NAFTA – The Daily Tearsheet

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.

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: Hurricane Florence eyes the US

Vital Statistics:

	Last	Change
S&P futures	2884.25	9.55
Eurostoxx index	375.79	2.02
Oil (WTI)	68.05	0.29
10 year government bond yield		2.93%
30 year fixed rate mortgage		4.60%

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

In terms of economic data, we will get CPI and PPI on Wed and Thursday and retail sales on Friday. There will be little in terms of Fed-speak. The Fed Funds futures continue to up the probability of a Dec hike (Sep is in the bag), which is now sitting at 79%.

We are coming up on the 10 year anniversary of Lehman’s collapse. Expect a lot of handwringing articles about whether we are set up for another collapse (we aren’t). Residential real estate bubbles are rare events (the previous one was in the 1920s) and the psychological basis for bubbles to inflate requires decades and decades of bull markets to build up that sort of complacency. Not saying that we can’t see pockets of decline, but a broad-based drop of 20% or more? Highly unlikely.

Boston Fed President Eric Rosengren would like to see two more rate hikes in 2018 as the economy strengthens. He sees the economy expanding at a 3% pace for the rest of the year, and believes the Fed needs to keep going: “Going beyond just the next two hikes, I see no reason why we wouldn’t want to be at a more normalized rate, given the economic conditions we currently have, unless something changes dramatically that we’re not anticipating.” He also advocated that the Fed impose the counter-cyclical buffer, which requires banks to set aside additional capital in good times to draw upon when credit tightens.

Hurricane Florence is looking more and more likely to hit the East Coast, with North and South Carolina as the center of the projected path. It is expected to reach the coast late Thursday night / early Friday morning. Lots of areas are already waterlogged so flooding will be an issue even inland.

Canada sees reasons for optimism in NAFTA discussions and thinks we could see a deal. Any major changes will require legislation, but a tweak here and there will allow Trump to declare victory and move on.

Interesting map of the average age of homes in the US. In the Northeast, the average age of an owner-occupied home is over 50 years. Most of these MSAs have been losing population over the past 10 years.

Morning Report: Moody’s downgrades Chase’s jumbo status

Vital Statistics:

	Last	Change
S&P futures	2888	11
Eurostoxx index	385	0
Oil (WTI)	68.79	0.02
10 Year Government Bond Yield		2.82%
30 Year fixed rate mortgage		4.58%

Stocks are higher this morning on news that the US and Mexico might strike a deal on NAFTA. Bonds and MBS are flat.

We should have a quiet week heading into the Labor Day weekend. We will get GDP on Wednesday and Personal Incomes / Personal spending on Thursday and those are probably the only potential market-moving reports.

Mohammed El-Arian believes there is a 60% chance that Trump’s hard line on trade will result in a better deal for the US. There is a 15% chance that Trump’s stance could result in a beakthrough with China (similar to Reagan’s approach with the USSR during the Cold War), and another 25% chance that we go into a full blown trade war. He stressed that the US’s role as the world’s biggest consumer matters: “I’ve said from day one, it’s just a matter of time until other countries realize that their best approach is to collaborate with the U.S. and fix things that are broken,” El-Erian said.

Moody’s downgraded Chase’s jumbo underwriting rating to “above average” from “strong” based on concerns over the percentage of loans that come from its delegated correspondent channel. Moody’s also dinged them over their proprietary LOS (licensed from Quicken), disliking the look and feel of it. Chase obviously disputes the downgrade, and defended their underwriting. “We respectfully disagree with the rating and feel it’s based on insufficient information. While we provide select correspondent lenders with delegated underwriting authority, we also then conduct individual underwriting reviews on roughly half of those loans. These are high-quality loans that perform well,” Amy Bonitatibus, chief marketing and communications officer of Chase Home Mortgage, said in an email.

Elon Musk ended his proposed buyout of Tesla late last week. The Street never took it seriously to begin with, and was highly skeptical of his claim that funding for the deal was secured. The SEC is investigating the “funding secured” comment, which sounds like it was based largely on the existence of a pitch book, not any sort of letter from an investment bank (not even a “highly confident” letter).

Layoffs continue in the mortgage biz. Wells let go 600 people, mainly in servicing and retail fulfillment. Lower volumes and margins contributed to a 33% drop in mortgage banking income for Wells in the second quarter.

Economic activity decelerated in July, according to the Chicago Fed National Activity Index, which is a meta-index of 85 economic indicators. Production-related indicators decelerated, while employment-related indicators improved. The 3 month moving average fell as well.

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.

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.