Morning Report: Goldman sees the unemployment rate falling to 3.25% this year

Vital Statistics:

 

Last Change
S&P futures 3362 9.25
Oil (WTI) 50.51 0.72
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.66%

 

Stocks are higher this morning as China begins to restart industrial production. Bonds and MBS are down.

 

Jerome Powell goes to the Hill today for his semi-annual Humphrey Hawkins testimony. The Fed is closely monitoring the Coronavirus issue with respect to global growth. With this being an election year, the questioning will probably be more focused on political posturing (what would you do about income inequality? what would you do about affordable housing?) than anything else. I doubt there will be anything market-moving in the testimony, but you never know.

 

Small Business started the year off strong, according to the NFIB Small Business Optimism Index. “2020 is off to an explosive start for the small business economy, with owners expecting increased sales, earnings, and higher wages for employees,” said NFIB Chief Economist William Dunkelberg. “Small businesses continue to build on the solid foundation of supportive federal tax policies and a deregulatory environment that allows owners to put an increased focus on operating and growing their businesses.” Labor continues to be an issue: “Finding qualified labor continues to eclipse taxes or regulations as a top business problem. Small business owners will likely continue offering improved compensation to attract and retain qualified workers in this highly competitive labor market,” Dunkelberg concluded. “Compensation levels will hold firm unless the economy weakens substantially as owners do not want to lose the workers that they already have.”

 

Speaking of the labor market, Goldman Sachs Chief Economist Jan Hatzius sees the unemployment rate falling to 3.25% this year. That would be the lowest since 1953. But first, the Boeing and Coronavirus issues need to recede into the rear-view mirror.

 

The Trump Administration released its 2021 budget, which cut social programs and increased defense spending. Some housing related programs were hit, such as the Housing Trust Fund and the Capital Magnet Fund, which are funded by a 4 basis point charge on Fannie and Freddie origination. The Community Development Block Grants would be eliminated. As a general rule, these proposed budgets are not meant to become law (one of Obama’s budgets received exactly zero votes) – but are more statements of priorities. It also cuts Medicare and Medicaid, which means it would get no support from Democrats.

 

 

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: Small business optimism slips

Vital Statistics:

 

Last Change
S&P futures 2968 -10
Oil (WTI) 57.95 0.25
10 year government bond yield 2.06%
30 year fixed rate mortgage 4.03%

 

Stocks are lower this morning as we await a speech from Jerome Powell. Bonds and MBS are down.

 

Jerome Powell speaks at 8:45 this morning at the Boston Fed regarding stress-testing for the banks. Here are his prepared remarks. He doesn’t address monetary policy.

 

There were 7.3 million job openings in May, down slightly from April. The quits rate, which tends to lead increases in wages, was steady at 2.3%, where it has been all year. Private sector openings were flat, while government fell by about 40,000.

 

Small Business Optimism slipped in June, according to the NFIB. This reversed May’s jump, however sentiment is still at historically high levels. Expectations eased for sales and profitability, and the outlook for capital expenditures weakened. The capital expenditure level was the lowest since May 2015. Employment also decreased, however most firms are still in hiring mode, with the availability of qualified labor the biggest issue.

 

NFIB

 

The Congressional Budget Office analyzed the probable effects of raising the Federal Minimum Wage to $15 an hour. Unsurprisingly, they concluded that it would cost jobs, with the median estimate coming in at 1.3 million. The graph below looks at how the constant dollar minimum wage has behaved relative to the bottom 10th and 25th percentile of workers over time.

 

minimum wage

 

Mortgage delinquencies are the lowest in 20 years, according to CoreLogic. 30 day DQs fell 0.7% to 3.6%, while the foreclosure rate slipped 0.1% to 0.4%. Delinquencies fell pretty much across the board, with the exception of areas that were affected by natural disasters.

Morning Report: The Fed’s balance sheet will probably never return to pre-crisis levels.

Vital Statistics:

 

Last Change
S&P futures 2896 -2.5
Eurostoxx index 388.12 0.58
Oil (WTI) 64.46 0.06
10 year government bond yield 2.52%
30 year fixed rate mortgage 4.16%

 

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

 

Factory Orders fell 0.5% in February, while January was revised downward to no change. Core Capital Goods Orders (which is a proxy for business capital expenditures) fell 0.1% after unusually strong readings in January and December.

 

Small Business Optimism increased in March, according to the NFIB Small Business Optimism Survey. Hiring indicators improved (companies added .5 workers on average), the earnings outlook brightened, and capital expenditures were steady. The only negative was an inventory build.

 

House flipping is back to pre-crisis levels. Profit margins are much higher however, which should provide a bit of a cushion if home price appreciation tails off. The type of property is generally older – a fix and flip – which is dominated by professionals, not neophytes. Those were the type who would purchase rights to buy a new construction condo and then hope to sell the right at a profit.

 

Margin compression and lower volumes has meant job losses in the nonbank mortgage sector. Nonbank lenders employed 320,000 people in February, which is a drop of about 20,000 jobs from August.

 

30+ day delinquencies fell to 4% in January, which is a drop from 4.9% in January of 2018. The foreclosures rate fell to 0.4% from 0.6%. Delinquency rates fell across the entire spectrum of buckets, and are at the lowest levels in 20 years. Interestingly, DQ rates for student loans and auto loans are up.

 

Good explainer on quantitative easing and why the Fed doesn’t want to return to pre-crisis levels for its balance sheet. Changes in the way banks manage their reserves, along with rising global demand for dollars has made a larger Fed balance sheet a necessity. The mechanics of rate setting involve setting the interest they pay on bank reserves, and in order to do that, they need a large level of reserves in the banking system. These reserves are the Fed’s liabilitites, and if the liabilities need to increase, the assets will have to move up in lockstep. Hence the need to maintain a bigger balance sheet.

 

Note that the equity value of the Fed’s balance sheet is largely unchanged, which means the Fed is vulnerable to a fast uptick in interest rates. This is because rising interest rates will negatively affect the value of its bond portfolio (bond values fall as rates rise). The Fed has about $3.9 billion in assets, supported by $39 billion in equity. In other words, a 1% drop in their asset portfolio would wipe out their equity. While that is a distinct possibility for their long-term bond holdings, it is highly unlikely for their short term bond holdings. That said, the Fed does operate with a 100:1 leverage ratio and historically that level has been deadly for institutions that don’t own a printing press.

 

Federal Reserve Assets