NFIB Small Business Optimism – The Daily Tearsheet

Morning Report: Homebuyer sentiment softens

Vital Statistics:

	Last	Change
S&P futures	2571	20
Eurostoxx index	346.77	3.89
Oil (WTI)	49.14	0.86
10 year government bond yield		2.69%
30 year fixed rate mortgage		4.43%

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

As the shutdown drags on with no end in sight, the IRS has decided to begin issuing tax transcripts. It will probably take a few days to catch up with the backlog, but at least this headache for originators will go away.

Small business sentiment remains strong, according to the NFIB. “Optimism among small business owners continues to push record highs, but they need workers to generate more sales, provide services, and complete projects, said NFIB President and CEO Juanita D. Duggan. “Two of every three of these new jobs are historically created by the small business half of the economy, so it will be Main Street that will continue to drive economic growth.” Bill Dunkelberg notes the cognitive dissonance in the business press these days: “Recently, we’ve seen two themes promoted in the public discourse: first, the economy is going to overheat and cause inflation and second, the economy is slowing and the Federal Reserve should not raise interest rates,” said NFIB Chief Economist Bill Dunkelberg. “However, the NFIB surveys of the small business half of the economy have shown no signs of an inflation threat, and in real terms Main Street remains very strong, setting record levels of hiring along the way.”

Growth in the service sector decelerated in December, according to the ISM Non-Manufacturing Index. New Orders were the bright spot in the report while most other indicators fell. Note that we are still at historically very strong levels, so there is nothing recessionary in this report. Residential construction remains an issue. One of the respondents said: “New residential home sales have slowed significantly. Tariff delay has slowed material cost increases, but all indications are that January will bring price increases.” I found that surprising given that lumber prices have been falling steadily for the past 6 months and are down 22% YOY.

Homebuyer sentiment has been souring as well, according to the latest Fannie Mae National Housing Survey. Blame high house prices: “Consumer attitudes regarding whether it’s a good time to buy a home worsened significantly in the last month, as well as from a year ago, to a survey low,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Although home price growth slowed in 2018, the cumulative impact of sustained, robust increases in home prices outpacing income growth likely helped drive the share of consumers citing high home prices as a primary reason for a bad time to buy a home to a survey high.” The net number of people who think it is a good time to buy fell from 23% to 11%. The net number of people who think home prices will rise fell slightly, but nothing as dramatic as the good time to buy statistic. Note that there was no major moves in the personal economics numbers either – the net number of people not concerned about losing their job hit 79%, a series high.

The Washington Post summarized the 2019 housing forecasts from the MBA, NAR, and more. The MBA is forecasting that the 30 year fixed rate mortgage will hit 5.1%. (Zillow is even more bearish – they are forecasting 5.8%) While those forecasts are certainly a possibility, they seem unlikely if the Fed is indeed done with this tightening cycle. Despite that rate forecast the MBA does see purchase origination increasing, while refis will decline. The NAHB is predicting new home sales will be flat with 2018, around 618,000.

Morning Report: Small business optimism remains high

Vital Statistics:

	Last	Change
S&P futures	2667.5	28
Eurostoxx index	345.14	5
Oil (WTI)	51.55	0.25
10 year government bond yield		2.89%
30 year fixed rate mortgage		4.72%

Stocks are higher this morning on hopes of a trade deal. Bonds and MBS are down.

There were 7.1 million job openings as of the end of October, according to the BLS. This was largely unchanged from September. IT and real estate had the biggest increases in open positions. The quits rate fell by 0.1% to 2.3%. The Fed pays close attention to the quits rate as it historically has presaged wage inflation. The JOLTs report does echo what we saw out of last Friday’s employment situation report – the job market is still strong, however it is beginning to cool down a touch.

Small Business optimism slipped ever so slightly in November, however it remains at multi-decade highs. A tight labor market remains one of the biggest issues, with a scarcity of “qualified” – i.e. not just “skilled” labor as a major issue. A net 34% of all small businesses are increasing wages, a historically robust number. While labor markets are generally tight, there still is a large number of people who are on the older side, who probably do want to work, but are unable to find jobs. Getting them back into the economy is needed in order to raise potential GDP, which acts as a speed limit on the economy.

Mel Watt’s term running the FHFA is up in January, and it looks like Mike Pence’s Chief Economist Mark Calabria is the front-runner to replace him. Calabria is a Libertarian, which will be sure to upset affordable housing advocates. Mel Watt was considered to be an ideological kindred spirit of the affordable housing lobby, and he allowed Fannie Mae and Freddie Mac to increase their footprint in the mortgage market. Calabria will probably side with Republicans who want to see the GSEs reduce their influence, and will probably look to tighten requirements, increase guaranty fees, and lower eligible loan sizes. This of course assumes Congress does nothing about GSE reform, which is probably a safe assumption.

Funding for the government expires on Dec 21. Trump and the Democrats are negotiating over funding the wall. Government shutdowns generally do not affect the financial markets – as much as they bother the Washington Post, Wall Street does not care. That said, the last time we had a shutdown, originators were unable to get tax transcripts out of the IRS, so plan ahead.

Morning Report: Small Business Optimism still at record levels

Vital Statistics:

	Last	Change
S&P futures	2881	-13
Eurostoxx index	370.66	-1.75
Oil (WTI)	74.94	..67
10 year government bond yield		3.25%
30 year fixed rate mortgage		4.97%

Stocks are down this morning as the global sell-off continues. Bonds and MBS are down after taking yesterday off.

Small business optimism hit its third highest reading in September. This survey goes back 45 years, so that is an impressive data point. “This is the longest streak of small business optimism in history, evidence that tax cuts and regulatory rollbacks are paying off for the economy as a whole,” said NFIB President and CEO Juanita D. Duggan. “Our members say that business is booming and prospects continue to look bright.” We are also seeing plans translate into actual spending, especially in capital expenditures. For a long time, businesses were saying they planned to increase investment in their businesses, but they weren’t actually doing it at the moment. That has changed.

While the sell-off in US stocks is gaining some attention, Asian markets are at 17 month lows, driven by emerging markets and trade fears. The IMF just downgraded global growth for the first time in two years, based on the same issues. Chinese market weakness is encouraging more selling. This weakness is putting additional pressure on the Chinese currency, which only adds to the trade tensions between the US and China.

The higher interest rate bet (short Treasuries) is the biggest trade on the Street right now, and many hedge funds rang the register last week when rates spiked. The net speculative short position fell to 740k from 756k the week before. Implied volatility in bond options also increased, which means the market is expecting further big moves. Volatility tends to beget volatility, so we could have a bumpy road ahead. Be careful floating.

Fun fact: There have only been 4 years where bonds had a negative yearly return in the past 50 years: 1994, 1999, 2009 and 2013. This year is looking like it could be another. That said, the bond bear market was already well underway in the late 60s, having begun about 10 years earlier, when the ultra – low interest rate environment from the Great Depression and WWII ended. In other words, the most relevant comparison to the current economic climate is the the 1950s and 1960, which this data range ignored.

The Conference Board’s Employment Trends Index declined in September. “The US economy is very strong now. Demand for workers is likely to continue growing rapidly in the coming quarters, but with the unemployment rate now at 3.7 percent, recruiters have their work cut out for them. They will have to bring more people off the sidelines faster. In the meantime, businesses will have to squeeze more out of their current workers, either by increasing working hours or raising labor productivity. Labor market tightness varies across occupations and geographies. However, for the nation we expect the unemployment rate to go down to 3.5 percent or even lower in 2019. We also expect labor force participation and productivity to gradually increase, and wages to further accelerate” said Gad Levanon, Chief Economist, North America, at The Conference Board.

Hurricane Michael is threatening the Florida Panhandle and Georgia, and will probably dump a lot of rain on the Eastern Seaboard this week.

Morning Report: Wage pressures building

Vital Statistics:

	Last	Change
S&P futures	2872	-8.25
Eurostoxx index	373.62	-1.89
Oil (WTI)	67.66	0.12
10 year government bond yield		2.97%
30 year fixed rate mortgage		4.62%

Stocks are lower this morning on trade and weather fears. Bonds and MBS are continuing their post jobs-report sell-off.

Job openings hit a record high in July, hitting 6.9 million, according to the JOLTS survey. Job openings increased in finance and insuring, but fell in retail and government. The quits rate increased to 2.4%, the highest level since 2001.

Small business optimism set a record last month, hitting 108.8 and beating the previous high set in July 1983. The number of businesses saying it is a good time to expand hit a high, and plans for capital expenditures and inventory investment also hit pre-crisis highs. The NFIB index had a discontinuous jump upward starting in late 2016, but that was primarily driven by expectations of hiring and investment. Now the index is being driven higher by actual hiring and investment and that is driving GDP growth. Labor shortages continue to be a problem.

Same store sales continued their recent strength, rising 6.3% last week. All of this points to a strong Q4.

Signs of building wage pressures? Leaders for the United Steelworker’s Union are demanding pay increases as steelmakers get a profit boost from tariffs. They are targeting US Steel and Arcelor Mittal. Steel prices are up 30% – 40% this year, which is boosting profits. This issue of course is that these increases will probably prove to be temporary as the tariffs are a negotiating tool. That said, expect to see more of this as the labor market tightens. US Steel has offered the union a 4% wage increase next year, and 3% the following two years. After that, base pay will increase by 1%, but profit-sharing bonuses will be implemented.

