Morning Report: Consumers are becoming less bullish on house prices

Vital Statistics:

	Last	Change	Percent
S&P Futures	1989.1	8.4	0.47%
Eurostoxx Index	3029.0	16.1	0.54%
Oil (WTI)	34.96	0.4	1.13%
LIBOR	0.635	0.003	0.51%
US Dollar Index (DXY)	97.37	-0.224	-0.23%
10 Year Govt Bond Yield	1.87%	0.03%
Current Coupon Ginnie Mae TBA	105.4
Current Coupon Fannie Mae TBA	104.6
BankRate 30 Year Fixed Rate Mortgage	3.68

Stocks are higher this morning as commodities rally and the market anticipates more stimulus from the European Central Bank tomorrow. Bonds and MBS are down small.

Mortgage Applications edged up 0.2% last week as purchases increased 4.2% and refis fell 2.3%. The 30 year fixed rate mortgage rose 6 basis points. We saw a big move up in ARM rates from 3.02% to 3.2%. In an environment where the yield curve is flattening, switching from an ARM to a 30 year fixed is the trade to make. 

Wholesale sales fell 1.3% last month while inventories built up 0.3%. The inventory-to-sales ratio is 1.35 month's worth, which is the highest since April of 2009. This is a negative sign for the economy going forward, as inventory build adds to GDP, and a buildup essentially "borrows" growth from future quarters. While this number doesn't carry the same weight it did 20 years ago, it still matters. 

Marco Rubio had a tough day yesterday. John Kasich is looking more and more like he could be the "establishment candidate." Bernie Sanders beat Hillary in Michigan, as anti-trade populism resonates deeply in the hard-hit rust belt. 

Consumers are becoming a touch less bullish on future home price appreciation, according to the latest Fannie Mae National Housing Survey. They anticipate that home prices will appreciate 1.7% next year, as opposed to 2.2% last month. We are certainly seeing some signs of softness in the oil states as well as the high end. Their view on the economy is about the most negative it has been since the big equity sell-off in August. 56% believe the economy is on the wrong track, and only 37% believe the economy is on the right track. This statistic explains the appeal of Sanders and Trump these days, two candidates who would ordinarily get zero traction. 

Global financial markets are forecasting that the age of ZIRP will be with us for 10 years or more. Sound far-fetched? Japan has been at 0% interest rates for over 20 years. Interest rate cycles are long. While the US may not be in the sort of deflationary trap that Europe and Japan are in, relative value trading will help keep a lid on rates going forward. In fact, the US may be more at risk of future asset bubbles than deflation. 

With rates so low, consumers are happy to rack up the credit card debt. The average credit card debt level for a US consumer is $7,879, closing in on the unsustainable levels we saw early in the Great Recession.

Morning Report: worrisome trend in the inventory / sales data

Vital Statistics:

	Last	Change	Percent
S&P Futures	2081.0	-18.8	-0.90%
Eurostoxx Index	3619.3	-55.6	-1.51%
Oil (WTI)	43.62	-1.3	-2.98%
LIBOR	0.312	0.000	0.06%
US Dollar Index (DXY)	96.98	-0.181	-0.19%
10 Year Govt Bond Yield	2.16%	-0.07%
Current Coupon Ginnie Mae TBA	104.2	-0.2
Current Coupon Fannie Mae TBA	103.6	0.1
BankRate 30 Year Fixed Rate Mortgage	3.91

Markets are lower this morning after China devalued the yuan overnight. Bonds and MBS are up.

Wholesale inventories rose 0.9% in June, while wholesale sales rose only 0.1%. The ratio of inventories to sales rose to 1.3. This is a worrisome signal. A rising inventory to sales ratio is a harbinger of a cyclical recession. While there is a possibility that the West Coast Port strike from earlier this year is messing with the data, the trend is unmistakable. 

Productivity rose less than expected in the second quarter, and unit labor costs were higher than expected, which was disappointing. The first quarter numbers were revised better (productivity up and unit labor costs down), however Q1 productivity was still flat and unit labor costs were higher than inflation. These two numbers can be volatile, so it makes sense to look at a moving average. The 12 month moving average for productivity is about 0.25%. The 12 month MA for unit labor costs is about 2.1%. Anyway, flat productivity and 2% wage inflation is not symptomatic of a great labor market, despite what the numbers say.

