Friday, April 24, 2015
Capital Markets Update
By Louis S. Barnes Friday, April 24, 2015
The good news is very nice: mortgage rates are stable near 3.75%, sales of existing homes have risen 10.4% in the last year, and sales of new ones have soared 19%. Even the poor news is good: a softer-than-expected economy is holding the Fed at bay.
Forecasting the economy is not easy. I asked an exceedingly bright client, a super-computer wonk from our National Center for Atmospheric Research, to compare the difficulty of forecasting climate and the economy. His eyes shot up to the ceiling, then closed; he became silent, wrapped his arms around his sides; then some chanting noises and back-and-forth rocking, and at last fairly shouted: “Easy!” What…?
“Climate is easy! We have laws of thermodynamics, fluids, and gasses! Economy… we have no rules.”
Today the Fed would second that motion. March orders for durable goods stripped of volatile transportation (airplanes and cars) were expected to rise .3% from February’s pit (-.6%) and instead fell .2% — down .5% if private-sector only, excluding military.
Wall Street houses are grudgingly backing down their estimates for 1st quarter GDP to a 1%-1.5% range. The Atlanta Fed’s GDPNow, a real-time tracker, is running 0.5%, and no better in April. The media chatter is embarrassing. “The economic weakness is all about bad weather.” Give that up, guys. Not everyone lives in New England or New York. And, oddly enough, weather is often lousy in winter.
The Fed with the best intentions has painted itself into a corner, but at least has the sense to put down the brush when it runs out of paint. All Fed speakers in the majority close to Yellen have become tentative, changed from “Hold us back” to “We must liftoff… but not now.”
Two aspects of Fed forecasting have failed: long term and short. Clean sweep. The Fed’s models assumed ever since 2009 that extraordinary measures would ignite the economy, but I thought then and since misunderstood what had gone wrong. The blown credit and housing bubbles did their damage, but a majority of Americans for 25 years have been undercut by foreign competition, and IT has accelerated the affair.
In the last six months the Fed’s estimates of the effects of falling oil and strong dollar have been embarrassing. Oil first. Oil began a violent ramp-up in 1973, again in 1979 — the two combined so extreme that long lead-time production and conservation held prices steady until 2005. Then the spike to $100 in 2005, all the way to $150/bbl in 2008, and holding $100 until the collapse last December.
In each of those jumps, fallbacks, and plateaus, natural gas and coal (and therefore electricity) rose and fell together, a concerted drag then stimulus. Not this time! Natural gas super-collapsed six years ago, same for coal. Gasoline had been so overpriced since 2008 that Americans limited their driving for the first time since WW II rationing.
Upper-crust economic pundits are out of touch with households, now burbling about a “temporary increase in the savings rate” to explain the absence of fallen-oil stimulus. Two-thirds of US households have been painfully overstretched, and $2.25 gas only eases a little strain — not a return to mindless consumption.
The dollar. Late last year the party line went: “We don’t export much, so losing some won’t hurt, and everything we import will get cheaper.” Uh-huh. You missed the globalized damage in the Great Recession, and you’re still missing it. Every competitor in the last year has chopped its currency value by an aggregate 15% (except China, which secures its competition by other means). Note that their devaluations do them no good at all versus each other, just with us. A desperate maneuver.
In a global market, wages paid by our competitors in dollar terms just fell 15%, and this new undercut follows 25 years of holding down US wages in global leveling.
Answers are not easy (how to teach kids to compete, and to pursue sound careers, and to run resilient households?). The Fed does need to lift off from 0%. But all of this would be easier if we acknowledged that this is not 1945, or 1965, or 1985. We had been lucky beyond imagining then, and now need to use the ol’ thinking cap.
Friday, April 17, 2015
Capital Markets Update
By Louis S. Barnes Friday, April 17, 2015
Nothing is more disturbing in markets than a freeze while a lot is going in the real world. The implication: tension is building for a substantial move, but in the absence of movement nobody can tell which way, which drives us all nuts.
The 10-year T-note has held within a short putt of 1.90% for a month, mortgages steady in the high threes. The dynamic tension holding the bond market in place has been the Fed in “hold-us-back” mode, meeting-to-meeting on hair-trigger to lift off from zero — but in conflict with distinctly weak economic data.
