Rates Improve Slightly on Mixed Economic Data

Mortgage interest rates improved slightly on the week on mixed economic data.  Economic data stronger than expected included weekly jobless claims, the September core Producer Price Index (PPI), September Retail Sales excluding automobile sales, the University of Michigan Consumer Sentiment Index, and August Business Inventories.  The University of Michigan Consumer Sentiment Index reached its highest level since 2001.  Economic data weaker than expected included the NFIB Small Business Optimism Index, August JOLTS Job Openings, the September Consumer Price Index (CPI), and September Retail Sales.  While September CPI was up slightly less than anticipated, CPI was up 2.2% year over year.  The Treasury auctioned $56 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met with reasonably strong demand.  President Trump continues to promote tax cuts.

 The Dow Jones Industrial Average is currently at 22,881, up over 100 points on the week.  The crude oil spot price is currently at $51.24 per barrel, up almost $2 per barrel on the week.  The Dollar weakened versus the Yen and Euro on the week.

 Next week look toward Monday’s Empire State Manufacturing Survey, Tuesday’s Import and Export Prices, Industrial Production, and Housing Market Index, Wednesday’s Housing Starts, Thursday’s Jobless Claims, Philadelphia Fed Business Outlook Survey, and Leading Economic Indicators, and Friday’s Existing Home Sales as potential market moving events.



The Fed has begun to reverse its quantitative easing, letting MBS bleed out of its portfolio. Thus far, no effect on mortgages. We can tell because the spread between mortgage rates and the 10-year T-note has remained in historical pattern: add 1.80% to 10s on any given day, and get close to the 30-fixed no-point mortgage rate. And so mortgages are today, roughly 4.00%.

We are still in a data-vacuum, everything distorted by hurricanes. And what little data might be reliable is distorted by news-pushers desperate to find meaning and yell about it.

One sample: ubiquitous fear and prediction of a stock market fainting spell -- interrupted only by those expecting stocks to go higher. Perfectly normal.

The work of the newest Nobel Prize winner in economics, Richard Thaler is especially helpful today. Prior to his work, and dominant at the Nobel-heavy University of Chicago was the “rational expectations” school of economics. Since individuals are likely to make decisions in their self-interest, the rational behavior of large groups need only be detected in order to explain economic and market events.

Despite two decades of subversive academic thought, Thaler was appointed to the Chicago faculty in 1995 and has just about demolished “rational expectations.” His research shows that we are in fact, nuts. Or at least irrational.

“Behavioral economics” to me is little more than a parlor game, but Thaler’s insights go farther. Behavioral economics (BE) points out to us ad nauseum that we are frequently tricked by our own minds. Boxers have known for some time that if you hit an opponent in the belly over and over, the opponent will leave his head open to a blow. Or vice-versa. BE advocates present zillions of our hunches as in reality our own self-deceit. No boxer necessary.

The purpose of a good education is to teach us self-suspicion. Avoid hunches. Do not expect repetitive patterns to repeat in perpetuity. We are not prisoners to BE; it is one of our many choices.

Thaler himself is not immune -- as I’m sure he would agree with a laugh. One of his famous experiments: he gave coffee mugs to half of the students in a class, and then opened a market for mugs in the class. Students who had received mugs gave them value double that acknowledged by students without mugs, and Thaler announced the discovery of an “endowment effect.”

Those of us who work in markets will quickly tickle to the absurdity of the discovery. Does any seller of anything -- stocks, bonds, houses -- think the asset is worth less than the value placed by a potential buyer? Financial markets -- all of them -- have “bid” and “offer” sides. When they match we have a transaction. The rest of the time the bids are lower than the offers to sell, glaring at each other across an inevitable divide (spread), no trading. We might call that the First Law of Possessions. We don’t give away valuable things without compensation, whether altruistic or monetary, and the possessor values the possession more than the buyer. Which may be one of the few rational human activities.

Circle back to Thaler’s central point, well-demonstrated. We are nuts. What a perfect insight for today!

Neither markets nor businesses like uncertainty. As carefully as I can muster dispassionate commentary, financial markets are semi-frozen -- or perhaps better, in a process of congealing. As is some unknown amount of economic activity. Here is the shifting-sands list for today:

1. We live and die every day with IT, every market and business. IT has gone rogue, vast new computing power now used to destroy legitimate IT use. I don’t now how ugly or disruptive this is going to get, but it’s running downhill fast. The new head of Homeland Security is exactly the right person, Kirstjen Nielsen, an IT security expert. Google her and the info is so thin that she may not actually exist. So much for terror as the top threat; now it’s IT.

2. We do not know who the next Fed Chair will be. If it’s Warsh or Taylor, the slightest misstatement by either after nomination will blow up markets. Even Yellen’s re-nomination will have an effect (rates and stocks up). The new nominee is due any day, or who knows.

