The things we know for sure: the 10-year T-note during most of 2017 traded below 2.50%, at New Year’s 2018 broke out to a 2.95% top on February 21, and in the month since has been in the 2.80s despite universal expectation for an eruption above 3.00%.
Mortgages follow 10s, thus topping at 4.75% in late February, now back down, just above 4.50%. Sidebar: concerns that the Fed’s unwinding its MBS QE-portfolio would increase the mortgage spread above 10s... uh-uh. Still a remarkably steady 1.80% spread from 10s to no-point 30-fixed loans.
So, what stoppered the rate volcano? Consumer spending is suddenly weak, flat-to-negative in the last three months, corking all of the strong projections for GDP. Inflation numbers are under-performing, year-over-year core CPI still below 2%. And, as strong as hiring is, the supply of potential workers is larger, and new hiring is in low-wage jobs, thus little threat to inflation. The stock market is still iffy, putting a safety bid in the bond market. Last, German 10s pay 0.572%, and Japanese 0.036%. Buy Treasurys.
The Fed’s next meeting will break on Wednesday the 21st, hiking Fed funds from 1.50% to 1.75%, releasing a new set of projections and “damned dots” indicating the slope of future hikes, and concluding with Chair Powell’s first post-meeting press conference. Compared to all other government goings-on, a most-refreshing interlude of rational competence.
Strange goings-on in a lot of places...
A Kansas City family flying home on Tuesday from Seattle loaded as cargo its German shepherd, Irgo. But, in baggage claim in K.C. was a Great Dane. Irgo was in Japan, expected home soon.
On Wednesday a Seaside CA schoolteacher (also Mayor and police officer) leading a firearm safety class accidentally fired a round into the ceiling. The ricochet superficially wounded only one student, so startled that he didn’t notice the bullet fragment stuck in his neck until he got home. Irgo had a better trip.
The installation of the Miami bridge which has collapsed was monitored by an engineering firm based near my home town. It’s tweet then, a few days ago, "We are thrilled to have performed structural monitoring during a spectacular bridge move...” was replaced yesterday by this: "BDI was not involved in the bridge's design or construction... We are deeply saddened....”
Now that readers are in a proper frame of mind for a political update...
Dignified Rex Tillerson, wise Texas buzzard who knows how the world really works was fired on Tuesday by tweet. Not even a phone call. His replacement as Secretary of State will be Mike Pompeo, if Congress will confirm him. US Army Captain, then businessman, an arch-hawk elected to the House in the Tea party wave of 2010.
Gary Cohn of Goldman, who resigned last week as Chief Economic Advisor will be replaced by Larry Kudlow, a CNBC personality who has never held a job in which he would have responsibility for his catchy, if extreme views.
Cohn departed because of the tariff decision, whose author Peter Navarro has ascended to control trade policy. A professor and Fox polemicist, Navarro’s opinions on trade are representative of the 19th Century. Maybe the 18th.
National Security Advisor Lt. General H.R. McMaster was fired yesterday by leak (not worth a tweet). Some potential replacements would be okay, although the leading candidate, John Bolton would not.
Markets have reacted little to developments in this administration because most matters have been political, not economic. Markets did react to tariffs and to Tillerson’s discharge, and these new personnel changes involve potentially destabilizing security issues. I encourage all to google the old people and the replacements, and check sources across the political spectrum.
Congress tends to freeze at about this point prior to any election. But this administration will be active with or without Congress, and security is big, inside of markets and out.
Back to economics. The top question at the end of this week: what happened to the consumer? Perhaps the effects of the tax bill are delayed? Not likely three months into new withholding tables, and exuberance among found-money businesses, although capital investment can take time. But the impression of a ramping-up global economy also seems overdone. Perhaps the primary reason for Xi’s term-extension is China’s need for tough measures to compress borrowing, and the wrenching adjustment to a shrinking workforce -- both of which are likely to slow the outside world. Europe and Japan are as fragile as they have been, and Czar Vladimir will wreck anything he can.
Through all of that, one thing stands out. Neither political party is addressing the mountain of new demographic data describing fabulous economic success in cities, and the collapse of the countryside.