Finally, a note on 9/11

I was on the trading floor at Bear, Stearns in London. It was just after lunch. A headline went across Bloomberg saying a plane had hit one of the WTC towers. CNBC mentioned the story as well, but no one was thinking “terrorism.” I emailed one of my friends at Merrill Lynch (right across the street at the World Financial Center) and he wasn’t even aware of what happened. The European markets were down a bit on the day, but didn’t really react to the first hit.

After a few minutes, CNBC started showing live footage of the fire and then we saw plane 2 hit. Immediately, the world realized what had happened. The Euro markets were collapsing and I was inundated with sell orders. The news of the Pentagon hit came out. People on our floor started freaking out. We were in Canary Wharf (One Canada Square) in the tallest building in the UK. Planes routinely come close to the building as they approach City Airport. The head of Bear Stearns Europe came on the trading floor and told everyone if they were uncomfortable, to go home. No one knew if today was “fly a plane into financial headquarters day” Everyone bailed, and I was one of the last guys on the trading floor, trying to reconcile my book by hand and get flat before I left.

I looked up at CNBC before I left and saw the place I got married at a year earlier collapse on my birthday.

P.S. As I headed to the tube to go home, I passed the Slug and Lettuce (a pub) and found all of the “uncomfortable” Bear Stearns employees having a pint directly below the building they were so uncomfortable being in.

By the way, I am still searching for a senior capital market role at a mortgage bank. If anyone is hearing of anyone looking, I would appreciate the head’s up.

Morning Report: Small Business Confidence soars

Vital Statistics:

	Last	Change
S&P futures	2833	7.5
Eurostoxx index	385.12	0.21
Oil (WTI)	67.99	0.79
10 Year Government Bond Yield		2.88%
30 Year fixed rate mortgage		4.58%

Stocks are higher this morning after the Turkish Lira rallied 6%. Bonds and MBS are flat.

Import prices were flat in July but were up just under 5% on a YOY basis. This was pretty much all driven by oil prices which are inherently volatile and self-correcting.

Small business optimism is near record highs according to the NFIB. Availability of workers remains a big concern, and we are seeing record levels of compensation increases. Note that many of these comp increases are planned, so there will be a 9 month lag before it shows up in the government data. Credit availability is a non-problem. The biggest headache for small business is availability / quality of labor, not the cost of labor. I don’t know that we have cost-push labor inflation quite yet, but if that is the case, then it won’t be good for mortgage rates as it will primarily affect the long end of the curve.

HUD is electing to discontinue the Obama Administration’s controversial interpretation of the AFFH rule from the 60s, which means it no longer will be suing towns to force them to change their zoning codes to allow multi-family housing. HUD will focus on eliminating regulatory impediments to building more housing, and will tie grants to measures which increase building. In other words, The Obama Admin used a stick approach, while the Trump Admin will use a carrot approach.

Home prices rose 0.7% MOM and 6.8% YOY in June according to CoreLogic. They are forecast to rise 5% over the next year. Sales in the red-hot markets are down double digits as affordability issues and lack of inventory crimp activity.

The Despot reported better than expected earnings as homeowners choose to fix up their existing place instead of trying to move in a tight real estate market. Better weather helped the company rebound from their sales miss in the first quarter.

Morning Report: Small Business sentiment near 45 year high

Vital Statistics:

	Last	Change
S&P futures	2789	2.25
Eurostoxx index	387.87	-0.07
Oil (WTI)	66.04	-0.06
10 Year Government Bond Yield		2.98%
30 Year fixed rate mortgage		4.59%

Stocks are higher this morning on reports of an agreement with North Korea. Bonds and MBS are down.

The FOMC meeting begins today. The Fed Funds futures are handicapping a 91% chance of a rate hike tomorrow.

Trump and Kim signed an agreement to denuclearize the Korean Peninsula. There is no timetable, but not much in the way of concrete agreements, however Trump did pledge to end military exercises with South Korea.

Inflation at the consumer level remains under control, as the Consumer Price Index rose 0.2% MOM / 2.8% YOY. The core rate rose 0.2% MOM / 2.2% YOY. These numbers were all in line with street estimates. Aside from energy, healthcare costs (hospital, Rx) drove the increase.

