Morning Report - Consumer Confidence up, Consumer Spending down

Vital Statistics:

	Last	Change	Percent
S&P Futures	1999.2	2.5	0.13%
Eurostoxx Index	3165.0	0.6	0.02%
Oil (WTI)	95.03	0.5	0.51%
LIBOR	0.235	-0.004	-1.47%
US Dollar Index (DXY)	82.49	0.010	0.01%
10 Year Govt Bond Yield	2.35%	0.01%
Current Coupon Ginnie Mae TBA	106.5	-0.1
Current Coupon Fannie Mae TBA	105.9	0.0
BankRate 30 Year Fixed Rate Mortgage	4.06

Markets are flat this morning on no real news. Bonds and MBS are flat as well.

I don't think bonds are closing early today, but for all intents and purposes they are as most of the Street will be gone by noon ahead of the 3 day weekend. 

The ISM Milwaukee index fell to 59.6, however the Chicago Purchasing Managers Index rose to 64 and the University of Michigan Consumer Sentiment Survey rose to 82.5. 

Ready to pop the champagne over the good consumer sentiment numbers? Well, it has yet to flow through to actual spending. Personal Spending fell .1% in July, however the reason was falling energy prices. Ex-food and energy, spending increased .1%. That said it isn't that strong of a number. Personal Income rose .2%.

One of the interesting features of this recovery has been the disconnect between the reported unemployment rate and the actual health of the labor market. While unemployment keeps falling, the labor market still doesn't feel much better. The Fed is now looking at an index comprised of 24 indicators called the Labor Market Conditions Index (LMCI) to describe the health of the labor market. There are two pieces to the index - the current level of activity and momentum. The momentum indicator gives you clues as to where the market is going in the future. Here is what it looks like at the moment - about a year away from normalcy.

Short missive as there is not much going on. Have a happy Labor Day everyone.

Morning Report - 2Q GDP revised upward

Vital Statistics:

	Last	Change	Percent
S&P Futures	1988.7	-8.4	-0.42%
Eurostoxx Index	3164.7	-29.8	-0.93%
Oil (WTI)	94.58	0.7	0.75%
LIBOR	0.238	0.000	-0.13%
US Dollar Index (DXY)	82.51	0.086	0.10%
10 Year Govt Bond Yield	2.33%	-0.03%
Current Coupon Ginnie Mae TBA	106.6	0.1
Current Coupon Fannie Mae TBA	105.9	0.1
BankRate 30 Year Fixed Rate Mortgage	4.08

Markets are lower this morning on tensions in Ukraine. Bonds and rallying as well. 

Some strong economic data this morning, with the second revision to 2Q GDP coming in at 4.2%. Consumption rose to 2.5% and the PCE price index (the Fed's preferred inflation indicator) came in at 2.1%, with the core at the Fed's target rate of 2%. 

Initial jobless Claims came in at 298,000, another strong number. The Bloomberg Consumer Comfort Index rose to a 5 week high. 

Pending Home Sales rose 3.3% in July, but are down 2.7% year-over-year.

The Ellie Mae Origination Insight Report is out. Refis dropped to 32% of all loans in July. FHA accounted for 20%, Conventional 64%, VA 11% and other 5%. The average FICO dropped to 727.

Fannie Mae has taken down their estimate for housing in 2015. They dropped their estimates for housing starts and new home sales by 17%. People hoping that 2015 is the breakout year in housing are going to be disappointed.

New rules on PMI could raise rates on average 15 basis points. 

The elderly are finding the amount they owe on their mortgages increasing. Not sure how much of this is due to reverse mortgages. The mortgage-burning party seems to be a thing of the past.

Consumers have confidence, but not the cash to do anything about it. This is why the consumer confidence numbers look good, but spending numbers are not. Asset prices can only do so much - the chief driver of spending is wages, not asset prices. In fact, home equity extraction during the bubble years masked the overall weakness in wage growth. 

Morning Report - Slow news day

Vital Statistics:

	Last	Change	Percent
S&P Futures	1998.2	-0.4	-0.02%
Eurostoxx Index	3194.6	-3.0	-0.09%
Oil (WTI)	93.98	0.1	0.13%
LIBOR	0.238	0.004	1.49%
US Dollar Index (DXY)	82.49	-0.159	-0.19%
10 Year Govt Bond Yield	2.37%	-0.03%
Current Coupon Ginnie Mae TBA	106.6	0.2
Current Coupon Fannie Mae TBA	105.9	0.1
BankRate 30 Year Fixed Rate Mortgage	4.23

Stocks are higher this morning as the S&P 500 crossed the 2000 level yesterday. Bonds are following the rally in Europe. The German 10 year hit 90 basis points this morning.

Slow news day. Going to be a short missive because there isn't much to talk about.

Mortgage Applications rose 2.8% last week. Purchases rose 2.6% while refis rose 2.8%. Refis were 55.7% of all mortgages originated. 

As European economies continue to struggle, the speculation is that European Central Bank Head Mario Draghi will announce some sort of quantitative easing early in September. Blackrock was just appointed as the ECB consultant for the ABS purchase program, it looks like the ECB is serious about going down this route. 

The 2008 meltdown was worse than the Great Depression, according to Ben Bernanke. "Of the 13 most important financial institutions in the United States, 12 were at risk of failure within the period of a week or two."

Morning Report - Consumer Confidence continues to rise

Vital Statistics:

	Last	Change	Percent
S&P Futures	1997.0	2.1	0.11%
Eurostoxx Index	3175.9	10.4	0.33%
Oil (WTI)	93.69	0.3	0.36%
LIBOR	0.238	0.004	1.49%
US Dollar Index (DXY)	82.54	-0.008	-0.01%
10 Year Govt Bond Yield	2.38%	-0.01%
Current Coupon Ginnie Mae TBA	106.5	0.0
Current Coupon Fannie Mae TBA	105.8	0.0
BankRate 30 Year Fixed Rate Mortgage	4.24

Rallies in European stocks and bonds are dragging US stocks and bonds along for the ride. Remember the PIIGS? The US 10 year yields just a touch less than Italian sovereign debt and about 20 basis points more than Spanish sovereign debt. Let that sink in.

Durable goods orders were all over the map due to a big jump in aircraft orders. The headline number increased 22.6%, however the number most pros focus on - Capital Goods Orders Non-defense / ex-aircraft was down .5%, however June was revised up big, from 1.4% to 5.4%.

The Richmond Fed Manufacturing Index rose to 12 from 7. Consumer Confidence rose to 92.4 in August, from 90.3 the prior month. This is a post-recession high and we are approaching historical normalcy. Lets see if this translates into good personal spending numbers on Friday.

It is official: Burger King is buying Tim Horton's and plans to move its headquarters up north. Expect the usual kvetching about "corporate patriotism" out of the usual suspects. That said, Walgreens was jawboned into not moving their headquarters, but the stock was slammed on the decision. I am curious as to whether the left will go after the company by threatening a boycott or will go after Burger King Worldwide's biggest shareholders - 3G and Pershing Square. That said, 3G is a Brazilian investment firm, and who knows if Ackman holds BKW in its onshore or offshore accounts. BKW could already be more or less foreign owned to begin with. 

House prices are down month-over-month and year-over-year according to Case-Shiller. These are the seasonally-adjusted numbers - the non-seasonally adjusted numbers were still up .9% month over month.

Separately, home prices continue to rise, according to FHFA, with the index up .4% from May. Prices are up 5.1% year-over-year. The FHFA index is different than Case-Shiller in that it only looks at homes with a conforming mortgage, which means it excludes distressed and high end home. It is more of a central tendency index and tends to be less volatile than Case-Shiller.

Morning Report - Lots of data this week

Vital Statistics:

	Last	Change	Percent
S&P Futures	1996.2	8.4	0.42%
Eurostoxx Index	3136.9	38.4	1.24%
Oil (WTI)	93.71	0.1	0.06%
LIBOR	0.238	0.004	1.49%
US Dollar Index (DXY)	82.54	0.206	0.25%
10 Year Govt Bond Yield	2.39%	-0.01%
Current Coupon Ginnie Mae TBA	106.4	0.0
Current Coupon Fannie Mae TBA	105.8	0.1
BankRate 30 Year Fixed Rate Mortgage	4.28

Markets are higher this morning on no real news. Bonds and MBS are up small.

