Morning Report - bonds sell off on stronger-than-expected ADP report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1788.0	-3.4	-0.19%
Eurostoxx Index	2988.7	-25.2	-0.84%
Oil (WTI)	97.06	1.0	1.06%
LIBOR	0.242	0.001	0.23%
US Dollar Index (DXY)	80.77	0.180	0.22%
10 Year Govt Bond Yield	2.84%	0.06%
Current Coupon Ginnie Mae TBA	104.7	-0.1
Current Coupon Fannie Mae TBA	103.4	-0.4
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.43

Markets are lower this morning after a strong ADP employment report. Bonds and MBS are down. Later on today, we will get the ISM services index and new home sales. 

The ADP employment report showed 215k jobs added in November, above the 170k estimate. October was revised upward from 130k to 184k. The forecast for Friday's payroll number is 175k. Lately, ADP has not been a great predictor of the upcoming jobs report, so bear that in mind. According to JP Morgan, the street is leaning heavily short going into the number, so the reaction to a strong report could be muted. Conversely a weak report could send bonds flying. A classic case of "buy the rumor, sell the fact."

Mortgage applications fell 12.8% last week, which isn't surprising given the holiday. Purchases dropped 4.1% while refis dipped 17.5%. Mel Watt is supposedly going to be confirmed next week and the rumor is that he wants a HARP extension for loans through 2010. So we could see some sort of refi wave, although it won't be anything like 2012 was. 

Smaller mortgage lenders have been picking up market share, according to Inside Mortgage Finance. As of Q3, they had a 60% market share vs 39% share in 2009. One reason - the big banks have tightened credit standards and are taking longer to process loans than smaller lenders. LOs, this is a good selling point to bring up with your realtor contacts - what realtor wants to get paid later rather than sooner?

Detroit has filed for bankruptcy, and it looks like pensions and creditors will likely take a hit. Detroit owes more than $18 billion and cannot perform even basic services. Half of that debt is retiree benefits. If Detroit was a company, they would be filing Chapter 7, not Chapter 11. Given the crime rate in the city, I don't know what brings business back into Detroit. Almost on cue, Fitch, which recently cut Chicago's rating, is predicting there will be more muni downgrades than upgrades in 2014.

Here is what the CFPB is going to be up to over the next few months.

Bill Gross's Investment Outlook is pretty good:  If you look at asset prices, there is an implied growth rate built in. But that implied growth rate is based in part on risk-free asset prices that are being manipulated by the Fed. That implied growth hasn't happened yet, and it may never materialize. Then what?