Today’s trading adds a delicate but excruciating element: inflation may have turned upward. CPI in March rose .2% both overall and core, stripped of energy and food. The Fed has been insistent that inflation would do so, but no mainstream person in markets agreed: we had faith that falling energy prices would pull down the general price level, and even more confidence that the rocketing dollar would undercut also.
The two principal components of rising CPI seem impervious to either energy or dollar: the year-over-year cost of shelter (rent) is rising at a steady 3% clip, and services at 2.4%.
A modest rise in inflation to the 2% mark is gratifying to the Fed, removing risk of deflation. But because of lags in the effect of Fed rate hikes, even 2% makes the Fed fearful that they are falling behind the future curve, one or two years out. Count on this: if the Fed thinks inflation is jumping the box, it will tighten no matter how weak the economy may be.
The stock market is having a bad Friday, the Dow off 336 at this writing. US stocks have tanked mostly because of CPI, but partly in sympathy with stocks overseas last night, down because of Greece (again, good grief), and way overbought. A stock panic normally drives down the 10-year T-note, money running to bonds for safety, but today only from 1.90% to 1.85%. Pfft. ECB QE and Greek fear overnight took the German 10-year to a new record low 0.06%, all shorter maturities below zero. A drop like that usually pulls down the US 10-year. Not today. Piffle pfennig.
The propeller-heads of markets watch nothing but charts of markets. Don’t bother us with the economy, or Fed this-and-that. The chart decline of the 10-year began 16 months ago at 3.00% and has followed a gorgeous glide path ever since. In chartism, for the glide path to continue it must continue. If it stops continuing, everyone will expect a violent counter-move, which will happen because everyone expects it. Thus the extended flat spot near 1.90% is troublesome — we must break through 1.86% going down, or the down-trend will be broken.
And we are exactly at that threshold today.
Until this week I thought the preponderance of data supported a gradually improving economy and Fed liftoff by late summer. Two weeks ago we did get a lousy report on March jobs, but the economy has underperformed in several recent first calendar quarters and then rebounded strongly. However, this week’s data have been awful. Even the up-tick in CPI is not necessarily good news — how are we helped by rising rents and prices if incomes are not rising enough to cover?
The other poor data: March retails sales .9% versus 1.1% forecast, and ex-autos (the overdone bright spot) only .4% versus .6% forecast. New purchase mortgage applications sank, reversing a hopeful rise. If mortgage rates in the threes won’t ignite housing, just how strong is this economy, really? March starts of new homes rose 2%, but pitiful considering the 15.3% crater in February. March new-home permits are up an anemic 2.9% year-over-year. New York and Philly Fed economic indices are barely on positive ground. And the charts following are troublesome… confounding.
Stitch it together… no matter what imperative the Fed feels to lift off, encouraged by CPI, a June hike is off the table and everyone knows. “Data dependent” we and they are, but to lift off they’ll need a lot better data and for longer, now. And if the 10-year breaks 1.85% going down, it will be a vote of economic anti-confidence.
Nothing is more disturbing in markets than a freeze while a lot is going in the real world. The implication: tension is building for a substantial move, but in the absence of movement nobody can tell which way, which drives us all nuts.
The 10-year T-note has held within a short putt of 1.90% for a month, mortgages steady in the high threes. The dynamic tension holding the bond market in place has been the Fed in “hold-us-back” mode, meeting-to-meeting on hair-trigger to lift off from zero — but in conflict with distinctly weak economic data.
Today’s trading adds a delicate but excruciating element: inflation may have turned upward. CPI in March rose .2% both overall and core, stripped of energy and food. The Fed has been insistent that inflation would do so, but no mainstream person in markets agreed: we had faith that falling energy prices would pull down the general price level, and even more confidence that the rocketing dollar would undercut also.
The two principal components of rising CPI seem impervious to either energy or dollar: the year-over-year cost of shelter (rent) is rising at a steady 3% clip, and services at 2.4%.
A modest rise in inflation to the 2% mark is gratifying to the Fed, removing risk of deflation. But because of lags in the effect of Fed rate hikes, even 2% makes the Fed fearful that they are falling behind the future curve, one or two years out. Count on this: if the Fed thinks inflation is jumping the box, it will tighten no matter how weak the economy may be.