A pair of news stories this week illustrate, the first about an Idaho schoolteacher, his spouse and one-year-old. His $32,000 salary will not afford his own school district’s health insurance coverage, so the couple has dropped their own insurance in favor of covering their infant. (Memo: my perfect-health 23-year-old son’s Silver coverage at Kaiser last year was $250/mo, in 2018 $320.)
The second story was about Madison, Indiana, a lovely town of 12,000 (unemployment 4% but median household income only $51,500, 20% of kids below poverty level), and the role of its 1-9 high school football team trying to protect youth from addiction and suicide. In Madison’s small county, 15 suicides in nine months in 2017, not counting overdoses. Four by students since 2014. In 2016, triple the national rate.
And we expected healthy consumer spending in heartland places like these?
A big batch of charts this week:
The 10-year T-note in the last year, poised, paused, or topped?
The Fed-sensitive 2-year T-note... poised. No doubt about that:
Three charts from Tim Duy, professor and Fed-blogger at U-Oregon, the threesome illustrating the too-fast pace of hiring supported by new entrants into the workforce for lousy pay:
Used to be an economic indicator, now a political one, the NFIB index is a caution to all of us about opinion-based economic surveys. Small-business owners are heavily conservative (of course to which they are entitled), and very pleased by the election and tax bill. The index is worth watching, to see if actual economic underpinnings rise to the level of optimism, or vice-versa:
The Atlanta Fed’s forecast for first-quarter GDP beautifully describes both fading expectations and uncertainty:
The ECRI may be the best long-term indicator available, and it confirms the Q1 softening:
Big news for credit scores!
After the Equifax security breach late last year, many people started paying a lot closer attention to their credit scores and the agencies that report on them.
We are happy to let you know that some big changes are on the way that will not only make qualifying for a home easier, but lighten the burden for a lot of different financing situations. The following changes are likely to help improve credit scores for many people and will be implemented beginning June 8, 2018.
- Collections under 180 days will no longer be accepted, giving consumers time to pay a collection before it hurts their credit
- Medical collections that are paid (or are being paid through insurance) will no longer negatively impact credit
- Collections with no activity for more than 6 months will be dropped from your credit score as the creditor is presumed to no longer pursue the collection
- Collections without a contract or agreement (i.e. traffic tickets and library fines) will also be removed
This could have a significant impact on a consumer’s credit scores as a collection account, even for the most minor thing, can affect a credit score by 100 points or more. Not having these collections factored in will open the doors for a lot of consumers that could not qualify before or may improve the loan and rate options for those with less than perfect credit.
If you have struggled with your credit in the past, or are just curious to see what these new regulations could mean for your purchasing power, give us a call today!
If you would like to check your current credit score, you can do so with no obligation or impact to your score at: www.annualcreditreport.com.
Mortgage interest rates improved slightly this past week on mixed economic data. Economic data stronger than expected included the February Treasury Budget, January Business Inventories, weekly jobless claims, February Import Prices, February Industrial Production and Capacity Utilization, the University of Michigan Consumer Sentiment Index, and January JOLTS Job Openings. Consumer Sentiment increased to a 14-year high. Economic data weaker than expected included February Retail Sales, February Export Prices, the March Philadelphia Fed Business Index, the March NAHB Housing Market Index, February Housing Starts, and February Building Permits. The February Consumer Price Index (CPI) and Producer Price Index (PPI) were up 0.2%, in line with expectations. Year over year, CPI was up 2.2% and PPI was up 2.8%. The Treasury auctioned $62 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with solid demand.
The Dow Jones Industrial Average is currently at 24,970, down about 360 points on the week. The crude oil spot price is currently at $61.25 per barrel, down slightly on the week. The Dollar strengthened versus the Euro and weakened versus the Yen on the week.
Next week look toward Wednesday’s Existing Home Sales and FOMC meeting announcement, Thursday’s Jobless Claims, FHFA House Price Index, PMI Composite Flash, and Leading Economic Indicators, and Friday’s Durable Goods Orders and New Home Sales as potential market moving events. The Fed is expected to increase the Fed Funds rate by 0.25% after its FOMC meeting.
Jeepers. What a week, and where to begin?
At the end, is where. Long-term rates have ended this week poised for the next step up, markets and Fed-speakers whistling past the graveyard.
Between beginning and end... since the 2016 election markets have mostly ignored goings-on at the White House. Yes, the stock market tended to general exuberance with a business-friendly administration, but the bond market has behaved like your mother trying not to notice what your brother is up to. You figure his spanking is coming any minute, but your brother escapes again and again.
