Morning Report - Housing starts disappointing

Vital Statistics:

	Last	Change	Percent
S&P Futures	1925.5	-3.7	-0.19%
Eurostoxx Index	3262.3	0.8	0.03%
Oil (WTI)	106.4	-0.5	-0.45%
LIBOR	0.231	0.000	0.17%
US Dollar Index (DXY)	80.62	0.149	0.19%
10 Year Govt Bond Yield	2.63%	0.03%
Current Coupon Ginnie Mae TBA	106.3	-0.3
Current Coupon Fannie Mae TBA	105.2	-0.1
BankRate 30 Year Fixed Rate Mortgage	4.2

Markets are lower this morning after housing starts disappoint. Bonds and MBS are down on the CPI data. The FOMC meeting starts today.

Consumer prices rose .4% in May versus expectations of a .2% rise. Ex food and energy, they were up .3%. On a year-over-year basis, prices are up 2%, which is more or less in line with the Fed's targets. 

Housing starts came in a touch over 1 million versus expectations of 1.03 million. Building permits were much weaker than expected, at 991k vs 1.05 million expected. We need housing construction for any sort of meaningful "recovery summer." It is looking more and more like that isn't going to happen. Permits fell off particularly hard in the notoriously volatile multi-fam segment. 

Part of the issue with the housing market is the first time homebuyer. While the issues of student loan debt and a lousy job market are considered the main driver, there are myths that just refuse to die. According to research firm Zelman and Associates, people believe on average that lenders require a down payment of 11% to 15%. 39% or respondents believe you need a 15% down payment or more. The industry needs to do more to get the word out that there are programs like FHA and VA which require little to no down payment. 

Yesterday, the IMF downgraded its estimate for 2014 US GDP growth to 2% and said that rates will stay at zero until late 2015. Right now, the Eurodollar futures are pegging the Fed Funds rate to be 75 basis points by the end of 2015. This forecast is lower than the Fed's own forecast. Note the Fed will release new forecasts for unemployment, inflation, and GDP growth in the FOMC release tomorrow. 

There has been a surprisingly low amount of grumbling from the Left over the Medtronic / Covidien transaction - where Medtronic is buying Ireland-based Covidien basically for the tax domicile. Corporate taxes in Ireland are 12%, versus the statutory tax rate of 35% plus state and local taxes which can push it to 40%. Ireland, like most other countries, has a territorial tax system where it only taxes income earned in its country. The U.S. taxes all overseas earnings once they are repatriated. Plus, obamacare slapped a 3.8% surtax on medical devices. It turns out that stocks that pursue these tax avoidance strategies outperform. Go figure. 

Scratching your head about why the 10 year bond is rallying even as QE is being withdrawn and the economy is heating up? Wrap your head around this: Japanese consumer price inflation is rising at 3.4% per year. The yield on their 10 year bond? 73.5 basis points. The Bank of Japan has been buying JGBs in their own form of QE and has bought enough to effectively corner the market. When you talk about US bonds being in a bubble, they are nothing compared to Japan's. File this one in the "market can stay irrational longer than you can remain solvent." file. Right now markets all over the world are pricing in a 100% probability that central banks worldwide can stick the landing and return us to a normal interest rate environment without any major dislocations. If you are a bond investor, understand this: Central banks all over the world are attempting to create inflation. At some point they will succeed. Inflation won't matter until it matters. And then it will be the only thing that matters.