3. We do not know if we will have a tax cut or tax reform or tax shuffling, let alone what kind.

4. Deadly overseas developments are still not likely, but are more possible than any time in 15 years.

5. Trade policy is moving in self-destructive directions.

6. The Party Congress in China is likely to coronate Xi Jinping as Emperor For Life, or however much shorter or longer he would like. And nobody but Xi knows what he will do with more power than anyone since Mao.

7. The newest executive order on Obamacare is destructive to the spirit of many Americans, but we don’t know to what economic effect.

8. The go-along Republicans have trusted old-fashioned discipline: stay quiet and try to get done whatever can be done. The result has been to hand over the agenda to morning tweets, stream-of-consciousness speeches to the faithful, and radicals who would vote the go-alongs out of office.


US 10-year T-note. Given the Fed on the march, it’s hard to see how rates break out of the bottom of this range. And if it’s not the bottom, its going to be....


US 2-year T-note is the Fed telltale, December built-in. A new Chair, and who knows:


The small business surveyor, NFIB goes back to the early ‘70s, and its “optimism” question has been an excellent proxy for the whole economy. Until last fall. The Trump response has been durable, but faltering now -- as shows above in the chart of the 10-year:


Other components of the NFIB survey show sudden and significant weakness in business prospects. Possibly a hurricane effect, but not showing in other economic data. Possibly the first sign of Trump-weariness among the faithful:

Rates Flat on Mixed Economic Data

Mortgage interest rates were flat on the week as economic data was mixed. Economic data weaker than expected included MBA Mortgage Applications, Employment Situation, EIA Petroleum Status Report and the ADP Employment Report. Economic data stronger than expected include Jobless Claims, ISM Non-Manufacturing Index and the ISM Manufacturing Index. Economic data that came in as expected included International Trade Deficit, Construction Spending and the PMI Manufacturing Index. Both non-farm and private payrolls were revised down and the unemployment rate continues to shrink. This is creating wage pressures that are leading some to believe that a rate hike at the December FOMC meeting may be back on the table.


The Dow Jones Industrial Average is currently at 22,759, up slightly on the week.  The crude oil spot price is currently at $49.33 per barrel, down over $2 per barrel on the week.  The Dollar strengthened versus the Yen and Euro on the week.


Next week look toward Tuesday’s NFIB Small Business Optimism Index, Wednesday’s JOLTS and FOMC Minutes. Thursday’s Jobless Claims, PPI-FD, EIA Petroleum Status Report and Treasury Budget and Friday’s Consumer Price Index, Retails Sales, Business Inventories and Consumer Sentiment as potential market moving events.


As anticipated, the hurricanes have turned the usual flow of economic data into a game of Pick-Up-Sticks, a meaningless tangle. The market reaction has been to ignore the new data, assume the economy is on-trend, and focus on other stuff which may be trend-changers. 

That other stuff would be the Fed, foreign policy, trade policy, and asset markets. 

The Fed is in play in two parts: what it will do and who will do it. The consensus now: in December the Fed will lift the overnight cost of money from 1.25% to 1.50%, and that move is largely built into mortgage and other market rates. However, we are nearing the end of the period in which the Fed could hike and long-term rates could stay put. The 10-year T-note has been hanging on to a key level all week -- 2.35% -- which is too low relative to the fed funds rate to survive another hike. Mortgages are now back just above 4.00%, and brace thyself. 

Who will lead the Fed after Yellen... markets hope Yellen. If not Yellen, then Powell. If not Powell, Cohn. If it’s Warsh, markets will have a grumpy day but will be okay until we see what he actually does. If it’s one of the wing-nuts, like Taylor... bad, bad days ahead. There is no useful guessing at who it will be. The president sees himself as an expert on debt, but his key skills have been default and wishing for low rates. 

The Fed’s future actions will be confined by events, no matter who is in the Chair. The Fed’s primary forecasting tool -- employment and wages versus inflation -- is busted, but they have other tools and concerns. One long-running one: the immense heap of cash created by global central banks may not produce traditional wage-based inflation, but could cause asset bubbles. 

The central banks after 2008 intended to create rising asset values. The right-wing brain-dead have objected that this policy was a market “distortion.” That’s what central banks do: they distort markets upward in bad times to help recovery, and downward in good times to prevent overheating. However, in the aftermath of the most extreme asset collapse in history, and now recovery, we have no history to frame policy for what comes next, and are stuck with the judgment of whoever staffs the Fed. That’s the best we can do: we must rely on them, and they must act on their collective hunches. 

Asset bubbles are notoriously difficult to see coming. The most traditional one is the easiest to see coming, and the one the Fed most-commonly punishes: housing. Except for apartment construction in some markets, there is no sign of a housing bubble -- which perversely complicates the Fed’s chore. If the Fed raises rates for some non-housing reason it could easily crater the non-bubble housing market. 