Lots of economic data this week: Tomorrow we get durable goods, the FHFA Home Price Index and Case-Shiller. Thursday, we get the second revision to second quarter GDP, and Friday we get Personal Income and Personal Spending.

On GDP, note that the Street is forecasting the advance estimate of +4.0% gets revised downward to +2.4%. If that ends up being the case, we will have had almost no GDP growth for the first half of 2014. 

Why have the strategists gotten it so wrong with their bond market predictions? (Mea Culpa - include me in that camp). One explanation is that they are looking only at the US and ignoring the weakness emanating out of Europe. The second explanation is that inflation just cannot be found - the rally in the dollar has depressed commodity prices and there is little to no upward pressure on wages. This also might help explain why the Fed is considering hitting some bids with its paper once QE ends. 

Another corporate inversion story: Burger King is apparently in talks to buy Canadian-based Tim Horton's. Note Walgreen's decided to scrap their plans for moving their headquarters and the stock got demolished. 

The takeaway from Jackson Hole? Labor markets need to heal more before the economy can weather higher interest rates. Wage growth is flat right now. In order to get to the Fed's 2% target on inflation, we would need to see wage growth of around 4%, because productivity-driven increases are non-inflationary. This just goes to show how far we have to go. That said, the economic staff at the Fed has taken down its estimate of the potential non-inflationary GDP growth, so there might not be as much slack as people think. 

Think home flipping is dead? Think again.

Morning Report - How much slack is really in the labor market?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1987.7	-1.9	-0.10%
Eurostoxx Index	3102.4	-22.2	-0.71%
Oil (WTI)	93.17	-0.8	-0.84%
LIBOR	0.235	0.001	0.21%
US Dollar Index (DXY)	82.18	0.029	0.04%
10 Year Govt Bond Yield	2.40%	-0.01%
Current Coupon Ginnie Mae TBA	106.5	0.0
Current Coupon Fannie Mae TBA	105.8	0.0
BankRate 30 Year Fixed Rate Mortgage	4.28

Markets are lower this morning on no real news. Bonds and MBS are flat.

Dull Summer Friday with no economic news. Janet Yellen is scheduled to hold a press conference at 2:30 EST, so there is the possibility of something coming out that could move bonds. 

The Washington Post has a breakdown on the Bank of America / DOJ settlement. Although the headline amount is $17 billion, it looks like they will actually pay closer to $12 billion. Of the homeowner relief, they may run out the clock on principal modifications and drag them out, as JP Morgan is doing. 

Nonvoting St Louis Fed President James Bullard argues there is less slack in the labor market than the Fed's statements imply. He argues that it is the unemployment rate and payroll growth that matters, and that the labor force participation rate doesn't add much information and is outside the purview of monetary policy. He is probably correct in that regard - I don't really see how 25 basis points one way or another on the Fed Funds rate is going to affect the long-term unemployed. That said, I don't think they move meaningfully until we start seeing wage inflation. That doesn't rule out a symbolic increase in the Fed Funds rate sometime next year. Separately, Charles Plosser thinks we should raise rates this year.

Morning Report - FOMC minutes data dump

Vital Statistics:

	Last	Change	Percent
S&P Futures	1985.4	2.1	0.11%
Eurostoxx Index	3110.0	26.5	0.86%
Oil (WTI)	93.58	0.1	0.14%
LIBOR	0.234	0.002	0.99%
US Dollar Index (DXY)	82.22	-0.008	-0.01%
10 Year Govt Bond Yield	2.43%	0.00%
Current Coupon Ginnie Mae TBA	106.3	3.0
Current Coupon Fannie Mae TBA	105.6	0.0
BankRate 30 Year Fixed Rate Mortgage	4.25

Markets are higher after another sub 300k initial jobless claims number. Bonds and MBS are flat.

Existing home sales rose to a 5.15 million annual pace, according to NAR. Median Home Prices are up 4.9% to $222,900. Distressed sales made up 9% of all sales, the lowest percent since 2008. First time buyers inched up to 29%, and all-cash buyers ticked down to 29%. Days on Market increased to 48. 

In other economic data, the Index of Leading Economic Indicators ticked up to .9% from an upward-revised .6% in June. The Philly Fed Manufacturing Index was strong at 28. 