Until now. The tariffs clobbered stocks and put a lid on rates. Cohn’s resignation did the same. Today stocks have returned to exuberance on the prospect of peaceful resolution with North Korea, and the report of a wild surge in jobs. If the president de-nuclearizes Chubby, all of the president’s sins are forgiven, even if it’s Emperor Xi’s work. Fingers crossed for a genuine stress-reliever.
Employment, unemployment, inflation, wages, Fed -- that whole furball is beginning to look like the last time the Fed and federal deficit spending were crosswise. That time: early Reagan, immense deficits and an ultra-tight Fed. The Fed won.
Today’s news, 313,000 new jobs created in short February, half-again the forecast. Do we believe that? The road to bond hell is paved with those who quibble with reports, and the 10-year Treasury yield has touched 2.90%, the highest since February 21 but way short of the run through 3.00% which everyone anticipates. These reports are prone to revision, sometimes heavily so. To create that many jobs and leave unemployment unchanged required the entry to the workforce of 800,000 people previously not looking for work and hence not unemployed -- the largest number since 1983, oddly concurrent with the last Fed-fiscal collision.
Other aspects of today’s employment report are just as confounding. Despite the jump in the workforce, long-term unemployment remained unchanged, as did “involuntary part-time” workers (looking for full-time but can’t find it). The average workweek nibbled an increase, but nothing fancy.
The clincher, holding bond yields down: in February average hourly wages rose four whole cents, an annualized increase of 1.5%. If anything slowing. No wage growth, no inflation. So long as no inflation, unemployment can go to zero for all the Fed should care.
Unless of course momentum is building in the economy which some month ahead will overwhelm the Fed’s current “normalization.” That’s what happened before every recession from 1945 to 2001. To lesser degrees in 1992 and 2001, but wages and inflation still rising.
How can wages not grow faster in an economy as hot as this? The Fed has been insistent that the GDP “speed limit” is about 1.8% annually -- below 2% for sure. The twin ISM surveys of purchasing managers are in the strongest sustained pattern in 40 years, the economy certainly accelerating, somewhere in the 3% range for GDP.
On March 7, John Mauldin distributed “An Economic Detective Story” by Jonathan Tepper, trying to solve the no-raise question. The article is a comprehensive list of prevailing theories. One at a time here, with my own alternate views.
The article begins with leading indicators for wage growth, but understates the failure of all indicators. The Fed’s inflation forecasts (implicitly wages also) have failed ever since recovery began in 2010. Unemployment at 6.5% was supposed to be the trigger for inflation, but something very strange or new is underway.
Greedy employers: since 2004 corporate profits have risen from 60 years of fairly steady 6% of GDP to an unsteady 8%. Meanwhile, employee compensation has fallen from 47% of GDP to 42%. However, these gaps have been narrowing since 2012. And, although hard-nosed, in a time of exceptional corporate innovation there is no reason moral or otherwise to maintain historical shares -- and does not explain why employers still are not competing for workers.
Wages disconnected from productivity: productivity (output divided by worker numbers) has risen steadily for 70 years, but hourly compensation flattened in the 1970s. This pattern is so durable that it questions what we think we mean by “productivity” and the elasticity of demand for workers. Might we enter periods of worker-plenty, suppressing compensation but meaningless?
Markups and business concentration: a version of greed. By some measures markups (profit margins) and concentration of businesses into monopsonies has enabled wage starvation. Okay as a theory for a temporary phenomenon, but the US more encourages formation of new businesses than any other nation, and protects against predatory competition. The consolidation of business is much more likely an IT and global competition (among business and workers) phenomenon than the return of the Robber Barons.
Lower wages in rural areas: now we’re getting somewhere. An Obviousman! award for this thought. Non-metro area wage growth appears to grow at less than half the rate of large metro.
CEO compensation: yes, it can be obscene, but we could confiscate all of it and redistribute to employees and not make a material change in worker comp. The S&P500 employs only 500 CEOs (whose quality of life is to me not worth the money).
The demise of unions: give it up. Unions once were crucial to worker well-being. That day passed long ago, every business adopting the union agenda of 50 years ago, and more. Workers are not stupid, union organizing heavily protected, but membership today is only 11% of workers and half of those in the public sector. Workers themselves have opted away from traditional unionism.
