Premier Mortgage Group

Mortgage interest rates increased slightly again this past week despite mostly weaker than expected economic data.  Economic data weaker than expected included March Business Inventories, the May Empire State Manufacturing Index, April Industrial Production, April Capacity Utilization, the May Philadelphia Fed Business Index, weekly jobless claims, and April Housing Starts.  Economic data stronger than expected included April Retail Sales, April Building Permits, the University of Michigan Consumer Sentiment Index, and April Leading Economic Indicators.  Also of note, inflation data continues to be tame.  The April Producer Price Index fell 0.7% and the April Consumer Price Index fell 0.4%, its largest decline since December of 2008.  Year over year, the Consumer Price Index is up just 1.1%.  Excluding the food and energy components, core CPI is up just 1.7% year over year.  In Europe, Q1 GDP fell 0.2% on expectations that it would fall 0.1%.

The Dow Jones Industrial Average is currently at 15,292, up about 170 points on the week.  Crude oil spot prices are currently at $95.35 per barrel, down slightly on the week.  The Dollar strengthened versus the Yen and Euro on the week.

Next week look toward Wednesday’s Existing Home Sales and FOMC Minutes, Thursday’s jobless claims and New Home Sales, and Friday’s Durable Goods Orders as potential market moving events.

Interest rates on long-term bonds and mortgages have stopped their May rise, a little above the halfway mark of the low and high for the year. The tilt seems to be upward, but the trading pattern has been chaotic and artificial, trading on guesses at the Fed’s intentions to continue, trim, or stop QE3 bond-buying.

Bond markets everywhere always trade on central bank intentions to ease or tighten money in the future — nothing artificial about that — but the central banks themselves have for five years engaged in artificial, full-scale-emergency-experimental action to prevent a re-run of the 1930s, or worse.

Trading on central banks is once-removed from the real drivers: inflation and economic growth. Every interest-rate analyst is always caught in this loop: what does the Fed think of incoming data, and how will it react, right or wrong? Complicated today by this wrinkle: in normal times the Fed attempts pre-emptive action, knowing that its moves take six to eighteen months to have effect; but these times are unprecedented, and no one in or out of the Fed has decent predictive tools. This is a pure, seat-of-the-pants deal, and the Chairman in those pants will retire in seven months.

PIMCO has been the largest and most successful bond investment manager of the last generation. This week its CEO, Mohamed El-Erian intoned (condensed): “The global economy will give way to one of two stark alternatives: either sustainable growth, or shortfalls, instability, social tensions, political instability, and debt traps.” Wow. El-Erian usually talks like the Oracle of Delphi, murky thought free of specifics.

Buried in the thread: “…in the next three to five years.” Translation: the world’s central banks still can buy time and have room for more heroics. Spitball from the back: “three to five years” means you don’t have any damned idea. El-Erian was joined by PIMCO’s Bill Gross, modern god of bond trading, saying the Fed has “12-24 months” of QE still ahead. Fire another sloppy wad at that guy.

Meanwhile the financial press publishes in bold any investment manager with a theory, or political angler, or boondocks Fed official (KC’s Ms. George, Dallas’ Mr. Fisher, and Philly’s Mr. Plosser belong in SNL skits) — a stream of confetti blinding civilians and professionals actually trying to figure this thing out.

Avoid analysis, and review as much hard data as you can. In a seat-of-skirt deal, yours is as good as anybody’s.

The Fed would like very much to pull back from QE, if only to reduce its political exposure. But it must err on the side of slow exit for fear of an accidental economic abort, and not enough ammunition to reverse it. To pull back, the Fed must be content that the US economy has entered self-sustaining recovery.

The job market is obviously not in such recovery. Housing may be, but did not find ignition until the Fed drove mortgage rates to 3.50% only ten months ago. Technology is a strength, and some manufacturing, but the only other general sector doing well is actually a ruinous burden on households: health care. In a spectacular accident, void of leadership, we have achieved the largest fiscal repair of any advanced nation, the Federal deficit cut in half in just two years and falling (the “out-years” are not pretty, but we have time for that). The Fed is justified in easing against that fiscal drag.

