Statistics:

	Last	Change
S&P futures	2858	-14
Oil (WTI)	61.94	0.24
10 year government bond yield		2.45%
30 year fixed rate mortgage		4.15%

Stocks are lower after the US imposed further tariffs on Chinese goods. Bonds and MBS are flat.

As promised, the US increased tariffs on about $200 billion of Chinese goods as trade talks continue. The Chinese vowed to retaliate, and that sent the Chinese stock market up sharply overnight. Both parties say they want to strike some sort of deal and it is possible this could get walked back.

Inflation at the consumer level rose 0.3% MOM and 2.0% YOY, right in line with the Fed’s target. Ex-food and energy, they were up 0.2% / 2.1%. Although the Fed doesn’t really pay too much attention to CPI (they prefer PCE), it keeps the Fed at bay, probably through the 2020 election.

Uber priced its IPO at $45 a share last night, towards the bottom of the range. The bankers claim that was due to market conditions, but the IPO market has been lousy in general, partly because all of the value is extracted in the funding rounds prior to the IPO, which means they are coming to the market priced for perfection. The lousy performance of Lyft’s IPO didn’t help matters either. A labor standoff with its drivers isn’t helping either.

Neel Kashkari discusses why we aren’t seeing inflation even at 3.6% unemployment. His main point is that the unemployment rate uses a measure of the labor force that is probably understated. You have to be actively looking for a job to be considered part of the labor force, and people who have been unemployed for over 6 months no longer count. The tell, therefore is wage growth. Given productivity has been running at around 1.5% and inflation is running around 2%, then non-inflationary wage growth should be around 3.5%. Since we are closer to 3%, there is still slack in the labor market. He also cited two interesting stats: First, of the people that got jobs in April, 70% said they weren’t looking for work in March. That suggests that many of these workers were on disability, which is basically long-term unemployment. The fact that they are coming back is a good sign. Second, the fall in the labor force participation rate offsets the unemployment effect. To get an apples-to-apples comparison of today’s job market versus the late 90s, 2.3 million more prime age workers (age 25-54) would need to have jobs. This also explains why wage growth has been running below what it should.

Usury laws are back. Bernie Sanders and Alexandria Ocasio-Cortez want to cap credit card interest rates at 15%. I guess the hope is that credit card companies will say “yes, we were overcharging you and we’ll still make money at 15%, so here you go.” In reality, all they will do is stop issuing cards to people with FICOs below a certain level. Credit card debt is unsecured, which means that the lender generally gets little to nothing if the borrower defaults. So, they assign a probability of default and multiply the interest by 1 minus the default rate and decide whether that return is acceptable compared to other debt instruments. By the way, these ideas aren’t new. Much of this had been tried and rejected over the past 100 years, but i guess in politics and finance, knowledge is cyclical, versus cumulative as it is in the sciences.

Mortgage credit standards loosened last month as more lenders embraced non-QM lending. The MBA’s Mortgage Credit Availability Index increased for everything except government loans, which fell. The drop in government is probably due to VA loans, which are under scrutiny right now. By the way, although the chart below is close to highs, it doesn’t go back to the bubble years. Compared to then, credit is still much, much tighter. The current index of 190 or so is still a fraction of the 900 level which characterized the days of “pick a pay” loans.

Morning Report: Small mortgage origination has fallen

Vital Statistics:

	Last	Change
S&P futures	2867	-17
Oil (WTI)	61.91	-0.21
10 year government bond yield		2.45%
30 year fixed rate mortgage		4.17%

Stocks are lower as the trade-driven sell off continues. Bonds and MBS are up. Note Jerome Powell will be speaking around lunch time. Also, the long-awaited Uber IPO will price after the bell.

Inflation at the wholesale level increased 0.2% MOM and 2.2% YOY in April according to the Producer Price Index. Ex-food and energy, they rose 0.1% / 2.4%. We will get the consumer price index tomorrow.

Initial Jobless Claims came in at 228k last week.

FHFA Chairman Mark Calabria said that Fannie and Freddie may be released from conservatorship even if Congress doesn’t accomplish housing reform. He also signalled that Congress would have an “entire Congress” – i.e. at least 2 years to hash out a solution. Calabria has not said that he would end the “net worth sweep” which sends all of the GSE profits to Treasury, which has created capital shortages for the GSEs.

Fewer and fewer mortgages are being made in the lower price tiers, which is having an impact on entry-level borrowers. The article blames lender focus on the jumbo space, but that probably isn’t really the driver. They look at the number of low balance mortgages (10k – 90k) being originated today versus 10 years ago. It turns out that the number of small loans is definitely lower. I think there are a few factors going on here: First, 2009 was the beginning of the big wash-out in real estate prices and the number of homes in that price range was a lot higher in 2009 than it is today. In other words, home price appreciation is the biggest driver. Second, compliance costs are simply much higher, and as the MBA has demonstrated, costs to originate have been rising relentlessly. FWIW, there is demand for low balance mortgages – the prepay speeds are much lower so investors are willing to pay up for them – but that probably doesn’t offset higher costs. Finally, it is hard to get loan officers excited about an 80k mortgage when they are only making 75 basis points on it to begin with. Given that an 80k mortgage requires as much effort as a 800k mortgage, it makes sense for loan officers to focus on larger loan balances.