What of other assets, stocks primarily? Begin with the obvious: nobody knows where stock prices “should” be, especially in a globalizing economy during an IT revolution, which make historical markers look like Puerto Rico’s electrical grid. But the persistent buoyance in stocks is anxious-making. This week alone, new all-time highs, broad indices up 1% against a news backdrop which should have hurt stocks: daily presidential jawbone indicating an urge to pop the DPRK and Rocket Man, a demolition derby in trade policy, canceling the nuke agreement with Iran, and the presidential solution to Puerto Rico damage by “wiping out” its $73 billion municipal bond debt. Some would argue that stock buyers are anticipating good things from tax cuts and reform, and some people will believe anything.

One good indicator of a bubble nearby is a rising market for a new fairy tale. For example, the 2004 belief that mortgage borrowers with no down payment and no proof of income or assets would perform on their loans. A comparable hallucination today is the growing market for crypto currencies. Bitcoin may have some ultimate utility because of its system of transaction settlement. But the new and fast-growing crypto subset is the “ICO,” $1.3 billion raised in the last 90 days, a 50% increase above the sum in the prior six months. Hyperbolic growth seldom has a happy ending. 

An ICO is an initial currency offering by a new and inevitably technology start-up company, and the nouveau substitute for an IPO, an initial public offering of stock. In the last 90 days, 105 of these: you give us your dollars, and we give you Tezos, or TenX, or PressOne at a value which we assert and control, and of course predicated on our start-up success. China and Korea have forbidden trading in these flights of imagination. ECB board member Novotny this week: the hype around digital currencies like bitcoin is “dangerous and deeply dubious.” 

Money of all kinds rests on faith. Even faith in gold was flawed, because gold-based economies fell in suicidal dominoes over and over again. But unregulated phony-money as a substitute for poor-idea stock offerings... you can bet the Fed is disturbed there is so much cash floating around that investors are lighting cigars with it. 

The US 10-year T-note is technically edgy. Take out 2.40% going up, and we’ll try the post-election tops. Decline from here and we’re okay:


The Fed-predicting 2-year T-note is all set for a December hike. Still, most unusual for the early part of a Fed cycle: markets are trailing the Fed, moving up the next notch only after the Fed has made its next intentions clear. Normally (always) rates rise much faster in anticipation of the Fed’s ultimate landing spot. Today’s trailing pattern is reasonable, as the Fed says it’s only trying to remove excess stimulus, and to take out insurance against the possible need for actual tightening in the future.


GDP accounts will suffer from hurricanes, too, but not so much as the granular data. Running 2%-plus is on the hot side for the Fed, no matter what the 3%ers are dreaming:


The ECRI concurs with the Atlanta Fed: good, solid growth.



The biggest news this week is what did not happen. The administration rolled out its tax plan, and markets ignored it. 

The plan has expanded from one page last spring to nine pages but is still just a list of principles, not detail. Markets did not react partly because there was nothing new, but largely because it is inconceivable that all of the principles as presented will pass into law, and no way to know what mix, if any will be enacted and to what economic effect. 

Last fall, markets instantly after the election leapt into the Trump Trade. Fool us once, not twice. The betting line on the tax proposal goes like this. A limited deal has a good chance, if only because giving away money is irresistible in Congress. Only two aspects would both have a decent chance of passage and significant economic effect: raising the basic deduction will have bi-partisan appeal, as will the ol’ snake oil that tax cuts will produce stimulus and deficit-closing tax revenue. 

Any other mixture of new tax law will resemble the F-111 fighter designed in the 1960s, intended to fulfill all missions for all services, but missed all so badly that its nickname was the anti-heroic “Aardvark.”

Economic data are now polluted by hurricane damage and response, but one piece fairly shouted: August core PCE inflation year-over-year fell again, from 1.4% to 1.3% and further confounded Fed forecasts. That slide may give impetus to deficit-spenders, although the Fed’s inevitable reaction to deficit stimulus will be to lean against it.

The Great Depression ended the period of Fed passivity after its 1912 founding. An active Fed gave birth to a great Wall Street pastime: Fed-bashing. Bashing is especially attractive to financial salespeople, who on any day can pitch to any potential client or excuse any failure by blaming the Fed. The miracle of alternate universes has produced unlimited invention in blame-casting. Bashing is so commonplace that bashers no longer need to offer recommendations for what the Fed should have done instead of what it did.

Whatever it does is wrong. Thus straight-faced flannel pinstripers say we’d be better off without a Fed, or one confined by mechanical rules.

This week Janet Yellen opened a window for all to see exactly what she and the Fed are thinking, how and why. She does not have the telegenic power of her predecessors, but more than makes up for the absence by her direct honesty. Her speech this week is in short and readable English, just six pages. 