Inflation is sliding by every available measure (CPI, PCE, chained-mean…), the “core” versions very close to the danger zone below 1%. Gold has dropped 25% since last fall, $1365 today, regaining its position as one of the worlds worst investments. Falling prices are grounds for Fed easing, not tightening.

Total bank credit outstanding has just now regained the level of 2008. The US GDP has grown 14% since then, credit support provided entirely by QE. Consumer credit is contracting 1% every 90 days, mostly in mortgage accounts (capping housing recovery), and shrinking despite the hideous explosion in loans to students.

There will come a time for QE pull-back and higher rates, but the data say this is not that time.

You can either over-regulate banks OR have enough credit.

Small business may be the best single indicator of a self-sustaining turn. Not yet.

10-year T-note. The vertical scale is greatly exaggerated, the whole top-bottom covering less than one percentage point, making narrow movement look wild.

Gold:

Mortgage interest rates increased slightly again this past week despite limited economic data for markets to digest.  Economic data of note included weekly jobless claims which fell 4k on expectations that they would increase by 12k.  Weekly jobless claims are at their lowest level in five years.  The four week average of claims fell to 336,750, its lowest level since November of 2007.  Also of note, the Treasury auctioned $69 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds which were met by markets with okay demand.  There is increasing talk that the Fed may curtail its current quantitative easing sooner than expected due to the recent positive employment numbers.  In Germany, factory orders increased more than expected and in China, exports increased by 14.7% on expectations that they would increase by 9.0%.  Poland, Hungary, and Australia cut their base lending rates this past week.

The Dow Jones Industrial Average is currently at 15,092, up over 100 points on the week.  Crude oil spot prices are currently at $93.79 per barrel, down almost $2 per barrel on the week.  The Dollar strengthened versus the Euro and Yen on the week.

Next week look toward Monday’s Retail Sales, Wednesday’s Producer Price Index (PPI) and Industrial Production, and Thursday’s Consumer Price Index (CPI), Housing Starts, Jobless Claims, and Philadelphia Fed Survey as potential market moving events.

In a week without economic news, markets very quiet, take time for the foibles, flights, fantasies, and filberts of public policy and human nature.

Whenever the hard right and hard left agree, duck and cover.

One example: the right and left both want to intervene in Syria. The right confuses war with video games, and hasn’t learned a thing since Vietnam. The left is oblivious to contradiction: violence is good if for humanitarian cause, exit optional.

On another front, left and right are joined in shouting, one-up competition to see who can do the most damage. To banks, credit, and the economy.

The right despises modern banking because it’s a government scheme. The Fed is a conspiracy. Government won’t allow losses, the punishment that keeps people in line. Won’t break up big banks and go back to the good old days of small-town bankers saying “yes” to the right kind of people. And the right hates all those mister-fancy-pants and electronic money. Even the right wearing fancy pants hates the fancy-pants.

The left hates banks and bankers because they have money and won’t give it to people who don’t have any. The left has exactly the same fondness for the safe, small-bank world which didn’t supply enough credit, and wasn’t safe. Left and right agree that taxpayers should not bail out bankers. Bankers should pay. And the left hates fancy proprietary trading, securities underwriting, and derivatives, which neither left nor right knows from prostates, undertakers, or dirigibles.

No, we’ve got an agenda and we’re stickin’ to it.

Fannie and Freddie are now earning profits at a $50-billion annual pace. Shut them down. They will repay the Treasury within three years, and with FHA and VA provide 90% of new mortgages. Shut them down.

We don’t like big. Little banks we could let go. Two problems with that: in 1929 we had a lot of little banks, all caught the same disease, and 75% of them died before we thought to stop it. Taxpayers who might have saved everything just by promising a back-stop instead lost everything. You still want to bust up the big guys? Wells, Citi, Chase, BofA, and Goldman (not so big, but everybody hates Goldman)? Want to just dump the pieces on the market? Want another crash? Who is going to buy the pieces?

The French. Maybe the French will buy the pieces.

