Morning Report - What happens if China hits the wall?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1883.4	0.5	0.03%
Eurostoxx Index	3198.1	10.6	0.33%
Oil (WTI)	99.33	-0.3	-0.29%
LIBOR	0.23	0.000	0.11%
US Dollar Index (DXY)	80.24	0.022	0.03%
10 Year Govt Bond Yield	2.80%	-0.01%
Current Coupon Ginnie Mae TBA	104.8	0.0
Current Coupon Fannie Mae TBA	103.6	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.45

Markets are flattish after initial jobless claims jumped to 326k. Bonds and MBS are up small.

Challenger and Gray reported that announced jobs cuts are down 30% from a year ago. Most businesses seem to be picking up, and the financial industry has already downsized for the brave new no refi world. 

The consensus seems to be that the Fed starts hiking rates in late 2015. What could delay it? Well, another recession here, which doesn't seem to be in the cards. Or, a China implosion, and it looks like the smart money (Soros, Chanos etc) are betting on one. China has been growing so fast for so long, that it pretty much seems inevitable. It seems like periods of rapid growth foment real estate bubbles and a mountain of debt, which seem to culminate in a violent crash (called the Minsky Moment). We had one in the 1930s after a period of rapid growth post WWI, Japan had theirs in 1989 after a great two-decade run in the 70s and 80s, and China has had an incredible run since Mao Zedong's death. 

If China has their Minsky moment, what will be the fallout? The biggest one, IMO, will be a collapse of commodity prices. Second, China will try and export their way out of the collapse. Finally, they may end up dumping their properties in the US and Canada. We could see some pricing pressures at the high end of the market (remember in crises, you sell what you can, not necessarily what you want to). None of this would be inflationary, in fact China will be exporting deflation. This will give the Fed conniptions as they hope the US economy strengthens enough to reach escape velocity from a global deflationary spiral. In other words, if China hits the wall, the Fed will be very reticent to raise rates. 

There were 43,000 completed foreclosures in Feb 2014, down 15% year over year, according to CoreLogic. The foreclosure inventory is down to 752k homes down 35% from a year ago. The judicial states (primarily FL, NY, and NJ) still have the biggest foreclosure percentages.