Morning Report: Hiring and quits are rising

Vital Statistics:

	Last	Change
S&P Futures	2422.0	-2.0
Eurostoxx Index	380.1	-1.6
Oil (WTI)	44.1	-0.3
US dollar index	88.4	0.1
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4.05

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

Job openings fell slightly in May to 5.7 million, according to the BLS. The number of hires increased by 430k to 5.5 million. The quits rate increased to 2.2 million. The quits rate is a key indicator that carries a lot of weight with the Fed. An increase in the quits rate usually is an indicator of future wage inflation. The quits rate is back to pre-crisis levels.

 

Small business optimism declined in June, according to the NFIB. We are still higher than we were pre-election, but some of the optimism is fading as it looks like tax reform and healthcare reform are not going to happen. Employment-related indicators ticked down, but are still very strong. 85% of all respondents that tried to hire reported that there were few or no candidates with the required experience. Rising compensation will draw more people into the workforce, however that will be a slow process. Note that much of the drop in the labor force participation rate has been due to people aging out. The first big question is whether these people want back into the workforce or are content to stay retired. The second big question is whether ageism will keep these people out. 

Consumers are becoming more optimistic according to the New York Fed. Nearly 35% of all respondents said they are better off now than they were a year ago, and they are less worried about losing their jobs. Consumers also said they expect to spend about 3.3% more in the coming year than they did last year.

Are appraisers going to be replaced by artificial intelligence and / or algorithms like Zillow's Z-estimates? Some people think so. Zillow has been tweaking its model to take into account more than just the comps - now it will include things like interior amenities. This may happen out of necessity: the regulators raised the barriers to entry so high that the pipeline of new people entering the profession is almost nothing (In 2005, 1,200 people entered the profession. Now it is 100). The average age of an appraiser is 58 and there simply isn't a stream of replacements. Freddie Mac is now willing to accept model-generated appraisals for some refis and is asking FHFA for permission to use more. It kind of begs the question of why the government then thinks appraisers need to have so much education and apprenticeship time if it is willing to accept modeled values to begin with. 

Mortgage performance improved last month according to CoreLogic. 4.8% of all mortgages were 30 days down in April compared to 5.3% the year prior. That said, early stage delinquencies (30 - 60 days down) ticked up to 2.2% from 2% the year before. 60-90 day DQs were roughly flat YOY. Some of the drop in performance is coming from the energy-intensive states like Alaska and North Dakota. Now that oil cannot seem to get out of its own way, we may start seeing more trouble in the oil patch. 

The CFPB has released a new rule making it easier for class-action suits against lenders. Financial firms will be restricted in their ability to use mandatory arbitration clauses to protect themselves against lawsuits. Under the Congressional Review Act, Congress has 60 days to overturn the new rule. The OCC has asked the CFPB for their data, and Republican Jeb Hensarling has already come out against it. 

Morning Report: Donald Trump orders a review of Dodd-Frank

Vital Statistics:

	Last	Change
S&P Futures	2286.0	-5.0
Eurostoxx Index	362.3	-1.8
Oil (WTI)	53.7	-0.2
US dollar index	90.6	0.2
10 Year Govt Bond Yield	2.42%
Current Coupon Fannie Mae TBA	102.1
Current Coupon Ginnie Mae TBA	103.2
30 Year Fixed Rate Mortgage	4.19

Stocks are lower this morning as credit spreads widen in Europe. Bonds and MBS are up.

The week after the jobs report is usually data-light and this week is no exception. We have no data this morning, and about the only report of consequence is the JOLTs job opening report tomorrow. All eyes will be on the quits rate, which has been pretty steady. An increase would signal wage inflation ahead. 

Goldman strategists are beginning to re-think their initial bullishness on the Trump administration. Instead of tackling things like tax reform, he is spending his energy on immigration and trade. There is a realization that gridlock is going to be the norm for the next two years, and that means no big, sweeping changes. Regulatory relief is still possible, but bureaucrats seem to be preparing to push back against major changes in direction. So the "Trump effect" could end up being a lot smaller than investors (and the Fed) were thinking a month ago. Which means the Fed has more room to be cautious.

MBS investors are beginning to worry about what happens to MBS when the Fed stops re-investing maturing proceeds from its QE portfolio. After all, the Fed has been the biggest buyer of MBS paper. Will the lower demand for mortgage backed securities translate into higher mortgage rates, even if the 10 year goes nowhere? It is possible, however take a look at the chart below: I plotted the 10 year yield and the 30 year mortgage rate, with the difference between the two (the spread) below. The two blue shaded regions were QE1, 2 and 3. The green line didn't really move all that much during QE. MBS spreads are about where they were prior to QE. Since the Fed isn't entertaining selling bonds, just not buying them anymore, the pre-QE level of something like 167 basis points is about right. Right now, the spread is 177 basis points, which probably represents some of the lag you see in mortgage rates versus Treasuries. My point is that MBS spreads vary over time, but they have historically been around these levels. I can't see MBS spreads making or breaking a homebuying decision. They just aren't that significant. 

On Friday, Donald Trump signed an executive order which directed a review of Dodd-Frank. There were the expected breathless headlines in the business press (with a stroke of a pen, Donald Trump eliminates Dodd-Frank, he's "gutting" Dodd-Frank), however this is just a "review and report back to me" order. A full repeal of Dodd-Frank would be impossible, and probably would not be supported by the industry: after all, they have spent the past 6 years getting compliant with D-F and the last thing they want to do is have to adopt some new system. The unintended consequences will be addressed, but the structure will probably remain in place. These will turn out to be addressing the CFPB and small banking regulation in order to get credit flowing for smaller borrowers, addressing the Volcker rule to encourage market making, and the fiduciary rule, which many financial advisors interpret as a gag order and a limitation of the investment options menu. What does this mean for the mortgage business? Probably not much, although the biggest potential is in an easing of CFPB enforcement and an increase in mortgage products as the private label securitization market returns.