The stock market is having a bad Friday, the Dow off 336 at this writing. US stocks have tanked mostly because of CPI, but partly in sympathy with stocks overseas last night, down because of Greece (again, good grief), and way overbought. A stock panic normally drives down the 10-year T-note, money running to bonds for safety, but today only from 1.90% to 1.85%. Pfft. ECB QE and Greek fear overnight took the German 10-year to a new record low 0.06%, all shorter maturities below zero. A drop like that usually pulls down the US 10-year. Not today. Piffle pfennig.
The propeller-heads of markets watch nothing but charts of markets. Don’t bother us with the economy, or Fed this-and-that. The chart decline of the 10-year began 16 months ago at 3.00% and has followed a gorgeous glide path ever since. In chartism, for the glide path to continue it must continue. If it stops continuing, everyone will expect a violent counter-move, which will happen because everyone expects it. Thus the extended flat spot near 1.90% is troublesome — we must break through 1.86% going down, or the down-trend will be broken.
And we are exactly at that threshold today.
Until this week I thought the preponderance of data supported a gradually improving economy and Fed liftoff by late summer. Two weeks ago we did get a lousy report on March jobs, but the economy has underperformed in several recent first calendar quarters and then rebounded strongly. However, this week’s data have been awful. Even the up-tick in CPI is not necessarily good news — how are we helped by rising rents and prices if incomes are not rising enough to cover?
The other poor data: March retails sales .9% versus 1.1% forecast, and ex-autos (the overdone bright spot) only .4% versus .6% forecast. New purchase mortgage applications sank, reversing a hopeful rise. If mortgage rates in the threes won’t ignite housing, just how strong is this economy, really? March starts of new homes rose 2%, but pitiful considering the 15.3% crater in February. March new-home permits are up an anemic 2.9% year-over-year. New York and Philly Fed economic indices are barely on positive ground. And the charts following are troublesome… confounding.
Stitch it together… no matter what imperative the Fed feels to lift off, encouraged by CPI, a June hike is off the table and everyone knows. “Data dependent” we and they are, but to lift off they’ll need a lot better data and for longer, now. And if the 10-year breaks 1.85% going down, it will be a vote of economic anti-confidence.
Friday, April 10, 2015
Capital Markets Update
By Louis S. Barnes Friday, April 10, 2015
The week began with a reverse-bang: last Friday’s payroll report was distinctly weak, and rates fell a lot that day, but on Monday morning markets immediately un-did themselves. Right back to where they were — mortgages in the high threes, the 10-year T-note just under 2.00%.
That trading is a clear sign that the bond market is gradually awakening from denial. The Fed is coming. Two if by land, one if by sea, but either way, they’re coming.
That trading is a clear sign that the bond market is gradually awakening from denial. The Fed is coming. Two if by land, one if by sea, but either way, they’re coming.
This week the Fed released minutes of its March 17-18 meeting, which were widely described as “divided.” No, they’re not. The control group — Chair Yellen and the governors appointed by the president and confirmed by Congress, joined by the capable regional Fed presidents (Dudley, Williams, Rosengren, Evans, Lockhart) — is in complete agreement: the Fed will lift of from 0% this year unless the economy swoons. Most likely in summer, and at a very low slope. And without further warning. The warmer the economy looks, the sooner; if a tad cool, early fall.
The other chatter out of the Fed comes entirely from the other regional Fed presidents, who seem unaware and uninterested that their hawkish world view is out of touch. Nevertheless, the bond market is a big place, and a lot of it has become convinced that the Fed will stay at 0% forever. Uh-uh.
The part of the economy most vulnerable to liftoff is of course… us. Housing. It is possible that the extraordinary bond-buying QE by foreign central banks will hold down US long term rates even as the Fed raises the overnight cost of money. Very low inflation and oil prices may have the same effect. But we have to address the central question: is housing strong enough to withstand higher mortgage rates?
The question is a big deal — last year despite all contrary forecasts, mortgage rates fell back into the threes, and housing still did not ignite. Just stumbling forward, underperforming nearly all forecasts.
But now, this spring, there are flickers of improving health. Little up-ticks in purchase mortgage applications. What does real health look like, and why? I live in the hottest housing market in the US, Denver Metro. Why us, and not elsewhere?
