Morning Report - Flat retail sales

Vital Statistics:

	Last	Change	Percent
S&P Futures	1936.7	6.3	0.33%
Eurostoxx Index	3048.3	24.5	0.81%
Oil (WTI)	97.42	0.0	0.05%
LIBOR	0.234	-0.001	-0.55%
US Dollar Index (DXY)	81.44	-0.056	-0.07%
10 Year Govt Bond Yield	2.43%	-0.02%
Current Coupon Ginnie Mae TBA	106.5	0.1
Current Coupon Fannie Mae TBA	105.6	-0.5
BankRate 30 Year Fixed Rate Mortgage	4.43

Stocks are higher this morning after a disappointing retail sales report means the Fed is not going to be increasing rates any time soon. Bonds and MBS are up.

Mortgage Applications fell 2.7% last week as purchases fell 1% and refis fell 4%. The average 30 year fixed rate mortgage was steady at 4.35% despite a 7 basis point rally in the 10 year. Refis were 54% of loans. We have seen mortgage rates and TBAs not follow the bond market rally lately. TBAs did follow bonds higher, so mortgage rates should have dropped. According to the Fed's Senior Loan Officer Survey, credit standards are loosening on mortgages, which means more higher rate loans. 

Retail Sales were flat in July, below the .2% Street forecast. Ex-autos and gas, they rose .1%, lower than the Street forecast of 0.4%. Soft retail sales are not a recipe for inflation, so the Fed will probably continue to be sanguine about inflationary risks to the economy. Note that we are in the middle of the back-to-school shopping season, which is second only to the holidays in importance and usually predicts whether holiday shopping will be strong or muted. 

Note that the Fed is starting to think about the idea of secular stagnation - an idea that was in vogue during the Great Depression and is starting to come back. The idea is that a maturing economy begets a lack of investment ideas, which are necessary to fuel future growth. Fed Vice Chairman Stanley Fischer hinted at the possibility in a recent speech. The upshot: a mid-2015 tightening might be the earliest possibility, and the Fed is probably going to err on the side of being too loose. I continue to believe that the Fed isn't going to move in a meaningful manner until we start seeing wage inflation of 4%. And we aren't even remotely close to seeing that. 

FHFA is seeking input from market participants on a single TBA for Fannie and Freddie loans. This is part of the move towards a common securitization platform, which is going to be a multi-year project. Expect Ginnie Is and Ginnie IIs to be merged as well, although Ginnie Is have been trading behind IIs for a while now, so it is kind of moot.

We have been hearing about how income inequality has been an issue in this country. It turns out that the income gap between the richest and poorest metropolitan regions is at a record as well. Places like Austin, TX are experiencing a boom, while rust belt cities continue to struggle. The high income areas, like Boston and San Jose are seeing the biggest price appreciation, and the most apartment construction. Which means these areas are seeing the most jobs in construction, which is a big employer of lower and middle income people. The places that need jobs the most - places like Akron OH, for example, are seeing little home price appreciation, and therefore little construction. Which means job growth remains depressed in these areas, and this accounts for the fact that housing starts remain mired at a level that is about 30% below what they should be.