Morning Report: Fed is looking for new recessionary indicators

Vital Statistics:

			Last	Change
S&P futures			2790	16
Eurostoxx index			384.01	2.61
Oil (WTI)			70.92	0.54
10 Year Government Bond Yield				2.86%
30 Year fixed rate mortgage				4.53%

Stocks are higher after China made some conciliatory comments regarding the trade situation. Bonds and MBS are flat. 

Inflation at the consumer level remains under control, with the consumer price index rising 0.2% MOM / 2.9% YOY. Ex-food and energy it rose 0.2% / 2.3%. These numbers were more or less in line with Street expectations. Energy, especially petroleum drove the increase in the index. Housing also pushed up the index, while autos and utilities exerted downward pressure. 

Initial Jobless Claims fell to 214,000 last week, which is at levels we haven't seen since the early 1970s (when we had a draft). 

Loan performance continues to improve, according to CoreLogic. The 30+ DQ rate fell from 4.8% to 4.2% in April. DQ rates are near historic lows, except for FL, TX, and LA which are still dealing with the fallout from Hurricane Harvey. The national foreclosure rate fell by 10 basis points to 0.6%. Home price appreciation of 7% is helping matters. In fact, home equity is increasing rapidly, but HELOC are not. 

As the 2s-10s spread decreases, many in the financial press are worrying whether the slope of the yield curve is signalling a recession. We already have some strategists calling for the yield curve to invert sometime in 2019. An inverted yield curve (where short term rates are higher than long term rates) has historically been a strong recessionary signal. As a general rule, the yield curve flattens during tightening cycles. In fact, it did invert in the late 90s (before the stock market bubble burst) and during the real estate bubble (before the Great Recession). 

Recent Fed research indicates the 2s-10s spread may not be the best signal of an upcoming recession. It suggests the spread between the 3 month T bills and 18 month Treasuries could be more predictive. Another signal is the Eurodollar futures market. The idea is that the Fed would use these indicators as a yellow signal and stop tightening before they risk a recession. 

To me at least, the last two recessions had very little to do with the Fed. We had a stock market bubble, and we had a residential real estate bubble. To say the Fed caused those recessions implies that these bubbles would have kept on going had the Fed just stayed away (or stopped tightening sooner). That is a big assumption - all bubbles eventually come to an end, and when they do you have a recession. The tightening may have been the catalyst to initiate the recession, that is a question of "when," not "if." We were going to have a recession given we had a bubble in place already. And the Fed might have been guilty of causing the bubble in the first place, but that is a separate question. 

Of course, all bets are off when it comes to this yield curve versus the past. The size of the Fed's balance sheet relative to the economy is vastly different this time around. Pre-Great Recession, the Fed had about $800 billion worth of assets. Now it is about $4.4 trillion. To draw comparisons, you would have to estimate where the 10 year would have been without Operation Twist, QE1, QE2, and QE3. Punch line, the yield curve may in fact invert if the Fed continues to tighten and inflation remains under control. The signal-to-noise ratio of the yield curve is extremely low, so take it with a grain of salt. 

Morning Report: Housing starts depressed by hurricanes

Vital Statistics:

	Last	Change
S&P Futures	2504.5	1.8
Eurostoxx Index	382.0	0.0
Oil (WTI)	50.3	0.4
US dollar index	85.3	-0.1
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.83

Stocks are flat this morning as the Fed begins its meeting. Bonds and MBS are flat as well. 

Housing starts for August came in at 1.18 million, a touch above the 1.17 million estimate. Building Permits rose 1.3 million, much better than the 1.23 million the Street was forecasting. The hurricanes did depress starts a bit, as the FEMA disaster areas accounted for about 13% of US building permits. Multi-family starts have been more or less flatlining over the past couple years, while single family has steadily increased. Note that starts will probably be depressed over the near term as construction workers in these already tight markets get drawn into rebuilding projects versus new home construction. 