1. Our home prices stayed flat from 2001 until ignition in January 2013. We had no bubble. We had a mini-bubble 1998-2000, when the IT Fairy landed here, but when she left… flat. We had our foreclosure episode, plowing through consequences of idiotic subprime lending, but no bust, just flat. Flat is good, and long flat is ideal. During twelve years of flat prices, purchasing power accumulated — even with wages growing at two, or three, or four percent, that’s a lot of accumulated power.
2. From 2000 to 2015 the state population grew by one million people, a 25% increase, most of them within commuting range of Denver. While prices were flat. And because of accumulated development, and our local mania for open space preservation (in CO outside a municipality, the minimum lot size is 35 acres by state law), as big as CO is we are short of land. Near Denver, very short. Near Boulder we can see the last single-family building sites ever. Our economy is diversified, heavy with stable government payrolls, IT, bio-T, and entrepreneurial.
Purchasing power meets scarcity, and ka-BOOM. Prices in 2013 and 2014 rose in an annual range of 5%-8% depending on the usual things. I had thought that mortgage hyper-regulation and appraisal lids would hold appreciation in the 8% range despite our explosive demand/supply mismatch. Uh-uh.
An attractive new listing this year will be sold in the listing office before it hits the market. Good ones which make it to market may have 40 showings in the first 48 hours. Offers commonly waive appraisal and commit to making up in cash any gap between appraisal and price. A new bubble? Nope — the economic foundation is sound.
A few other places are like us, but most are not. Most have neither the scarcity, the long-flat, nor the income growth. The Fed knows housing is still fragile, but…
They are coming.
They are coming.
Friday, April 3, 2015
Capital Markets Update
By Louis S. Barnes Friday, April 3, 2015
The last line in last week’s column: “For complete chaos, and canceling all rate worry above: a weak report on jobs.”
And chaos it is! Masked until Monday by today’s holiday, but the ground is moving now. Only 126,000 new jobs in March, the prior two months revised down by 69,000, slightly declining hours in the workweek, overtime flat… this is the growing strength the Fed needs to pre-empt?
Stocks are closed, but bonds are trading: the US 10-year T-note at 1.81%, down from 1.98% on Monday, and all technical forecasting models suggest a re-test of February’s temporary two-year low at 1.65%. The next visit may not be so temporary.
But, be very careful here. Rising wages are much more important to the Fed than payroll numbers. At 5.5% unemployment the economy is already in the historical danger zone. Average hourly earnings in March rose 2.1% year-over-year, but last month climbed 2.8%.
Chair Yellen delivered a magnificent speech on March 27, one of the best-ever by a Fed leader, thinking out loud through all the reasons the Fed should liftoff from 0%. Buried and brief on page 3, reasons not to move:
“I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken, if market-based measures of inflation compensation were to fall appreciably further, or if survey-based measures were to begin to decline noticeably.”
Today’s report does not show weakened wages, nor in other reports any weakening of inflation. We did see a weaker ISM manufacturing survey for March, down to 51.5 from 52.9, obviously hurt by a stronger dollar. Fed Vice Chair Fischer’s statement last fall that “Falling oil prices are an unambiguous benefit” has proven wildly overconfident, the drop not yet stimulating consumer spending but currently shaving jobs.
On the happy side we have a slowly but consistently improving housing market, sales up 12% year-over-year, and prices rising at double the rate of inflation.
On net: presumption that this jobs report has intercepted liftoff in June or in September, or in 2015 is very premature. Specifically to gambling on mortgage rates, these extremely low levels are held down by overseas central banks, which the Fed sees as artificial — not a signal of US weakness, and possibly requiring Fed interception.
For now, rejoice in low rates. And also in an unusual cluster of other good news.
First, little noticed, the WSJ reported this week that the Fed in 2014 began to lean on bank boards of directors to do their jobs. To supervise management. Not just take fees, get their buddies on other boards, back-scratch executive and their own compensation, take five-star junkets — and when their ward institutions bring down the global financial system, sniff in indifference. Fed supervisors are leaning hard, one director at a time, especially on previously inert and crony “independent” directors. I have believed ever since 2005 that bank-director indifference to bank conduct was the primary failure leading to the meltdown. The Fed is late, but hooray anyway.