Okay, okay… than make them stop doing dangerous things. Like making money? You give deposits to a bank and expect a return, both interest and principal. To make money with your money your bank has to invest in something that you don’t know how to or are scared to or should be. “Make loans,” right and left say. To whom? Safe credits sell their own bonds. Safe stuff — Treasurys — doesn’t pay anything. Every other investment or loan entails risk that must be managed with sophisticated tools.

Forcing banks to raise more capital is wise, but in the hands of right and left any good idea gets overcooked. “Risk-based capital” is today such piling-on that banks are forced to shed useful businesses. Both wings are fond of “bail-in,” the European plan for assisted suicide: demand that banks simultaneously raise capital from investors and tell those investors that in the next systemic run they’ll get the Cyprus Haircut.

The joint assault on banks misses the one worthwhile target: CEOs, directors and chairmen. Could we import some new, ethical, and polite ones from Canada, where giant banks have worked very well? The new governor of the Bank of England is a Canadian recruit. Send the casino-ego boys packing.

Fed governor Tarullo published a paper on the Fed’s site that’s hard to read, but describes the extraordinary and real progress made in reforming banks since 2008, and the exceedingly careful pace. Careful not for benefit of bankers, but depositor-taxpayers and the society. Haste makes new bank runs. Net of huge losses and paying back TARP, US banks have raised $400 billion in new capital in just four years.

Never mind. From left and right, Rand Paul to Elizabeth Warren: break them up and shut them down. Business starved of credit hides under desks, eyes wide at the scene.

Red and amber bars, certain foreclosures, are still five times normal, and…

concentrated in states which have allowed judicial proceedings to freeze foreclosures and prolong the healing process. The non-judicial states are in recoveries, only benighted Nevada and Rhode Island still beyond any remedy:

Mortgage interest rates increased slightly this past week largely on today’s April employment report.  The unemployment rate fell to 7.5% on expectations that it would be unchanged at 7.6%.  The unemployment rate is at its lowest level in five years.  Non-Farm Payrolls increased by 165k on expectations that they would increase by 153k.  February and March payrolls were revised higher as well.  Other economic data was mixed.  Economic reports stronger than expected included March Pending Home Sales, April Consumer Confidence, the US Trade Balance, and weekly jobless claims.  Economic reports weaker than expected included March Personal Income, the April Chicago Purchasing Managers Survey, the April ADP Employment Estimate, March Construction Spending, the April ISM Manufacturing Index, March Factory Orders, and the April ISM Service Sector Index.  Also of note, the European Central Bank cut its base lending by 0.25% and the Federal Reserve reiterated its commitment to its current quantitative easing.

The Dow Jones Industrial Average is currently at 15,006, up almost 300 points on the week.  Crude oil spot prices are currently at $95.37 per barrel, up over $2 per barrel on the week.  The Dollar strengthened versus the Yen and weakened versus the Euro on the week.

Next week look toward Thursday’s weekly jobless claims as a potential market moving event.  Also, the Treasury will auction $72 billion of 3 Year Notes, 10 Year Notes, and 30 Year Bonds.

Deep breath.

This morning’s news of a better job market has pushed 10-year Treasury yields from 1.63% to 1.73% overnight, and intercepted the mortgage move below 3.50%. Stocks of course to a new high, Dow above 15000.

Breathe again. The job market is not really better, just not as poor as could have been — markets were looking for worse and didn’t get it. We did add 165,000 jobs in April and revised up the two prior months, but the average workweek and overtime declined. Wages are rising at a 1.9% annual pace, below even diminished inflation, and another 278,000 people looking for full-time work could not find it and took part-time.

The twin ISM surveys both fell in April, manufacturing barely positive at 50.7, down from 51.3, and the service sector to 53.1 from 54.4. The Fed’s post-meeting minutes changed tense: in March it noted “a return to moderate economic growth:” this month “… has been expanding at a moderate pace.” Nobody wants to be a has-been.

The Fed also noted, along with everyone else: fiscal drag. One would hope so, given the Cliff tax increases and Sequester, although it’s astounding that we can meat-ax $85 billion out of Federal spending and not notice until the FAA tried to make airports uncomfortable on purpose.

Austerity is a calibration deal: we have to do enough of it, better not do too much, but the austerity dial has no level-indicator. Like living through winter with a thermostat arrow-pointer but no temperature marks, and a heating system responding to the thermostat in a random lag of two to 24 hours. That’s how life feels to the Fed.

That’s the run-down here in the US: slowing a bit, but okay, housing producing smiles. But the most powerful forces on the US economy, affecting everything from jobs to mortgage rates, lie overseas. All data show slowing in China. Japan’s inflation-inducing experiment is going to take months to evaluate, at the outset doing nothing but pushing down yields on non-Japan bonds. The emerging world churns its way forward by sucking jobs from the West, the means visible in Bangladesh.

Europe is back in the forefront of overseas trouble. The soap opera over there has overstayed its welcome, each new episode the same plot as the last, just shuffling the cast, and endlessly foreshadowing conclusions but no end to it. Thus we lose feel for the magnitude of the disaster and its progress. Unemployment across the south is now uniformly above 25%, in Germany 5.4%. Southern bond yields are down from 7% to 4%, but German ones today fell to a new all-time low 1.16%, and business credit in the south is all but unobtainable.

South is moving north. French unemployment is 10.8% and rising, and in Holland up to 8.1%, double two years ago. S&P this week reported on housing in Europe: French prices are off 5%, expected to fall another 5% this year and the decline “gaining momentum.” Spain’s prices are off an official 28% since 2008, but no one knows what will happen when it’s bad bank dumps foreclosed inventory. Dutch prices are off 18%, expected to fall another 5% this year and again next, 25% of Dutch mortgages underwater now. German home prices rose 3.5% last year, trend continuing.

Apparent German health conceals a fatal illness. Its banks and central bank assume that debt owed to Germany by the others will be paid. In euros. When it could not be more clear that the deutschemark-calibrated euro has crushed all the others.

Political stability is holding among the others for now, it seems because having German money in your wallet is worth any amount of damage to your children’s future. Anything but go back to the unreliability of the lira, peseta, or even franc. We have all looked to the weak as the most likely to leave the euro, but it could be someone like Holland, making its way in the world for hundreds of years with a reliable guilder.

Mercifully the US has made great progress, especially bank re-capitalization, so much so that we can make it through even a euro-breakup. Meantime, pain there keeps rates low here and assists our own recovery. Quite the world.

10-year T-note. Today’s job data just took us back where we’ve been, before markets overdid their worries about an economic slide. Also pushed lower by overseas lunacy noted above.

The ISM is the old Purchasing Managers’ Association, its manufacturing series one of the longest-running surveys available (early ’70s). We are moving forward, but may or may not be self-sustaining. Still need the Fed.

And Bill McBride’s all-time great visual. The world as we knew it 1945-1990 has passed into history, and we don’t know enough about the new one to describe any part of it as “normal,” new or otherwise.

Mortgage interest rates improved slightly on the week as economic data was mixed.  Economic data stronger than expected included weekly jobless claims and the University of Michigan Consumer Sentiment Index.  Economic data weaker than expected included March Existing Home Sales, March Durable Goods Orders, and the first look at Q1 GDP.  During Q1, the drop in defense spending outweighed the biggest increase in consumer spending in two years.  Economic reports in line with expectations included March New Home Sales and the FHFA housing price index.  The Treasury auctioned $99 billion in 2 Year Notes, 5 Year Notes, and 7 Year Notes which were met by markets with okay demand.  In Europe, services and manufacturing shrank in the euro area for the 15^th straight month in April.

The Dow Jones Industrial Average is currently at 14,716, up almost 170 points on the week.  Crude oil spot prices are currently at $93.10 per barrel, up over $5 per barrel on the week.  The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Monday’s Personal Income and Outlays, Wednesday’s ISM Manufacturing Index and FOMC Announcement, Thursday’s International Trade and jobless claims, and Friday’s employment report for April as potential market moving events.  Markets will closely watch the FOMC Announcement for any indication of when the current quantitative easing may be lifted.

A lot of movement under the covers. Although few sounds, nobody talking, most of the lumps are recognizable.