Import prices rose 0.6% MOM and 2.1% YOY as the hurricanes boosted energy prices last month. The Fed will almost certainly consider that effect to be transitory and it won't affect their inflation out look all that much. 

Mortgage fraud risk is up 17% YOY, according to CoreLogic. In the second quarter, over 13,400 mortgage applications (or 0.82%) showed symptoms of fraud, compared to 12,700 (0.7%) a year earlier. “This past year we saw a relatively large increase in the CoreLogic National Mortgage Application Fraud Index,” said Bridget Berg, principal, Fraud Solutions for CoreLogic. “If the factors that influenced the increase continue, including a shift to purchase transactions and growing wholesale channel origination activity, it is likely that mortgage application fraud risk will continue to rise as well. Fraud on cash-out refinance transactions and home equity loans may become more of a factor in the coming years as home values and equity rise.”

30 day + Delinquencies fell to 4.5% in June from 5.3% a year ago. The foreclosure rate of 0.7% was the lowest in 10 years. The range went from 0.1% in the Denver MSA to 2.2% in the Newark MSA. Decent home price appreciation and job growth are pushing delinquencies back down to pre-crisis levels. 

The Fed is expected to announce that it will begin to unwind its balance sheet at the September meeting. There seems to be a lot of handwringing in the press over the implications of the Fed ending its "easy money" policy. An important thing to remember is that easy money / tight money isn't a binary choice. It is a continuum. In all reality, if you were to put Fed policy on a scale of 1 to 10, with 1 being easy money, we are basically moving from 1.0 to 1.1. Real short term interest rates (i.e the Fed funds rate less the inflation rate) are still negative. Long term real rates are barely positive. The Fed will still continue to purchase assets in the open markets, however they will let something like 10% - 20% of maturing assets simply go away. These are truly baby steps intended to cause as little negative impact as possible. The Fed is going very slow and cautiously, and the persistent low inflation numbers give them that cushion. 

Morning Report: Delinquencies are at a 10 year low

Vital Statistics:

	Last	Change
S&P Futures	2180.0	10.0
Eurostoxx Index	346.0	-1.2
Oil (WTI)	43.7	0.1
US dollar index	86.1	-0.2
10 Year Govt Bond Yield	1.49%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.52

Stocks are higher this morning on strong economic news out of Europe. Bonds and MBS are up.

Retail Sales were flat in July. Ex-autos and gas they were down. Basically autos and ecommerce did okay, and everything else was lousy. Speaking of lousy, we are getting retailer earnings and for the most part they are disappointing. 

Inflation at the wholesale level is nowhere to be found, with the producer price index falling .4% in July versus expectations of a .1% increase. The core PPI was up .8% YOY. 

Business inventories barely moved in July, increasing by 0.2%.

Consumer sentiment came in lower than expected as well. 

The National Association of Federal Credit Unions blames high prices and tight regulation for the lack of housing that people in the middle class can afford. 

Delinquency rates hit a 10 year low in the second quarter according to the MBA. The number of homes in foreclosure hit 1.64%, down 10 basis points from the first quarter and 40 basis points from a year ago. VA loans are performing the best, while FHA are performing the worst.

Partisan conflict is the highest since 1984, according to the Philly Fed. This conflict supposedly suppresses economic growth. 

Morning Report: Foreclosures continue to decline

Vital Statistics:

	Last	Change	Percent
S&P Futures	2057.6	9.6	0.47%
Eurostoxx Index	3436.9	74.7	2.22%
Oil (WTI)	41.53	-0.2	-0.50%
LIBOR	0.364	0.002	0.55%
US Dollar Index (DXY)	99.55	0.105	0.11%
10 Year Govt Bond Yield	2.30%	0.03%
Current Coupon Ginnie Mae TBA	104.1
Current Coupon Fannie Mae TBA	103.2
BankRate 30 Year Fixed Rate Mortgage	3.87

Markets are higher this morning after good numbers out of Wal Mart and the Home Despot. Bonds and MBS are down.

