Morning Report: New Down Payment Assistance programs

Vital Statistics:

Last Change
S&P futures 2728.75 9.5
Eurostoxx index 379.91 3.04
Oil (WTI) 73.39 -0.06
10 Year Government Bond Yield 2.84%
30 Year fixed rate mortgage 4.52%

Stocks are higher this morning on end-of-quarter window dressing. Bonds and MBS are flat.

Personal incomes rose 0.4% in May while personal spending rose 0.2%. Incomes were in line with estimates, while spending was lower. The June FOMC statement said that consumer spending was accelerating – no evidence of that in this report. Services spending drove the decline, and we could be seeing evidence that higher gasoline prices is affecting discretionary expenditures. Inflation was in line with expectations at the MOM level, and a hair above expectations on an annual basis. The core PCE index ex-food and energy came in at 2%, which is right where the Fed wants it. April’s income and spending numbers were revised downward. Don’t be surprised if strategists take down some of their Q2 GDP forecasts on these numbers.

The Chicago PMI improved to 64 from 62, which is a 5 month high. New Orders and order backlog drove the increase. We are seeing some signs of inflation brewing, with extended lead times, and a 7 year high on the prices paid index. Businesses were asked about how trade was affecting their operations. About 25% said they were having a significant impact, 40% said there was a minimal impact, and the rest were either unsure or insulated from trade issues.

KB Home reported strong numbers, with a 170 basis point increase in gross margins, 10% revenue growth, and a 50% increase in operating income. ASPs were up 4% to 401,800, and order growth was 3%. Backlog was the second highest on record. The stock is up 7% pre-open.

Interesting theory about the lack of construction workers: opiods. Between users and those that have been convicted of crimes related to usage, many workers are shut out of the work force. 80% of homebuilders report shortages in subcontractors.

The Senate will hold hearings on July 12 and 19th for Kathy Kraninger’s nomination to run the CFPB. The conventional wisdom is that she is not intended to be confirmed, but is to be an excuse to keep Mick Mulvaney in charge of the agency.

Deutsche Bank failed its stress test, while State Street, Goldman and Morgan Stanley got dinged.

Many Millennials are struggling to get a down payment for a home, and now some companies are working to help them get it. One company will supply up to a $50,000 downpayment if the borrower rents out a room on Air B&B and shares the income with the company. These loans are appealing to borrowers who might qualify for a FHA or 3% down Fannie loan but don’t want to pay the MI and other costs. While there are fears that we are bringing back the bad old days of the real estate bubble, here is the MBA’s mortgage credit availability index. We are a long way away from the days of the pick-a-pay mortgage.

MCAI long term

Morning Report: Spending / Incomes up, PCE inflation at target

Vital Statistics:

Last Change
S&P futures 2679 7.6
Eurostoxx index 385.1 0.46
Oil (WTI) 67.48 -0.62
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.56%

Stocks are higher after a slew of new mergers were announced. Bonds and MBS are up small.

We have a big week ahead with the FOMC meeting starting tomorrow and the jobs report on Friday. The Street isn’t looking for any changes in interest rates at the May meeting, but will focus as usual on the language of the statement. For the jobs report, the expectation is 190k new payrolls and 2.7% annual wage inflation.

Pending Home Sales were up marginally from February, but were still down on an annual basis, according to NAR’s Pending Home Sales Index. Bad weather in the Northeast pushed down pending sales, however all parts of the country were down. Again, blame low inventory and falling affordability.

Personal Incomes rose 0.3% in March, while personal spending rose 0.4%, in line with expectations. The PCE index was up 2% YOY and the core PCE index was up 1.9%. This is the Fed’s preferred measure of inflation and it is right where they are targeting. Income growth was the weakest since last Fall, however.

The big debate right now is whether there is any slack in the labor market. Anecdotal evidence abounds that companies are struggling to find qualified workers. However, Econ 101 says that we should be seeing higher wage inflation as a result and that isn’t happening (at least not yet). Some theories are claiming this is a market failure and that employers are artificially holding down wages (which is then used as an argument for more government intervention in the labor market). I suspect the issue is that there are three big forces holding back wage growth. First, inflation is low – if companies cannot pass along price increases to their customers, they aren’t going to be raising wages. Second, lower wage jobs are competing with technology which is only getting better and cheaper. And finally, the long-term unemployed represent a reservoir of slack that companies know they can tap if needed. FWIW, I think the first and third explanations explain it, and find the idea that employers are somehow colluding to keep wages low to be wholly unconvincing. Take a look at the chart below, which shows wage increases versus inflation. You are seeing actual wage growth.

wages vs inflation

For now it looks like the 3% level in the 10 year has held. What drove the sell-off – it wasn’t like there was anything data-wise to support it. JP Morgan blames CTAs using momentum strategies to short the 10-year. Chinese selling has also been rumored to be a factor. We won’t be able to confirm or deny that theory for a couple of months. CTA funds have been net short Treasuries since September, however a momentum signal in mid-April caused people to pile into the trade and that apparently drove the late month sell-off.

Steve Mnuchin is “cautiously optimistic” on trade talks with China. The subject will include intellectual property and joint ventures.

Defect risk decreased on a MOM basis but was up on a YOY basis, according to the First American Loan Defect Index. The biggest risk was in the sand states, while the lowest risk was in the Rust Belt.