There was nothing earth-shattering in the FOMC minutes. One thing did jump out at me, and it was the fact that they lowered their estimate for the potential GDP growth rate. They revised their GDP forecast downward and also said that unemployment was closer to its natural rate. This effectively lowered the "speed limit" of the U.S. economy, and in a way, waves the white flag over the plight of the long-term unemployed. Of course there is probably not much monetary policy can do for the long-term unemployed in the first place, but that is a separate issue. I guess the Fed is seeing wage growth somewhere (not sure where, aside from skilled labor), and they think we are closer to seeing inflation flare up for the whole economy. The punch line is that, at the margin, rates may be going up sooner than anticipated. 

Speaking of inflation, thanks to the recent rally in the US dollar, commodity prices are getting slammed. Oil is down 13% in the last two months, natural gas is down 20%, corn is down 17%, and bonds are rallying. Not seeing where the inflation is going to come from. Fun fact: Spanish 10 year bond yields are now lower than the US 10 year. Remember the PIIGS of the European Sovereign Debt Crisis? Their bond yields are generally in line with ours: Portugal is 3.26%, Italy is 2.59%, Ireland is 1.88%, Greece is 5.78% and Spain is 2.39%. Kind of amazing when you think about it. The point is that you can't look at US rates in a vacuum - worldwide sovereign yields are rallying, and it is pulling US yields lower as well. 

Bank of America settles with the DOJ for $17 billion. BOA's purchase of Countrywide will probably go down in history as one of the most ill-advised mergers ever, along with Time Warner's purchase of AOL, and Warren Buffet's purchase Johns Manville's asbestos liability stream. Separately, while the government dropped its criminal case against Angelo Mozillo, they are still going after him in a civil case.

Morning Report - Black Rock vs Dr. Cowbell

Vital Statistics:

	Last	Change	Percent
S&P Futures	1974.7	-2.5	-0.13%
Eurostoxx Index	3069.7	-21.5	-0.69%
Oil (WTI)	95.65	1.2	1.24%
LIBOR	0.232	0.000	0.00%
US Dollar Index (DXY)	82.06	0.181	0.22%
10 Year Govt Bond Yield	2.41%	0.01%
Current Coupon Ginnie Mae TBA	106.3	-3.0
Current Coupon Fannie Mae TBA	105.6	-0.1
BankRate 30 Year Fixed Rate Mortgage	4.25

Stocks are lower this morning on no real news. Bonds and MBS are flat.

Mortgage Applications rose 1.4% last week. Purchases fell .4%, while refis rose 2.7%. The 30 year fixed rate mortgage finally fell six basis points after stubbornly resisting the moves in the bond market. 

Later on today, we will get the FOMC minutes. While there were no changes to the economic forecasts, the markets will be looking to see if the circle of hawks is growing. 

Job growth is mainly at the low end of the pay scale. But the wage growth is mainly at the high end. The US labor market is incredibly bifurcated at the moment. This is certainly what keeps Janet Yellen up at night, although the bigger question is whether the Fed can really do anything about it. 

BlackRock chief investment strategist Russ Koesterich is saying that bonds have it right, stocks have it wrong with respect to the view of the economy. The higher debt levels will act as a drag on growth for the next decade or two. In other words, we are Japan, and Reinhart / Rogoff are right. This is of course heresy to Dr. Cowbell, who believes the solution to the economic morass is to borrow more (since rates are so low) and to spend it on infrastructure. Japan did exactly what Krugman wanted, and took their debt to GDP ratio to 2.2x and has had little to no economic growth for a generation. As a point of reference, our debt to GDP ratio just over 106%, however the Fed owns about a quarter of that (through QE) so it is really debt we owe ourselves.

Foreclosure starts and Delinquencies ticked up in June, according to Black Knight Financial Services (formerly known as Lender Processing Services or LPS). DQs increased to 5.7% from 5.62% in May, while foreclosure starts ticked up to 88.3k vs 86.3k a month before. On a year over year basis, foreclosures starts are down 19%. Inventory continues to be concentrated in the judicial states of NY, NJ, and FL. Short sale discounts continue to narrow, while the REO discount is flat. 