I am left with two overlapping probabilities: there is something new underway in the employment economy, coinciding with the IT revolution and global trade, and it is impossible to evaluate the Fed’s risk of a very bad shot from the blind side.
Have a nice day, Jay Powell.
US 10-year T-note since December, a nice pause:
The 10-year back five years. Odds are stupendous that the pause near 2.90% gives way to a run past 3.00%:
Mortgage interest rates increased slightly on the week on a stronger than expected February employment report. Non-Farm Payrolls were up 313k on expectations that they would be up 205k. Private Jobs were up 287k on expectations that they would be up 195k. The Unemployment Rate, though, remained at 4.1% on expectations that it would drop to 4.0%. Average Hourly Earnings were up just 0.1% on expectations that they would be up 0.2%. Other economic data was mixed. The February ISM Services Sector Index, February ADP Private Jobs, Q4 Productivity, and Q4 Unit Labor Costs were stronger than expected. January Factory Orders, the January U.S. Trade Balance, January Consumer Credit, and Weekly Jobless Claims were weaker than expected. President Trump is moving forward with tariffs on aluminum and steel although is exempting Mexico and Canada for the moment. This is increasing concerns of a trade war and slowing global economic growth.
The Dow Jones Industrial Average is currently at 25,176, up over 600 points on the week. The crude oil spot price is currently at $61.08 per barrel, down slightly on the week. The Dollar strengthened versus the Yen and Euro on the week.
Next week look toward Tuesday’s Consumer Price Index (CPI), Wednesday’s Producer Price Index (PPI) and Retail Sales, Thursday’s Weekly Jobless Claims, Philadelphia Fed Business Outlook Survey, Empire State Manufacturing Survey, Import and Export Prices, and Housing Market Index, and Friday’s Housing Starts, Industrial Production, and Consumer Sentiment Index as potential market moving events.
Mortgage interest rates improved slightly this past week as economic data was mixed. Economic data stronger than expected included the February Consumer Confidence Index, Weekly Jobless Claims, January Personal Income, the February ISM Manufacturing Index, February Auto and Truck Sales, and the University of Michigan Consumer Sentiment Index. Weekly Jobless Claims fell to their lowest level since 1969. Economic data weaker than expected included January New Home Sales, January Durable Goods Orders, the January U.S. Trade Deficit, the December FHFA Housing Price Index, the February Chicago Purchasing Managers Index, January Pending Home Sales, and January Construction Spending. Based upon testimony to Congress by Fed Chair Powell, it appears that the Fed is still on track to increase the Fed Funds Rate three times this year. President Trump is threatening tariffs on China’s exports of steel and aluminum which may increase inflation.
The Dow Jones Industrial Average is currently at 24,278, down over 1,000 points on the week. The crude oil spot price is currently at $60.46 per barrel, down over $3 per barrel on the week. The Dollar weakened versus the Euro and Yen on the week.
Next week look toward Monday’s ISM Services Sector Index, Tuesday’s Factory Orders, Wednesday’s ADP Employment Report, International Trade, and Productivity and Costs, Thursday’s Jobless Claims, and Friday’s employment report for February and Wholesale Trade as potential market moving events.
Before stocks, rates, and the economy, an introduction to new Fed chair Jerome (“Jay”) Powell -- which so far the mainstream media has flubbed.
This week we got to see his demeanor while testifying to Congress. This is a most interesting man, and very different from his predecessors -- both in pedigree and behavior.
Media thus far have accurately described Powell as “not an economist,” which itself separates him from predecessors back to 1979. He is also described as some sort of Wall Street operator, which press and public lump into one (usually unpleasant) line of work.
Powell’s Wiki-bio is here. Summarizing, his education began by Jesuits at Georgetown Prep. Every Jesuit-trained person I have known is distinguished by clear and self-critical thinking, and although respectful of others in discussions cannot be intimidated, and while not acting in a manner superior to others grants no superiority to anyone else. Your title adds nothing to the merit of your argument.
All commanding personalities have their traits and tricks. Volcker was a banker and Treasury under-flunky standing six-foot-seven. Between that mass and his cigar, Volcker was a threatening physical presence. And so he ruled: punishing to the point of brutality.