Next, Nigeria replaced its crooked head of state in a non-violent election. Good luck to Muhammadu Buhari in his promised fight against corruption and Boko Haram. Nigeria is 178 million souls today, quadrupled in 50 years, and in another 30 years will be more populous than the US.
Then the Iran deal. In the last two weeks as the negotiation deadline drew near and passed and revived, financial markets traded on the outcome. When the deal looked dead, stocks and rates went down, risk up; alive again, stocks up and rates up. Nobody knows how the deal will turn out, but markets like the fact of six powers talking.
Last, some would argue whether good or bad news, but we can hope in the next two weeks to get a resolution to Greece. If they are out, then quick downward pressure on rates here, fearful of chaos (that word again…). If they stay in, nobody will care. For my own part, an end to the story would be a blessing.
The last line in last week’s column: “For complete chaos, and canceling all rate worry above: a weak report on jobs.”
And chaos it is! Masked until Monday by today’s holiday, but the ground is moving now. Only 126,000 new jobs in March, the prior two months revised down by 69,000, slightly declining hours in the workweek, overtime flat… this is the growing strength the Fed needs to pre-empt?
Stocks are closed, but bonds are trading: the US 10-year T-note at 1.81%, down from 1.98% on Monday, and all technical forecasting models suggest a re-test of February’s temporary two-year low at 1.65%. The next visit may not be so temporary.
But, be very careful here. Rising wages are much more important to the Fed than payroll numbers. At 5.5% unemployment the economy is already in the historical danger zone. Average hourly earnings in March rose 2.1% year-over-year, but last month climbed 2.8%.
Chair Yellen delivered a magnificent speech on March 27, one of the best-ever by a Fed leader, thinking out loud through all the reasons the Fed should liftoff from 0%. Buried and brief on page 3, reasons not to move:
“I would be uncomfortable raising the federal funds rate if readings on wage growth, core consumer prices, and other indicators of underlying inflation pressures were to weaken, if market-based measures of inflation compensation were to fall appreciably further, or if survey-based measures were to begin to decline noticeably.”
Today’s report does not show weakened wages, nor in other reports any weakening of inflation. We did see a weaker ISM manufacturing survey for March, down to 51.5 from 52.9, obviously hurt by a stronger dollar. Fed Vice Chair Fischer’s statement last fall that “Falling oil prices are an unambiguous benefit” has proven wildly overconfident, the drop not yet stimulating consumer spending but currently shaving jobs.
On the happy side we have a slowly but consistently improving housing market, sales up 12% year-over-year, and prices rising at double the rate of inflation.
On net: presumption that this jobs report has intercepted liftoff in June or in September, or in 2015 is very premature. Specifically to gambling on mortgage rates, these extremely low levels are held down by overseas central banks, which the Fed sees as artificial — not a signal of US weakness, and possibly requiring Fed interception.
For now, rejoice in low rates. And also in an unusual cluster of other good news.
First, little noticed, the WSJ reported this week that the Fed in 2014 began to lean on bank boards of directors to do their jobs. To supervise management. Not just take fees, get their buddies on other boards, back-scratch executive and their own compensation, take five-star junkets — and when their ward institutions bring down the global financial system, sniff in indifference. Fed supervisors are leaning hard, one director at a time, especially on previously inert and crony “independent” directors. I have believed ever since 2005 that bank-director indifference to bank conduct was the primary failure leading to the meltdown. The Fed is late, but hooray anyway.
Next, Nigeria replaced its crooked head of state in a non-violent election. Good luck to Muhammadu Buhari in his promised fight against corruption and Boko Haram. Nigeria is 178 million souls today, quadrupled in 50 years, and in another 30 years will be more populous than the US.
Then the Iran deal. In the last two weeks as the negotiation deadline drew near and passed and revived, financial markets traded on the outcome. When the deal looked dead, stocks and rates went down, risk up; alive again, stocks up and rates up. Nobody knows how the deal will turn out, but markets like the fact of six powers talking.
Last, some would argue whether good or bad news, but we can hope in the next two weeks to get a resolution to Greece. If they are out, then quick downward pressure on rates here, fearful of chaos (that word again…). If they stay in, nobody will care. For my own part, an end to the story would be a blessing.
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