Morning Report - Good Housing Starts number

Vital statistics:

	Last	Change	Percent
S&P Futures	1972.7	5.2	0.26%
Eurostoxx Index	3089.2	15.7	0.51%
Oil (WTI)	95.94	-0.5	-0.49%
LIBOR	0.232	0.001	0.43%
US Dollar Index (DXY)	81.82	0.245	0.30%
10 Year Govt Bond Yield	2.36%	-0.03%
Current Coupon Ginnie Mae TBA	106.7	0.1
Current Coupon Fannie Mae TBA	105.7	0.1
BankRate 30 Year Fixed Rate Mortgage	4.38

Markets are higher this morning after housing starts hit the highest level in eight months and inflation at the consumer level remains muted. Bonds and MBS are up.

Housing starts in July were at a seasonally-adjusted annual rate of 1.09 million, which is 15.7% above June and almost 22% above last year. Building Permits were 1.05 million, up 8.1% month-over-month and up 7.7% year-over-year. Multi-fam drove the increase, although single fam did increase as well. Multi-fam starts are notoriously volatile. We saw big increases in the Northeast, while the Midwest was flat. The South and West were up slightly. Can't complain about the number, which was the highest in eight months. Still, "normalcy" is around 1.5 million units per year, which goes to show how depressed housing still is. We probably will not hit historical numbers until the first time homebuyer returns. 

The Consumer Price Index rose .1% in July, which is up 2% year over year. Ex food and energy, it rose 1.9% year over year. This cheered the bond market. 

The Despot reported earnings that beat estimates, with comp store sales up 5.8%. People are starting to spend money on home improvement. The stock is up about 4 bucks this morning.

What will the world's finance chiefs be talking about this week at Jackson Hole? First, don't look for any market-moving statements, but there is always the possibility. Second, the labor market and the issue of the economy's speed limit. Is it possible to have unemployment continue to fall without increasing the labor force participation rate? Are the long-term unemployed now permanently unemployed? If so, the amount of improvement we can expect to see without causing inflation is limited. FWIW, the most dangerous words in economics and financial markets are "this time is different." I am more sanguine than most.

Is the lock-in effect going to matter as rates rise? In other words, as rates rise, home buyers will experience an increase in their mortgage rates, which could prevent people from moving. If so, will this be a drag on mortgage production? Zillow convened a panel of experts who believe this effect will probably be muted. Unless we suddenly get a bout of hyperinflation, rates are probably moving up to 5% or so over the next few years. This is probably a gradual enough increase that it won't affect things too much.

Morning Report - Partially improving labor market

Vital Statistics:

	Last	Change	Percent
S&P Futures	1968.0	15.6	0.80%
Eurostoxx Index	3071.4	37.8	1.25%
Oil (WTI)	95.98	-1.4	-1.41%
LIBOR	0.232	0.001	0.43%
US Dollar Index (DXY)	81.57	0.149	0.18%
10 Year Govt Bond Yield	2.38%	0.04%
Current Coupon Ginnie Mae TBA	106.7	-0.1
Current Coupon Fannie Mae TBA	105.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.28

Markets are higher as European stocks rally. Bonds and MBS are down on decreasing pressure in Ukraine.

The National Association of Homebuilders Sentiment Index rose to 55, the highest level in seven months. 

This week will have some important data, with housing starts and building permits tomorrow, and the FOMC minutes on Wednesday. The minutes will be especially interesting as "lift off" (the Fed's euphemism for increasing rates) approaches. Finally, central bankers, finance ministers, and other officials will meet at Jackson Hole on Thursday. There will be the possibility of market moving quotes so be aware. 

The labor market is improving, at least at the higher end. Skilled labor is tough to find, and we are finally seeing some job growth in professional services. Low skilled labor and the long term unemployed are still struggling. Separately, part time workers who want to work full time are presenting a problem for the Fed. Which means don't focus on the unemployment rate, focus on wage growth when thinking about the Fed's posture towards interest rates. 

What has QM succeeded at doing? Raising compliance costs. Has it changed business practices? Nope.

Morning Report - Initial Jobless claims the lowest since the late 60s

Vital Statistics:

	Last	Change	Percent
S&P Futures	1957.4	3.9	0.20%
Eurostoxx Index	3088.2	30.1	0.98%
Oil (WTI)	95.74	0.2	0.17%
LIBOR	0.234	0.001	0.21%
US Dollar Index (DXY)	81.46	-0.126	-0.15%
10 Year Govt Bond Yield	2.39%	-0.01%
Current Coupon Ginnie Mae TBA	106.6	0.0
Current Coupon Fannie Mae TBA	105.8	0.0
BankRate 30 Year Fixed Rate Mortgage	4.3

Stocks and Bonds are up small on no real news. MBS are flat.

