Mortgage Credit News - 3/16/18

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?

10 year t note

The Fed-sensitive 2-year T-note... poised. No doubt about that:

a fed-sensitive t note

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:

Us nonfarm payrolls

civillian labor force participation rate

all employee average wages

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:

small business - optimism index

The Atlanta Fed’s forecast for first-quarter GDP beautifully describes both fading expectations and uncertainty:

evolution of Atlanta GDP

The ECRI may be the best long-term indicator available, and it confirms the Q1 softening:

ECRI weekly leading index