Small business optimism rose in July, according to the NFIB. Expectations for the economy accounted for about half the rise. Employment was flat. Increasing labor costs (not only wages, but regulatory burden) are depressing the bottom line as profits fall. In fact, most are reporting that the increase in labor costs is due to mandated benefits, not wage increases. This again speaks to the bifurcated market: the big S&P 500 companies are doing well, but much of that is due to (a) rock bottom interest rates and (b) overseas exposure. Those circumstances don't really apply to the local dry cleaner. Which is why liberals can claim: "These hugely profitable companies refuse to pay a "fair" wage" and conservatives can claim "Regulation is strangling small business and those costs are manifested in stagnant wages." Liberals are focusing their ire at the big multinationals and conservatives focus their ire at government. There is a bit of truth in both viewpoints. 

Speaking of regulations, the American Enterprise Institute crunched the numbers and it turns out that Seattle lost about 1,300 jobs from Jan - June. Of course it is still early days, but it looks like the laws of supply and demand are still applicable in the labor market, regardless of what politicians think. 

Completed foreclosures fell to 43k in June, according to CoreLogic. This is up 4.8% from May but down 14.8% from a year ago. The foreclosure inventory remains the highest in the Northeast, where the judicial states are still working through their backlog.

Google is now going to be known as Alphabet. They are re-organizing into a holding company structure.  The Street seems to like it. 

Morning Report: The labor market is getting tight.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2076.2	-2.0	-0.10%
Eurostoxx Index	3453.9	-14.5	-0.42%
Oil (WTI)	59.5	1.4	2.34%
LIBOR	0.281	0.002	0.82%
US Dollar Index (DXY)	95.55	0.249	0.26%
10 Year Govt Bond Yield	2.43%	0.05%
Current Coupon Ginnie Mae TBA	100.6	-0.3
Current Coupon Fannie Mae TBA	99.42	-0.1
BankRate 30 Year Fixed Rate Mortgage	4.06

Stocks are lower this morning on concern that Chinese growth is slowing. Bonds and MBS are lower.

Wholesale Inventories increased 0.4% in April, while wholesale sales rose 1.6%. The inventory to sales ratio was 1.29x, which is on the high side. This means that unless sales increase markedly, manufacturers will have to slow down production to work down the excess inventory. This would dampen GDP growth going forward.

Job openings hit 5.4 million in April, the highest number since the survey began in late 2000. The "quits rate," which is an important data point for the Fed is inching up to 1.9% from 1.7% a year ago. 

The NFIB Small Business Optimism index rose to 98.3 in May, finally approaching "normalcy." Money quote regarding the labor market: "Owners report that the labor market is, from an historical perspective, getting very tight. Owner complaints about “finding qualified workers” are rising, job openings are near 42 year record high levels, and job creation plans remain solid. Over 80 percent of those hiring or trying to hire in May reported few nor no qualified applicants. This is inconsistent with current Fed policy, which has no impact on the supply of qualified workers." In terms of biggest concerns for small business, quality of labor (not cost) remains the #3 biggest concern, behind taxes and government regulation. Quality of labor has now displaced "poor sales" on the top 3 list.

The Chinese stock market bubble continues to inflate despite a weakening economy. The Chinese government is basically endorsing the rally, and is changing the rules regarding margin selling to ease the problem of forced selling. China is undoubtedly having an episode similar to the US in the 20s and Japan in the 80s. It may (and probably will) go on for a lot longer than people think it will. But with each passing day, the "investments" get more marginal and more speculative, and the whole edifice is built on borrowed funds, which always seems to end badly when the music stops. 

Completed foreclosures fell to 40,000 in April, down from 50,000 a year ago, according to CoreLogic. The seriously delinquent rate fell to 3.6%, the lowest since Feb 2008. About 521,000 homes are in some stage of foreclosure, down from 694,000 a year ago. Foreclosure inventory remains the highest in the judicial states of New Jersey and New York. Note, New York is going to do something about zombie foreclosures: vacant homes which are taking their time to get through the process. Lest anyone think they are doing this to give investors a chance to limit their losses, the real reason is so they can sue if they are unhappy with the way the property is being maintained.