U.S. Mortgage Loan Applications Meander; Interest Rates Surge
The Mortgage Bankers Association reported that its total Mortgage Applications Volume Index rose 0.7% last week (5.8% y/y) following a 2.6% decline during the prior week. Purchase loan applications were stable (9.3% y/y) following a 3.4% shortfall. Applications to refinance increased 0.9% (1.8% y/y) following a 2.9% drop.
The effective interest rate on a 15-year mortgage jumped to 4.09%, up sharply from 3.76% four weeks ago. The effective rate on a 30-year fixed-rate loan increased to 4.66%. The rate on a Jumbo 30-year loan rose to 4.60%. For adjustable 5-year mortgages, the effective interest rate was fairly stable w/w at 3.92%, up from 3.69% four weeks ago.
U.S. Consumer Credit Usage Cools
Consumer credit outstanding increased $18.44 billion during December following a $31.03 billion November rise and a $22.99 billion October gain, revised from $27.96 billion and $20.53 billion. It was the weakest monthly increase since September. During all of last year, consumer credit usage increased 5.4% y/y, the weakest full-year gain since 2011. During the past ten years, there has been a 52% correlation between the y/y gain in consumer credit and y/y growth in personal consumption expenditures.
Nonrevolving credit usage strengthened $13.35 billion (5.1% y/y) after surging during the prior two months.
Revolving consumer credit balances increased $5.11 billion (6.0% y/y), the weakest rise since August.
After Market Turmoil, Fed Officials Stand Firm on Rate Path Federal Reserve officials signaled the recent spasm of market volatility isn’t prompting them to rethink their path of interest-rate increases or upbeat economic outlook.
U.S.: Will higher wages lead to inflation surge?
“I caution against interpreting good news from labor markets as translating directly into higher inflation,” said St. Louis Fed President James Bullard in a speech in Lexington, Ky., on Tuesday. He said the relationship between inflation and labor market conditions “has broken down in recent years and may be zero.”
NBF economists would agree with Bullard:
MIT tracks prices on internet in real time. Its “Billion Prices Index” has tracked CPI (blue line) closely, currently suggesting that CPI will decelerate:
(via Financial Sense)
Deficit Worries Take a Back Seat in Latest Spending Proposal The two-year budget deal reached by congressional leaders marks a triumph of defense hawks over the dwindling number of lawmakers focused on reducing the federal budget deficit.
Nobody cares about deficits and debt anymore…
What’s going to happen next time the Dems take control?
Warning Sign Behind Market Swings The economy is still abnormally dependent on low interest rates and richly priced assets
(…) Even before he became Fed chairman this past Monday, Jerome Powell had observed how recent expansions ended not with inflation but collapsing asset bubbles. And they don’t need to bring on a financial crisis to do damage. Goldman Sachs estimates that higher stock prices added 0.6 percentage point to U.S. growth last year via the wealth effect—households spending their stock winnings. By Goldman’s calculation, a 20% hit to prices this year could knock 1.1 points off growth. That would more than wipe out the stimulative effect of the tax cut.
There is no reason to assume this latest pullback is the start of a deflating bubble; stocks are richly valued but conceivably make sense given optimistic assumptions about growth, interest rates and volatility. But asset markets routinely overshoot their fundamentals, and that is a worry that will hang over the economy so long as interest rates and inflation remain abnormally low.
Equity valuations have little to do with growth and volatility. Inflation and interest rates drive the discount factor to earnings.
SHORT VOL AND MARKETS
A reader sent me this link to an Evercore ISI presentation which discusses (after the 6th minute mark) the short vol trades that have contributed to the recent equity pullback. Such financial engineering excesses amplify the market movements as they eventually must unwind. They contribute to the up leg but they only amplify the down leg after rising interest rates (generally due to rising inflation and inflation expectations) tightened the credit markets. Listen past the 20th minute as Chris Cole explains the similarities with portfolio insurance all the vogue in 1987 and why the recent tremors could well be followed by more, possibly even stronger, quakes.
Thanks very much Mark.
SENTIMENT WATCH
Amareos has an interesting way to measure sentiment: social media.
(…) Even though it is labelled the equity market “fear index”, as we have suggested on numerous occasions in the past[2], the VIX is not much help for investors because it is a contemporaneous indicator of the price action in the underlying market. (…)
An alternative method is to analyze the emotional content of millions of online comments across traditional and social media posted every day. As we noted in a recent Market Insight[4], the prevailing mood of the crowd a month ago was one FOMO (Fear Of Missing Out), the antithesis of fear – indeed we showed our Fear sentiment indicator stood at record lows. What is interesting to note is that even with the latest price move and the surge in implied volatility, our crowd-sourced US equity Fear indicator (dark grey line) remains close to historical lows – see exhibit below.
Exhibit 3: Crowd-Sourced Fear Sentiment By Media Type – S&P500
Source: www.amareos.com
For the most part, this absence of fear is largely reflective of the tone of social media (red line), which we take to be more representative of a retail investor mindset. By contrast, fear sentiment in mainstream media (orange line), which we take to be more representative of a professional investor mindset, remains significantly higher as it has done ever since Trump was elected President (divergence that was not evident during the Obama years).
What such low crowd fear readings suggest is that even though the VIX has jumped to levels where it has proved profitable over the past several years to re-enter the market a “buy-the-dip” mentality may not be being a winning strategy this time around. Indeed, because the crowd has not been scared by the extreme price action (read price falls) down rather than up is where the market’s vulnerability is higher, which suggests the downward correction probably still has further to run. (…)
Here’s another, longer term, measure of sentiment:
TECHNICALS WATCH
LR says that recent days failed to suggest that Supply has yet to be fully exhausted and that near-term downside risk remains elevated.