Greenspan was artfully opaque, concealed behind millions of no-content words which made him seem more an oracle than he was. The longer we watched him, the more he seemed a salesman than a wizard, and at the end he bought the worst of his own stuff.
Bernanke was all professor, chair (and herder) of the Princeton economics department, and ran the Fed in the same collegial way. He was kindly, firm, and so clearly the smartest man in the room and with the best intentions that disagreement was silly.
Yellen was an academic, too, but also a Fed insider. She was Yoda. Deeply wise and kind, and more than any predecessor had the courage to say what the Fed did not know.
Powell trained as a lawyer, editor of the Georgetown Law Journal, and clerked and practiced for five years. Then to investment banking, with old-line “white shoe” Dillon, Read & Co. On to a stint at Treasury, including regulatory work adverse to Warren Buffett and his Salomon Brothers subsidiary. Briefly at Bankers Trust (he quit after the bank misbehaved with derivatives), back to Dillion and then a partner at Carlyle Group where he worked on mergers and acquisitions of industrial companies -- not whizz-bang financial devices. Before joining the Fed as a governor in 2012, he was managing partner of the Global Environment Fund investing in sustainable energy, a director of the Nature Conservancy, and worked on US debt with the Bipartisan Policy Center.
That resume is unlike any in Fed history. So is his net worth.
His appearance this week... on sight he seemed perfectly cast for the role of the undertaker in a Western. But he knows the game: dead-pan is best, give away nothing by a change in expression, offer more words only in repetition. The more he performed, the more I fought back the sense of Obviousman! about to rip open his coat and dress shirt to reveal his Duh! T-shirt.
Somebody tried to pin him down on the natural rate of unemployment. “It could be 5% and could be 3.5%.” Will more people enter the work force and suppress wage pressure? “The only way to find out is to find out.”
Bless you, sir.
Powell’s prepared remarks repeatedly affirmed the conflicted “dual mandate” of maximum employment and stable inflation. His first-day testimony was interpreted as hawkish, “hair trigger,” worried about overheating, but he killed that on his second day.
The misunderstanding about overheating resulted from his remark that “headwinds have become tailwinds,” specifically fiscal stimulus. Bi-partisan idiocy has resulted in an intention nearly to double deficit spending in 2018 -- almost as much as the emergency spending in 2009. Looking back at Yellen’s testimony one year ago, that fiscal splurge is the only real change in government policy and prospects for the economy. A “tailwind?” Obviousman! Overheating? The only way to find out is to find out.
Markets... the 10-year T-note yield dropped almost to 2.80% on Thursday at the stock market worst, and after the steel-aluminum tariff surprise. Essentially everyone had assumed we’d be making a run at 3.00% for 10s, and passing 4.75% for mortgages.
However, as of midday Friday the rate drop was just a breather. The problem with stocks is not the Fed or economy but having gone up too fast. There is solid support at Dow 18,000, a little at 19,800, and a little more at 21,000, the all-time highs in spring one year ago. From there to the top at 26,616 on January 23rd -- no support whatever. No news, no Fed, no nothing, the Dow could easily unwind to that 18,000-21,000. Which in our loopy world would be helpful to the Fed. A tailwind switching to headwind.
The tariff announcement is hard to handicap because it is so crazy -- “Trade wars are good, and easy to win!” -- reversing 90 years of US policy and standing economic common sense on its head. The most profound economic tailwind in the lifetime of anyone alive today has been global trade, and the US may have triggered a headwind.
Markets have largely ignored the current presidency, except for exuberance at the worst tax bill in modern US history -- worst if only for business-cycle timing. Markets are not so pleased by tariff insanity, but it has the same source.
Live by the sword, die by the sword.
The 10-year US T-note in the last week tells several stories. On Tuesday the overreaction to the Undertaker. On Wednesday the yield declining as stocks caved and frightened money ran to bonds. On Thursday, the instant of the tariff announcement is plain. Today, stocks found temporary bottom, long-term rates back up, Fed on the march:
The ultra-Fed-sensitive 2-year T-note in the last week tells the same story: 10s are watching the Fed more than anything, miles away from anticipating an economic slowdown caused by the Fed, stocks, tariffs, or anything:
The Atlanta Fed GDP tracker is now a tad volatile. The Undertaker may be right that the economy is not overheating, but it’s hot:
The ECRI confirms: