MORTGAGE CREDIT NEWS BY LOUIS S BARNES - January 17, 2020

There are some subtle signs of change, especially outside the US, but the Fed’s forecast is holding, policy in the right spot, open-ended.

However, few civilians would know that, given the web and traditional media storm of scare stories in their desperate effort to get your attention -- and the equally desperate effort by financial operators to get your money.

Data first. The only surprise of the last week was in December retail sales, up .3% but better than that, roughly rising .7% after excluding weak auto sales. Why exclude? The softness in autos seems to be caused by tightening of subprime loans, whose sales were not real demand anyway.

That surprise intercepted a brief trip by the 10-year T-note below 1.80% for the first time since early December. Now back to 1.82%, most 30-fixed mortgages at 4.00% or a hair below.

Inflation... December CPI nominal and core both rose 2.3% year-over-year, theoretically above the Fed’s 2% target. But, three things: the Fed watches PCE core, not CPI; the Fed has made very clear that an extended period modestly above 2% is no worry, just an offset to ten years below 2%; and the newest CPI figures are smaller increases, December’s nominal by .2% and core prices only .1%.

More on inflation: many had worried that the trade-war tariffs would push up prices of imports. Uh-uh. Import prices in 2019 rose only a half-percent -- and in an aspect of global non-inflation, US export prices fell .9% in the last year.

Housing. Three main things: housing is fine, in very short supply as construction cannot keep up with new urban/suburban demand, and please try not to read the statistics.

In long-running idiocy, the tradition is to report home sales and new starts and permits by monthly change. Seasonality and weather (not the same) have huge impacts on monthly figures: in theory, new starts in December rocketed 16.9%, and 40% above December last year. But total starts in 2019 rose only 3.2% over 2018, and not coincidentally new building permits rose 3.9%.

No market in the US is steadier. Vast unsatisfied demand by countryside migrants to cities will do that, satisfaction requiring vertical rezoning, years and years away.

Subtlety in Europe... In the last several years, strongly negative European interest rates made US rates attractive and held ours down despite massive Federal deficits and Fed tightening. Now a dog has not barked: the yield on German 10s was negative .70% last July, when US 10s were 1.50%. Both markets began to turn upward in September, but German yields by a half-percent -- at minus-.20% today, the highest since July 2016. US 10s have risen only .3%. The spread between the two had previously been locked, trade for trade.

Is Germany suddenly in recovery, demand falling for safety in bonds? No. The German economy is at no-growth standstill, the worst in six years. Whazzup? Mario Draghi, the “whatever it takes” king of ECB stimulus is gone, and the rise in German yields coincides with the arrival of Christine Lagarde as ECB chair and her demand for fiscal stimulus. That would mean German spending and borrowing, probably elsewhere in Europe as well, the ECB buying bonds. Hence bigger supply of bonds and yet again hope for European recovery.

Will the Germans significantly break discipline, enough for real growth in Europe? No.

And subtlety in Asia... If you believe the new China data, 6.1% GDP growth, I have a Yangtze bridge I’d like to sell. Hong Kong has made it plain that it wants nothing to do with the Party and Xi version of China, and last week Taiwan gave a 57% landslide to a not particularly attractive presidential candidate, but the one opposed to absorption by China. China’s response: we’ll make you join and look happy or else. China’s uber-control of its economy may prevent an upset affecting others, but will not end well. China’s birth rate fell another 4% last year, the lifetime per-woman rate now 1.6; the rate of replacement, just math for all nations: 2.1.

And central bank subtlety... Nick Timiraos at the WSJ, the best-ever to cover the Fed (nosing out even David Jones of Aubrey Lanston) has today posted a story on the loss of power by the Fed and perhaps most other central banks. The Fed can certainly still slow the economy, as shown by the near-hit one year ago. The situation is the inability of Japan and Europe to rise from the mire of negative rates, too-low inflation, and negligible growth despite previously inconceivable central bank stimulus. And the question, will the US and Fed join the others after our next recession?

The consensus, as in Europe: policy makers must look to fiscal solutions. I am unhappy with that thought for two reasons: representative governments in the last half-century have proven fiscally incompetent (too slow, bad priorities), and left us already borrowed to the eyeballs. Bernanke disagrees in part, says the central banks still have ammunition, but even he acknowledges limitations.

Two thoughts. First, this concern for a powerless Fed seems a solid forecast for rates to continue their long downtrend.

Second: we’ve got to think out of the box, beginning by asking what has gone wrong. Might start by acknowledging that we’ve had great fun making money with IT (Facebook, Apple, Amazon, Netflix, Google -- FAANG) but disrupting enormous segments of economies. And people! Same for global trade. And in the US, runaway medical costs.

Might start repairs there, because the worst problem may not have a solution: the populations of developed nations are certain to age and then fall within the lifetimes of Millennials, and then the whole planet. That development will have its benefits (climate, cheap land), but we’ve never tried it before.

The US 10-year in he last year, still no change since October:

The German 10-year fell early last year as did ours about one percent, but its rebound is far bigger and not really good news. Just the failure of negative-rate stimulus, and false hope ahead:

The Atlanta Fed... a modest oops-a-daisy below 2% forecast: