Top of the Street: Fading the Fed, fickle productivity, and retail and student lending sting securitized credit

The Fed keeps having a tough time selling the case for higher rates, and low productivity looks like the culprit. CMBS, meanwhile, signals that the Internet may keep eating bricks-and-mortar retail.

Markets: Fade the Fed
The Fed keeps having a tough time selling the case for higher rates. “The case for an increase in the federal funds rate has strengthened in recent months,” Yellen said at Jackson Hole. Yellen’s comments are consistent with possibly two hikes this year, Fischer noted. A September hike is “possible,” said Dudley. But still the market sees the chance of a September hike at 24% and one by December at 53%. The difference between the market and the Fed’s dots in the long run is an even bigger 181 bp. Deutsche Bank argues that persistent low productivity and a resulting cap on wage inflation will push the dots toward the market’s view. See BAML’s US Economic Weekly: How I Learned to Stop Worrying and Love the Fed, 2 Sep 2016, and DB’s US Fixed Income Weekly, 02 Sep 2016. (BAML, DB, Milepost).

Markets/economy: Wages and productivity
Payroll growth and unemployment may look okay, but the labor market still shows no signs of higher wages. Wage growth slowed in the last employment report and weekly hours worked fell to a 2-year low. Income growth stands near a 6-year low. Despite low unemployment, according to Deutsche Bank, demand for labor seems soft. Blame it on low productivity. If wages grow faster than today’s anemic productivity, employers eventually will cut back on labor to defend profits. That’s a plausible path to recession and continuing low rates in the next few years. See DB’s US Fixed Income Weekly, 02 Sep 2016. (DB, Milepost).

Markets: Retail hurts CMBS, student loans hurt ABS
Bad retail earnings and news like Macy’s decision to close 100 stores has stung CMBS lately, and ongoing risk of downgrades has hurt student loan ABS. Spreads on one CMBS derivative contract, CMBX Series 6, with 36% of underlying loans made to retail, has widened more than 150 bp since July. The Internet continues to threaten bricks-and-mortar. More than 11 new CMBS deals in Sep and Oct – some from conduits, some for single properties – could add to the CMBS spread pressure, according to Credit Suisse. Returns in ABS have lagged benchmark corporate credits as the sector waits to see which AAA FELP classes get downgraded in the aftermath of new rating agency methodologies announced this summer. See Goldman Sach’s The Mortgage Trader, 02 Sep 2016, and Credit Suisse’s CMBS Market Watch, 25 Aug 2016 (GS, CS, Milepost).

Economy: Ups and downs in the education business
The business of 4-year for-profit colleges has exploded since 2000, according to the NY Fed, with enrollment between 2000 and 2011 going up by 700% before declining 25% since then. By 2011, 4-year for-profits schools had more students than either public flagship universities or elite private schools. And enrollment at for-profit schools also seemed to respond much more to changes in the economy. In the first of four articles, the NY Fed’s Liberty Street Economics blog has started to chart the roll played by different types of schools and their impact on the quantity and quality of student loan credit. See Liberty Street Economics’ The Changing Higher Education Landscape.