Long-term rates have fallen here and everywhere since late March, and have taken a new leg down today, US10s to 1.67% for the first time since December. Some of today’s move may be “event risk” bond-buying to protect against Syria. If they’ve really used Sarin, in a region vastly more dangerous than, say, North Korea….

More likely: wrestling under the sheets is economic action. Starting with today’s GDP report, Q1’13 at 2.5% versus expectations of 3.1%, and dreams of 4% and even 5% before March data turned down. March data have been so poor that odds favor a downward revision from the 2.5%. The Chicago Fed’s index whipped to minus .23 in March from plus .76 in February, and new orders for durable goods tanked 5.7% versus expectations for a decline half that size — even stripped of volatile orders for transportation, durables were down 1.4% versus hopes for plus 0.5%.

China’s purchasing-managers’ equivalent in April slid by surprise (why is anyone surprised?) to breakeven 50.5 from 51.5 in March. Global commodity prices continue to follow China’s track.

The Bank of Japan’s ultimate stimulus is thus far leaking yen out of Japan, aiding the global drop in long-term rates but not appearing to do anything for Japan itself.

Europe has found new cans to kick, but only after concluding a new deal with Mephistopheles. It is now painfully clear that non-German economies cannot recover under current policies (tied to the over-strong German-euro), nor can they continue current austerity. Spain bolted today, announcing 3% budget deficit target in 2016, which might as well be 2061. The deal with the Devil: just keep on borrowing past the point of no return, Italian and Spanish 10-year sovereign yields falling from the 7% tops in 2011-2012 now to 4% under the protection of the ECB. Which is expected to cut its overnight rate next week from 0.75%, a band-aid on a traumatic amputation.

Footnote on “point of no return.” Rogoff and Rinehart, the great researchers of past financial crises, were caught in an error two weeks ago which questioned their sovereign debt tipping point at 90% of GDP. Global Krugmanites leapt on the flaw: “Hah! See! We can borrow forever.” No, you can’t. You can get away with it for a long time if your central bank helps, and far beyond 90% of GDP, but if you pass the hazy horizon in which your economy will never be able to generate enough tax revenue to pay the interest due… one day, someday, you will default. The Devil smiles.

To move eyes from overseas to here is a great relief. Our own austerity is probably responsible for our spring slowdown, but interest rates are falling accordingly, the Fed has no inflation fear except too low, and can and should continue QE. Most amazing, budget deficits are falling at all levels of government, especially Federal, which may make it below 3% of GDP within a year. If the economy does not plotz, just mashes forward, we could stumble into a Clinton-accidental balanced budget.

Housing is central here and badly misunderstood. Everyone in healthy markets (land-scarce, inbound-migrating, global-plugged economies) sees auction conditions, and thinks the economy will surge immediately.

It’s a big country. March sales of existing homes actually slid slightly, and sales of new ones are consistently below forecast. The usually reliable FHFA has home prices up 7% year-over-year, and that overstatement is testimony to everyone’s struggle to measure prices during the transition from high levels of distressed sales to low.

MGIC, the mortgage insurer, just released its April run-down on 73 metro areas: 15 are “weak,” 26 are “soft,” and 32 “stable” (which in MGIC terms means “moderate” price appreciation, “balanced between buyers and sellers”), and still not one, single “strong” market. 26 of the 73 are rated as “improving” (in the process of moving to a better category), but given wildly overtight credit and little growth in incomes even among those with jobs, housing-led recovery is going to take time. But will come.

I hate to argue with inspired Bill McBride (www.calculatedriskblog.com) using his own charts, but his sooner-stronger housing-led recovery is not visible. Yet.

Mortgage interest rates were flat again this past week as economic data continued to be mostly weaker than expected.  Economic data weaker than expected included the April New York Empire State Manufacturing Survey, the April NAHB Housing Market Index, March Building Permits, weekly jobless claims, March Leading Economic Indicators, and the April Philadelphia Fed Business Index.  Economic data stronger than expected included March Housing Starts, March Industrial Production, and March Capacity Utilization.  Inflation data was tame as the March Consumer Price Index fell 0.2% on expectations that it would be unchanged.  Year over year, CPI is up just 1.50%, lower than the Fed’s 2.0% target.  Also of note, China’s GDP grew by only 7.7% during the first quarter, its lowest rate of growth in 13 years.  The IMF lowered its outlook for global economic growth from +3.5% to +3.3%.

