Mortgage Credit News by Louis S Barnes - August 6, 2021

The interest rate calculus changed this week to the upside. Perhaps not the ultimate cyclical turn announced in error a few dozen times in the last year, but this time the best chance.

First today’s employment report and rate reaction, then a powerful signal from the Fed, largely missed, the trillion-dollar infrastructure deal, and Covid.

One million new jobs in July? On the first Friday of each month the BLS releases its survey of the job market. It may be the single least-reliable report, but because of the link to inflation and the Fed it’s the most important. The job count is unreliable despite enormous effort. The raw figure is always distorted by seasonality (holiday retail, summer jobs but schools closed...), which the BLS tries to offset with counter-seasonal adjustments, which occasionally magnify seasonal variation.

Within today’s 943,000 new-job announcement, at least one-quarter are seasonal-imaginary and perhaps half, but still a hell of a lot of jobs. And in subtle but important strength, almost a quarter-million people rejoined the labor force, newly looking for work and taking it.

Note for market watchers: on the Wednesday before each of these BLS beauties, the payroll service ADP forecasts the job report. The bond market hangs on that estimate, but should just take the day off. This week’s ADP guess was 330,000, either off by two-thirds or accurate, but the market trades on BLS because it thinks the Fed does. Unusual: a few Wall Street houses (Goldman, natch) had correct forecasts.

Rate damage. The job strength pushed the 10-year T-note to 1.30%, mortgages back above 3.00%. The 10-year since mid-July had mostly diddled with 1.20%, the lows just under, the brief tops at 1.30%. If we break 1.30% upward the next stop is the July 13th 1.42% and then retrace the long run down from 1.70% since May. NO bets on that rise -- too many weird forces pushing money to bonds.

Fed signal. Way back in the old days, roughly when computers shifted from vacuum tubes, the Fed said nothing, ever. We guessed at Fed policy changes by activity on its balance sheet and its buys and sells in Treasurys, until a more complicated world forced Alan Greenspan against his will to begin the Fed’s blabby era.

In the ooold days, if the Fed had a signal to send -- usually to correct a market misunderstanding of its intentions -- it would arrange a formal leak. The pattern was always the same, the leak handed to the top Fed-watcher of the day, and published in the WaPo or WSJ. In the ‘80s into the ‘90s, if David Jones of Aubrey Lanston gave a public opinion, everyone knew who was talking.

On Wednesday, Fed vice chair Richard Clarida gave a speech highlighted in a post by today’s best Fed-reporter, Nick Timiraos of the WSJ. These speeches are often missed in favor of the entertainment provided by Wall Street salespeople and “analysts.” Clarida’s comments are as definitive as we’ll ever see and a stark warning.

“First, if, as projected, core PCE inflation this year does come in at, or certainly above, 3 percent, I will consider that much more than a "moderate" overshoot of our 2 percent longer-run inflation objective. Second, as always, there are risks to any outlook, and I believe that the risks to my outlook for inflation are to the upside. I believe that... necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022. Commencing policy normalization in 2023 would, under these conditions, be entirely consistent.”

Chair Powell has made heroic efforts to knock the Fed out of its 70-year and frequently mistaken pre-emptive rate hikes based on forecasts and false notions of neutral. Maybe we have entered a new phase of inflation, and the deflation phase 1995-2020 has concluded. Maybe, but I fear that the pre-emptive reflex lives. Clarida’s use of “normalization” gives me chills, as does one year at 3% core inflation “much more than ‘moderate’ overshoot.”

$1,000,000,000,000 for infrastructure! One trillion. But here in the age of exaggeration, and during the lowest-energy presidency since Coolidge, take a minute for detail. The spending is over ten years, so $100 billion per year until modified. That sum is within the range of error in annual Federal spending. And a good thing, too: both parties conspire to say that it is paid for by revenue increases -- not a dime in taxes, just fiddling. This week the CBO said, maybe three-quarters paid, if the fiddlers actually fiddle.

Most people like Joe, but we all age at different rates, and he’s old. We need a president out with force of argument, especially Covid and countering the wannabe Trumps like DeSantis. We need someone strong enough in either party to say that we need more tax revenue, and the only place to find it is the middle class. We need a Democrat to act on a secure border, and a good salesman to reach out to both wings. It is hard for any veep to fill a void, but Harris is a void.

Especially in the bond market, players pay little attention to politics because all politicians are held in contempt. But the market does pay attention to anxiety because it pushes money into bonds. There are times when anxiety, especially overseas pushes rates too low and the Fed should counter, as it failed to do in 1998. But sometimes anxiety has good foundation.

Delta and descendants. For anxiety, Delta is hard to beat. Fauci is of course correct that the longer Covid runs free, the greater the risk of new, deadlier variants and/or vaccine resistance. Oxford says that 30% of the world has had at least one dose of vaccine, but that includes 28% of China vaccinated with NSG vaccine. In rough numbers, full credit to China, that leaves five billion of us completely unprotected and busily incubating variants. Hopes for herd immunity in the 60%-70% range have given way to 80% as the likely threshold.

Covid is pushing global money to US and European bonds, a lot of money. Both fear of the unknown, and evident slowing economic pressure.

The US 10-year T-note in the last year, the last two trading days added in red.

New data from Boulder County is discouraging. Of those aged 12 or older we are 80% vaccinated, 231,000 out of 290,000, thus 59,000 vulnerable -- as are the 40,000 unprotected kids under 10 and the worst spike, apparently a Delta effect. Last week we had our first two deaths since May. The case undercount may be the farthest under in the whole time of Covid: we are testing only one-half the rate of last winter and this spring, and far fewer of the vaccinated-infected are symptomatic as among the original Covid. Good news: total County hospitalizations are low and stable.

Testing in the whole state of Colorado: