Morning Report: Commodity prices falling

Vital Statistics:

 

Last Change
S&P futures 2778 -30
Eurostoxx index 364.14 -1.6
Oil (WTI) 60.5 0.31
10 year government bond yield 3.19%
30 year fixed rate mortgage 4.98%

 

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

 

Markets are open today, however many people are taking the day off in observance of Veteran’s Day.

 

There won’t be much in the way of market-moving data this week (CPI on Wednesday and retail sales on Thursday are the only potential market movers), however we do have a lot of Fed-speak, with Jerome Powell speaking on Wednesday.

 

Inflation at the wholesale level was a little hotter than expected, rising 0.6% MOM and 2.9% YOY. Ex food and energy, it rose 0.5% / 2.8% and ex food, energy and trade services (the core rate) it rose 0.2% / 2.8%. Inflation using the PPI metric is higher than the Fed’s 2% target, but the PPI isn’t the measure they target. We will get inflation at the consumer level on Wednesday.

 

Consumer sentiment improved in the first reading of the November numbers, according to the University of Michigan sentiment survey.

 

Amazing statistic: 20% of China’s apartments are vacant. That works out to be 50 million apartments. One of the biggest symptoms of a bubble is oversupply, and a 20% vacancy rate would qualify. In the big cities, apartments are ridiculously expensive, trading for something like 40 – 50 times income. For reference, prices in the US topped out at just under 5 times income in 2006. Chinese economic statistics are heavily massaged by government, but there is no doubt that they have the sort of real estate bubbles that seem to occur after decades of rapid growth, similar to the US in the 20s and Japan in the 80s. Once their bubble bursts, China will try and export their way out of it, which will probably spark more trade tensions, but will also put downward pressure on inflation and interest rates globally. The US could go through another period of having its cake and eating it too – a period where they go through strong economic growth without inflation worries.

 

Speaking of inflation, oil has been getting shellacked over the past month, losing over 20% from mid-October. Part of this has been driven by the US allowing 8 companies to buy Iranian oil despite sanctions. OPEC is now entertaining production cuts, which has stabilized prices at least today.

 

Also note that lumber prices (which have been soaring due to Canadian tariffs) have now reversed and are heading lower. This should help lower new home construction costs, although the biggest bottleneck remains labor and affordable lots.

 

lumber

 

So, while we are seeing inflationary pressures building in the labor market, commodities are going the other way.

 

California passed a couple of housing affordability initiatives last week, which were mainly targeted to the Bay Area. Similar measures in Oregon and Florida also passed.

 

 

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.