The Dow Jones Industrial Average is currently at 14,484, down almost 400 points on the week.  Crude oil spot prices are currently at $88.18 per barrel, down almost $3 per barrel on the week.  The Dollar strengthened versus the Yen and weakened versus the Euro on the week.

Next week look toward Monday’s Existing Home Sales, Tuesday’s New Home Sales, Wednesday’s Durable Goods Orders, Thursday’s jobless claims, and Friday’s first look at Q1 GDP as potential market moving events.

We have since the Great Recession began in 2007 been buttonholed by commentators of all kinds arguing about what is happening to us, and debating risks and remedies in a situation without precedent.

Perhaps the dominant thread has been those insisting that inflation will be the inevitable consequence of central banks’ efforts to save the global economy from implosion. The inflationistas have also hijacked the language, describing central banks working to prevent collapse of stocks and housing and bank portfolios as creating “asset inflation.” Joining the inflators, always: the gold bugs.

By this week’s end, the sky is black with buzzards circling the remains of these arguments and their progenitors, not just here in the US but everywhere.

In the US too much attention is paid to CPI; the Fed watches dozens of price indicators, led by “personal consumption expenditures.” PCE peaked in 2011, briefly almost 3% annualized and has fallen ever since, now barely 1%. The “core” PCE, stripped of energy and food costs, since Lehman in 2008 has never made it above 2%, and is today synchronized with nominal PCE at 1%. Both falling.

When inflation falls below 1%, some components of the economy are already in deflation, a very bad thing if carrying debt which must be paid back in dollars more valuable than those borrowed in the first place. And the world today is more debt-soaked than ever in history.

The investment darlings of the inflationistas have cratered. The immediate impetus is a matter of debate among vultures and victims alike, but this combination did the deed: new US job weakness, Japan in last-ditch printing, China slowing fast while trying to convert from an excessive-investment economy to consumer-based, and confiscation in Cyprus.

TIPS — Treasury Inflation Protected Securities — have fallen as never in their history. Gold peaked at $1800/oz last October, stumbled slowly to $1600 by April Fool’s Day and now trades — sort of — at $1400. NYMEX crude has topped at $100/bbl repeatedly in the last year ($150 in 2008), now $87. 10-year T-notes are 1.70% and looking more likely to fall than to rebound.

Major crises often change course because of last-straws in odd places. Little Austrian banks in 1930. Archdukes in Serbia. Cyprus.

On Wednesday Jens Weidemann of the ECB and Bundesbank gave an interview in which he confirmed the German reputation for flexibility, diplomacy, and sensitivity to others. The European crisis will “remain a challenge over the next decade,” which means he has no idea. Then, “The Cypriot case shows that it is possible to wind down banks… taxpayers don’t always have to step in to bail out.”

The plan imposed by Germany on Cyprus involves confiscating about a quarter of its bank deposits. Some are Russian (as everywhere in the euro zone), but the rest belong to taxpayers. Used to. The Cypriot economy will collapse by a like percentage, or more. Sparing harm to “taxpayers”? Hardly. Adding heat to the gold meltdown: the forced sale of Cyprus’ central bank’s gold reserves. (If you buy gold to protect against the end of the world, in the moment do you really think you’ll be able to get to your hoard — or if you begin to spend it no one will notice?).

The NYT reported this week, confirmed by Unicef, that across the Aegean from Cyprus, Greek children now go hungry in large numbers.

The greatest bank run of all time began in July 2007, and still we argue about “letting banks go” versus “taxpayer bailouts.” Charlatans have pretended there is someone else available to take the loss, but in a bank collapse taxpayers always will take the hit one way or another. The same phony-theorists claim that preventing financial collapse will inevitably bring inflation.

I hope that the deep losses taken in the last few weeks, afflicting both the guilty and innocent, will help us to move off dead center. Here and a lot of other places.