Small business optimism remains strong, as the NFIB index hit its second highest level in its 45 year history. Compensation increases hit a 45 year high as a net 35% of small businesses increased wages. 58% of employers reported openings, but half couldn’t find qualified applicants. I will say this again, I suspect the biggest culprit in the “labor shortage” is the plethora of application tracking systems which pre-screen job applications. They may have been a help during the days of high unemployment when finding the right employee was like finding a needle in a haystack. Nowadays, they the computer systems are probably screening out potential fits before anyone gets to see the resume. There are all sorts of articles about how these systems have to be gamed, and most people probably don’t.

The strong economy and good home price appreciation are contributing to a drop in delinquencies, according to CoreLogic. 30 day DQs dropped by 10 basis points to 4.3% in March. The foreclosure rate fell from 0.8% to 0.6%. In the first quarter, the typical homeowner saw a $16,300 increase in home equity.

Declining margins has lenders bearish, according to the latest Fannie Mae lender sentiment survey. “Lenders remain bearish this quarter as they continue to face headwinds from rising mortgage rates, tight supply, and strong home price appreciation, which have drastically reduced refinance activity and restrained home purchase affordability,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “These factors have combined to squeeze mortgage origination volumes and have increased competitive pressures. Increased competitiveness will likely persist as a top driver of lenders’ mortgage business strategy. We expect this will prompt businesses to turn to cost-cutting as a means of managing their bottom lines, with payroll reduction likely to assume a more prominent role in future belt-tightening efforts.”

Morning Report: Jerome Powell agrees with market on interest rates

Vital Statistic:

	Last	Change
S&P futures	2667	-3
Eurostoxx index	388.93	-0.56
Oil (WTI)	70.09	-0.62
10 Year Government Bond Yield		2.96%
30 Year fixed rate mortgage		4.55%

Stocks are lower as we await the Trump Administration’s decision on the Iran deal. Bonds and MBS are down small.

The Administration is set to announce later today whether they intend to stay in the Iranian deal or abandon it. Oil has been rallying on expectations Trump will leave.

Jerome Powell said that market expectations (i.e. the Fed Funds futures) are more or less in alignment with the Fed’s expectations for the future path of interest rates. The December Fed funds futures are predicting about a 10% chance of one more hike this year, a 44% chance of 2 more and a 39% chance of 3 more. Over the past month, the central tendency has become more hawkish.

Small Business Optimism remains strong, according to the NFIB. More businesses are planning on increasing capital expenditures, while hiring remains strong and we are seeing evidence of increased compensation. Profitability increased as well, which indicates that productivity is increasing, and that some of this CAPEX is going towards labor-saving technology. Finding qualified workers continues to be the biggest issue surrounding small business. “There is no question that small business is booming,” said NFIB Chief Economist Bill Dunkelberg. “Consumer spending, the new tax law, and lower regulatory barriers are all supporting the surge in optimism across all small business industry sectors.”

Despite the hurricane-related spike in delinquences, overall DQ rates have been falling, according to CoreLogic. Home price appreciation, in addition to more stringent underwriting standards are the driving force behind it. The foreclosure rate is down from 0.8% to 0.5%, and the 30 day DQ rate is down to 4.8% from 5.0%. As you would expect, TX and FL are experiencing rising DQ rates, but the rest of the nation is down.

Tesla stock has more or less recovered from its conference call induces swoon from last week. The bonds are at the lows however, trading at 88. Note there is a divergence also in NFLX, which has bonds in the low 90s, while the stock is a highflyer.

NYS AG Eric Schneiderman resigned from office after reports came out that he abused 4 women. Schneiderman was an AG cut in the same cloth as Eliot Spitzer, and hated the financial industry about as much as he did (FWIW the feeling was mutual). When Spitzer announced his resignation, cheers went up on the floor of the NYSE.

Freddie Mac is getting into the business of providing lines of credit against MSR portfolios. Nonbank servicers face liquidity issues when loans they are servicing go delinquent. They are required to make the mortgage payment to the ultimate investor of the mortgage until the loan is brought current or foreclosed. Banks generally have no problems with this, but nonbank issuers generally don’t have the balance sheet to withstand heavy advances activity. Fannie Mae only requires 6 months of advances, but Ginnie Mae has no similar relief. Policymakers are concerned about the ability of nonbank servicers to withstand a period of prolonged stress if delinquencies spike.

Homebuyer sentiment hit an all-time high according to the Fannie Mae Home Purchase Sentiment Index. “The latest HPSI reading edged up to a new survey high, showing that consumer attitudes remain resilient going into the spring/summer home buying season,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “High home prices and good economic conditions helped push the share of Americans who think it’s a good time to sell to a fresh record high. However, the upward trend in the good-time-to-sell share seen since last spring has done little to release more for-sale inventory. The tightest supply in decades, combined with rising mortgage rates from historically low levels, will likely remain a hurdle for mobility and a persistent headwind for home sales.”