Morning Report - Lots of economic data

Vital Statistics:

	Last	Change	Percent
S&P Futures	1876.9	-1.0	-0.05%
Eurostoxx Index	3198.5	0.1	0.00%
Oil (WTI)	99.17	-0.6	-0.57%
LIBOR	0.223	-0.001	-0.22%
US Dollar Index (DXY)	79.5	0.027	0.03%
10 Year Govt Bond Yield	2.65%	0.01%
Current Coupon Ginnie Mae TBA	105.9	0.0
Current Coupon Fannie Mae TBA	104.7	0.0
BankRate 30 Year Fixed Rate Mortgage	4.26

Markets are flattish after some decent economic data. Bonds and MBS are flattish. Markets should be somewhat less liquid today as much of the world celebrates Labor Day.

April Auto sales continue to stream in - GM reported a better than expected increase, while Ford reported a drop. Nissan literally blew the doors off with an increase of 18.3%.

The ISM Manufacturing Index came in better than expected, at 54.9. Employment is accelerating, and customers' inventories are very low, which portends future production (and economic growth). If you annualize out the ISM April reading, it would correspond to a real GDP growth rate of nearly 4%. Of course manufacturing isn't the percent of the economy it used to be, but still...

Construction spending rose .2% in March, after February was revised downward to a .2% decline. On a year-over-year basis, it is up 8.4%. Residential construction rose .7% month-over-month and is up 15.2% year over year. Of course with low double digit increases in average selling prices, that doesn't necessarily correspond to big unit volume, which is why employment lags. Public construction was down .6% month-over-month and is down .8% year over year. Of course after this past winter, the Northeast is going to see a lot of construction on the roads, fixing all the potholes.

Personal Incomes rose .5% in March and Personal Spending rose .9%. Part of the increase in spending is obamacare-related so it isn't really an apples-to-apples comparison. Still, it was a good number, but probably represents some pent-up demand from the bad winter.

Challenger and Gray announced job cuts rose 5.7%, but are still pretty low, running at a 40k pace. Telecom and Automotive sectors led way. Note these are announced job cuts (a press release). Often these cuts never materialize, or are over a long period of time.

Initial Jobless Claims rose to 344k - small increase from last week, but still a pretty good number.

The FOMC met yesterday and maintained interest rates while cutting another $10 billion a month out of asset purchases. Stocks and bonds rallied on the statement. They committed to maintaining interest rates below long-term levels even after unemployment and inflation reach the Fed's target rates. The Fed noted that economic activity has picked up recently, which means the early Q1 slowdown was probably indeed weather-related and not indicative of an overall economic slowdown.

Credit standards are easing again, as Wells cut its minimum credit score for conforming loans to 620 from 660. TD has lowered down payments to 3% without requiring mortgage insurance. When there is not much business to go around, people start reaching for yield. Interesting stat: almost 16% of the mortgages for home purchases went to homebuyers with DTIs > 43. This is up from 2012. I suspect much of these are low LTV, asset-rich jumbo borrowers, where the ability to repay is pretty strong in spite of the high DTIs.

In a story that seems to be getting a lot of press, The Chinese economy is set to become bigger than the US this year. This sort of analysis is difficult to begin with, because China manipulates its exchange rate so economists use Purchasing Power Parity (aka the Big Mac Index) to back out what China's GDP is. The Chinese real estate bubble is bursting as we speak, so this may be short-lived as their GDP will fall in real terms and growth will be slow as they dig out in the aftermath. Rapidly growing countries seem to have these bubble episodes - we did in the 20s, Japan did in the 80s, and China has over the past couple decades. Booms create mal-investments which sow the seeds for the boom's destruction.