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Capital Markets This Week – Get To Know Ron and Julie

Posted on by mortgagereconsulting
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Introducing the Ron and Julie Team
                      
By Louis S. Barnes                                                                 Friday, June 12, 2015
Long-term rates have run up again, now to levels of last fall: mortgages are close to 4.25%, the 10-year T-note cresting Wednesday just under 2.50%. Today, 2.36%.
Possibly fatal stubbornness, but I think most of this up-lurch is a correction from overreaction last winter, not the threshold of a sustained swoop-up. That may come, but it will require sustained economic data at least as strong as this spring’s revival.
Beginning mid-fall last year, Europe appeared headed into deflation. The ECB would embark on QE, but its effectiveness was very much in doubt. Oil crashed, removing all fear of inflation, and a lot of us discounted its stimulus potential. QE in one form or another spread everywhere outside the US, producing a dollar rocket, which at minimum created buyers for US financial markets (stocks-up rates-down), stimulated all of the export-based economies overseas (that would be all of them), and undercut the US. The icing: the weird US winter slowdown.
All of that has now either reversed or stabilized. Rates up.
Maybe, maybe, maybe at last a genuine turn in the world economy, which will self-reinforce. But the odds are that the great charge of the central bank cavalry has only bought more time, and the deflationary pressures are all still in place, especially overseas — and above all, hyper-competition compressing wages.
In the last two weeks both the IMF and World Bank have downgraded their forecasts for global growth, the latter to just 2.7% for this year.
The aspect without precedent is the divergence between the US and the rest. This certainly would not be the first time the US did better than the rest, even the locomotive for the others. But the divergence among central banks is without precedent, all-out printing over there, and tightening beginning here.
The US is by far the world’s most adaptable economy. That, our greatest strength, can be cruel to our people, more so than political structures overseas can survive. Europe is having an impossible time calibrating its several labor forces to one currency. China is trying to change its engine without slowing the car, fearful that any downturn will expose the Party as the fraud that it is. The Emergings are all in similar soup.
US data has picked up, I think more than just a rebound from another odd winter. The NFIB survey of small business is an especially important indicator, and it has nearly normalized. There are flickers of rising incomes especially at the low end, although compressed incomes for the lower two-thirds of our people are our principal headwind. Defying our fabled flexibility: the runaway cost of health care, acting as an anti-productivity tax, and the same for higher education.
Still, the Fed has to come up from zero. Clue: the IMF is so worried about the effect of liftoff on the dollar, and its effects on the weak Emergings, that it asked the Fed to hold off until next year. The huge dollar rise last winter versus all of the others (or their devaluation versus us — all is relative) was in response to the fact of QE overseas but anticipation of Fed liftoff. QE elsewhere is not going to change much. But nobody knows the moment of Fed liftoff or the slope of increase beyond. Shoot, the Fed doesn’t know.
This liftoff process is going to last a long time, and we should expect BIG volatility in things like mortgage rates. Not just up, but up and down and up. Liftoff is a given, but the future slope of increases is not. Since the Fed is data-dependent — all of its forecasting models worse than useless, misleading — then so are we.
The world is going to stay in a low-rate era so long as competitive pressures cap inflation. In many places, central banks may have to QE-lean against deflation open-ended. However, mortgage rates can ricochet rapidly in the post-bust range, 3.50% to 5.50%. Even a careful, “crawling” Fed pace (Vice-Chair Fischer’s word) of increase in short-term rates will beget wild anticipation in long rates. One month thinking the Fed is coming hard (mortgages up) the next thinking it’s overdone (back down).
As we come out of a place we’ve never been before to a new place we’ve never been before, the bond market will have no bearings. Moving, but busted compass.
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10-year T-note in the last year, an obvious bottom in April after an hysterical one in February. Add 1.80% to get 30-fixed no-point mortgages. I do not expect any big retreat from here, not without some very bad news somewhere.

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Economic News For The Week Of May 4th 2015

Posted on by mortgagereconsulting
By Louis S. Barnes                                                                  Monday, May 4, 2015
     The big news of the week: the US economy stalled in the first quarter, GDP rising 0.2%. And long-term rates, which go down on weak economic news instead went up.
     There are several keys to this conundrum. The first: the economy did not stall. The most basic forward momentum in our economy (any economy): 321 million Americans need to spend money every day to live, and “personal consumption expenditures” in the first quarter plodded along at a 1.9% annualized rate. Second, there is no new evident weakness in employment, although next Friday’s payroll report could surprise.
     Home sales are not rocketing, but not bad either: pending sales in March were 11% higher than one year ago. Today’s release of the manufacturing ISM index arrived unchanged in April at 51.5 despite weakness in the oil patch and the strong dollar hurting exports.
     GDP calculations are weird. BTW: nobody should have been surprised by a poor number — the Atlanta Fed’s real-time GDP tracker (“GDPNOW’) has had a near-zero figure for six weeks. Pulling GDP down: investments fell in Q1, everything from residential to business, some of that due to pullback in drilling. Another big sinker: imports rose, but exports fairly collapsed, down 7.3% in Q1 — we were still spending, but buying the production of others.
     The one aspect of the GDP report which does indicate a stall: businesses built a lot of inventory in Q1 which did not sell, but the production boosted GDP — it would have been negative without the inventory accumulation. Now we infer that the overstock will mean underproduction in Q2. And the Atlanta Fed tracker shows no rebound in April.
     If not a stall, certainly underperformance, then why the jump in mortgage and bond yields? Mortgages are still a hair below 4.00%, but the 10-year T-note is up to 2.11% and looks lousy. If ever you wanted confirmation that the outside world has more and more impact on daily life in the US, follow this bouncing ball.
     Last winter the Fed adopted the rhetoric of inevitable rate-hikes ahead. If economic growth merely remained on current track, the Fed was coming. No need for inflation even to rise toward target, we’re coming. Simultaneously the European Central Bank and the Bank of Japan entered end-stage QE money-hosing — panicked, really.
     In the near term, currencies move relative to each other because of changes in local interest rates (longer term: inflation and trade balances). Money will flow to the highest return, and in the era of electronic money on 24/7 screens, moves FAST. So the dollar rocketed up, and the euro and yen crashed, as did nearly all important currencies, those central banks also hosing in order to be trade-competitive with Europe and Japan.
     If you’re going to move to dollars you have to buy dollar-denominated bonds and stocks. Thus US bonds went up in price, down in yield, at max panic in early February, the 10-year to 1.65%. The NASDAQ returned to its all-time high. QE by the ECB and BOJ pushed yen and euro bonds almost to zero, adding to buy-pressure here.
     Historically, big swings in currency values take a year or years to change the flow of exports and imports. In the modern era, not just money is made of electrons; so is a lot of world trade. The weak euro has suddenly pinked European economies, Spain now the strong man of Europe, second only to Germany. However, ruddy Europe is at the zero-sum cost of a pallid US, our exports tanking.
     Hence the spreading global assumption that the Fed will have to hold off, maybe indefinitely. So the whole machine has run in reverse for 10 days: dollar down, euro and yen up. Euro bond yields up (all is relative, German 10s from 0.06% to 0.37%), US Bond yields up.
     Hunch: all of this QE-currency hoo-ah has not changed a thing. The world is and has been caught in oversupply of labor, materials, commodities, and manufactures, soggy everywhere, German and Chinese predation making all worse. The Fed may lift off (Bill Gross: “If only to show they can still get out of bed”), but the economy and rates are not going anywhere.
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