The equations appended to the speech are intelligible only to a Ph.D. -- not to show off, not her style -- but to keep her colleagues disciplined, and to show anyone else how deadly serious the Fed’s deliberations are. One example:


The ECI is central to the Fed’s predicament: analysis established for more than a half-century has recently failed to predict inflation. Another ECI chart, below, illustrates the extreme importance of the failure.

Yellen is so straight that she put the problem in the most plain English: “As I will discuss, this low inflation likely reflects factors whose influence should fade over time. But as I will also discuss, many uncertainties attend this assessment, and downward pressures on inflation could prove to be unexpectedly persistent. My colleagues and I may have misjudged the strength of the labor market, the degree to which longer-run inflation expectations are consistent with our inflation objective, or even the fundamental forces driving inflation.”

Quickly, give me the names of five most-senior government leaders who have recently said that they may be mistaken. And who have the duty to act anyway.

The center of Fed-bashing today is retrospective: the whole QE and zero-rate response to the Great Recession was a mistake. Then, so that bashers have no accountability: the Fed’s response screwed things up so badly that the Fed can’t fix the results. Bashers point to relatively low economic growth, but the Fed never said it had the power to create higher growth -- in fact, today says that the speed limit is lower no matter what the Fed does or what public policies are adopted (except for a focus on education and productivity, which nobody wants to hear). Bashers will say in the same paragraph that the Fed should normalize rates faster, raising them, but that raising them is a mistake.

In the near term, stick with Yellen. If the PCE measure of inflation is correct and stable (probably the former, not the latter), the Fed has only now gotten the cost of money up to the most conservative rate of inflation. That is stimulative policy any time, any place. To continue very gradual increases is just a sensible insurance policy. The term, “tightening” does not apply -- nowhere in the credit system have terms or availability become tighter.

The 10-year T-note has bounced up off a recurrent bottom, but is still within many-month bounds:

Yellen’s speech did move the telltale 2-year T-note, now pricing-in a December hike from 1.25% to 1.50%. Note that the dollar has rebounded accordingly:


The ECI chart is numbing to civilians, but brings consternation to Fed meetings. “Expected inflation” has been mistaken for ten years. “Trend productivity” is the actual result, falling steadily, which should -- should inevitably -- mean less slack for non-inflationary growth. Has the model become permanently obsolete? Or is the inevitable merely delayed? Or -- cold sweat -- is tension building during the delay, to be released suddenly? You be the Fed Chair, you decide... or bash:


Pat Oliphant and Jeff MacNellly were the great political cartoonists of their day. Any day. The tax plan as F-111... spot on:


Rates Flat Despite Mostly Weaker Economic Data

Mortgage interest rates were flat on the week despite mostly weaker than expected economic data.  Economic data weaker than expected included the September Chicago Fed National Activity Index, the July Case Shiller Home Price Index, August New Home Sales, September Consumer Confidence, August Pending Home Sales, weekly jobless claims, August Personal Income, the August PCE Price Index and the Core PCE Price Index, and the University of Michigan Consumer Sentiment Index.  The Core PCE Price Index was up just 1.3% year over year, well below the Fed’s 2.0% target, calling into question a Fed rate increase prior to the end of the year.  Economic data stronger than expected included the September Richmond Fed Manufacturing Index, August Durable Goods Orders, and the September Chicago Purchasing Managers Index.  The Treasury auctioned $88 billion of 2 Year Notes, 5 Year Notes, and 7 Year Notes, which were met with reasonably strong demand.  President Trump is promoting tax cuts.


The Dow Jones Industrial Average is currently at 22,364, up slightly on the week.  The crude oil spot price is currently at $51.39 per barrel, up almost $1 per barrel on the week.  The Dollar strengthened versus the Yen and Euro on the week.


Next week look toward Monday’s ISM Manufacturing Index and Construction Spending, Wednesday’s ISM Service Sector Index, Thursday’s International Trade, Jobless Claims, and Factory Orders, and Friday’s employment report for September and Consumer Credit as potential market moving events.

Top Mortgage Lender in Colorado

With the vast majority of our loans supported by Cherry Creek Mortgage, we are proud to announce they have been recognized as the top mortgage lender in Colorado! We’d like to thank all our clients and partners for helping to make this possible. We’d also like to recognize our Processors, Underwriters, Closers, Loan Officer Assistants and Loan Officers for their hard work in building such a trusted and reliable source for home financing. You can read the details of the rankings here.

With the vast majority of our loans supported by Cherry Creek Mortgage, we are proud to announce they have been recognized as the top mortgage lender in Colorado!

We’d like to thank all our clients and partners for helping to make this possible. We’d also like to recognize our Processors, Underwriters, Closers, Loan Officer Assistants and Loan Officers for their hard work in building such a trusted and reliable source for home financing.

You can read the details of the rankings here.