Russia and France are going to coordinate military operations against ISIS. 

Foreclosures fell to 1.88% of all homes with a mortgage in the third quarter, according to the Mortgage Bankers Association. While we are approaching normalcy, we still have a ways to go to get there. That said, I wonder how many of the homes left in foreclosure will ever sell. Many have been vacant for years and are in areas where the population is leaving. 

Mortgage delinquencies fell to 4.99% from 5.3% as well. 

The National Association of Homebuilders sentiment index slipped to 62 in November from 64 in October. 

Inflation remains well-controlled, as the Consumer Price Index came in at 0.2% MOM in October and is up 1.9% YOY. Real average weekly earnings were up 2.1%. 

Industrial production fell 0.2% in October, while manufacturing production increase 0.4%. Utilities and mining dragged down the industrial production numbers. Capacity Utilization fell to 77.5%.

Yes, house prices are approaching their 2006 highs. Do we need to worry about another bubble? The Fed says no. The bubble years were fueled by an expansion of mortgage credit, while this time around we aren't seeing that. Two other indicators: the house price to rent ratio and mortgage debt to personal income ratios are both well below the bubble years. I have always said bubbles are a psychological phenomenon. People have to believe an asset class is "special" and cannot go down in value. That isn't the case anymore.

Morning Report: Factory orders down, but vehicle sales strong

Vital Statistics:

	Last	Change	Percent
S&P Futures	2092.3	-3.1	-0.15%
Eurostoxx Index	3425.7	-8.8	-0.26%
Oil (WTI)	46.72	0.6	1.26%
LIBOR	0.334	0.005	1.58%
US Dollar Index (DXY)	97.33	0.401	0.41%
10 Year Govt Bond Yield	2.20%	0.03%
Current Coupon Ginnie Mae TBA	104.6
Current Coupon Fannie Mae TBA	104
BankRate 30 Year Fixed Rate Mortgage	3.89

Markets are lower this morning on no real news. Bonds and MBS are down.

Vehicle sales are coming in strong this morning, as the US goes through a long-delayed upgrade cycle. The average age of a US car has been at record levels for years, but consumers have been reluctant to spend on a new car. 

The ISM New York index jumped to 65.8 from 44.5 last month. This is a surprising reading given that factory orders fell 1% in September and August was revised downward from -1.7% to -2.1%. 

Economic optimism fell in November, according to the IBD / TIPP Economic Optimism Index. 

Weaker economic data has prompted the Atlanta Fed to take down its fourth quarter estimate for economic growth to 1.9%. Their prior estimate was 2.5%. While 1.9% growth is probably strong enough that we shouldn't be on the zero bound anymore, it is hard to see how this economy is overheating. 

Home Prices continue to climb, according to CoreLogic. Prices rose 0.6% in September and are up 6.4% year-over-year. Interestingly, they put out a map of the overvalued and undervalued real estate markets, and Southern California is largely undervalued. Green is considered undervalued, red is overvalued, grey is normal. Not sure how they are calculating this, but I find these results surprising. 

If you wondered what the median house looks like in these supposedly "undervalued" markets, here you go. 

Credit standards for conventional loans eased somewhat in the third quarter, while FHA loans tightened a bit, according to the Senior Loan Officer Survey. 

Bill Gross is suggesting that the Fed do "Operation Switch" which is the reverse of Operation Twist. The idea is to steepen the yield curve by selling longer-dated bonds and buying shorter dated bonds. Here is novel concept: How about we let the Treasury market be an actual market and let investors determine the cost of money. 

Seriously delinquent loans have hit a new post-crisis low, hitting 1.59% in September down from 1.96% a year ago. Seriously delinquent loans hit a high of 5.59% in February 2010. A "normal" rate of delinquency is below 1%, so the numbers are still somewhat elevated. I suspect many of these remaining seriously delinquent loans relate to zombie foreclosures left over from the bubble days, largely in states with judicial foreclosure laws.