The Empire Manufacturing Survey weakened in August, but is still at reasonably strong levels. Industrial Production rose .4% and Manufacturing Production rose 1% in August. Capacity Utilization ticked up to 79.1%. All-in-all, reasonably strong numbers.

Inflation at the wholesale level remained muted in July, with the Producer Price Index rising .1% month-over-month and 1.7% year-over-year. Lower energy prices depressed the headline number - ex food and energy, we were up .2%, still well below what the Fed would like to see. 

Consumer Confidence dipped in August, according to the University of Michigan. 

Bloomberg has a good article on the contradictory indications in labor market. Initial Jobless Claims as a percent of the population are about .12% of the population, which is the lowest since the late 1960s. Yet the labor force participation rate is stuck at levels we haven't seen since the 1970s. Separately, the JOLT job openings rose to 4.7 million, the highest since early 2001. So you have a situation where the numbers are saying one thing, yet common sense tells you the labor market is still very weak. As a result, the hawks have a much different view of what is going on than the doves. The best summation is from Edmund Phelps, a Columbia University Professor: "The difference of opinion is whether we're in a state that's about as good as it's going to get or whether we're in a very poor state, but with good policies and a bit of luck we'll be able to do a lot better." This is essentially the "speed limit" conundrum - has the Great Recession basically lowered the speed limit for the economy? If it has, then there really isn't much more the Fed can do, and keeping rates at the zero bound is the wrong thing to do. On the other hand, liberal economists want the Fed to keep rates as low as possible for as long as possible, arguing that the Fed can easily deal with inflation if and when it ever comes up. 

St. Louis Fed President James Bullard would like to see the Fed start hiking rates in Q1.

Morning Report: Head of the MBA explains why credit is so tight

Vital Statistics

	Last	Change	Percent
S&P Futures	1945.0	0.3	0.02%
Eurostoxx Index	3054.7	-1.4	-0.05%
Oil (WTI)	97.17	-0.4	-0.43%
LIBOR	0.233	-0.001	-0.30%
US Dollar Index (DXY)	81.45	-0.143	-0.18%
10 Year Govt Bond Yield	2.40%	-0.01%
Current Coupon Ginnie Mae TBA	106.6	0.1
Current Coupon Fannie Mae TBA	105.7	0.1
BankRate 30 Year Fixed Rate Mortgage	4.27

Markets are flattish on no real news. Bonds and MBS are higher.

Initial Jobless Claims rose to a six week high at 311,000. That said, initial jobless claims are pretty much back to boom-time levels. Consumer Comfort ticked up last week, according to Bloomberg.

Import prices fell .2% month-over-month and rose .8% on an annual basis. Oil drove the decrease. Ex food and fuels, import prices were flat. 

The latest CoreLogic Market Pulse is out. Home prices increased 7.5% year-over year, while foreclosure inventory is down 35%. However, foreclosure inventory is still not far off peak levels in the judicial states of New Jersey and New York. 

In another warning sign for the economy, Wal-Mart reported flat same store sales and cut its forecast for the year. The low-end consumer is still trying to pick themselves up off the mat. Health care costs were a factor in the revision as well. Separately, Cisco is cutting 6,000 jobs as it struggles to compete with software that manages data and internet traffic. 

The head of the Mortgage Bankers Association schools the left explains why credit is so tight. Having exposure to treble damages (in other words three times the loan value) if a FHA loan goes bad and the government finds an error in your file tends to dissuade people from making these loans and is why Jamie Dimon fired a shot across the bow of the government on FHA loans. Meanwhile, the sky has turned legal pad yellow as the lawsuits against the industry continue unabated.

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. 

Morning Report - Small Business Optimism still has a ways to go

Vital Statistics:

	Last	Change	Percent
S&P Futures	1931.2	-1.4	-0.07%
Eurostoxx Index	3039.6	-7.9	-0.26%
Oil (WTI)	97.28	-0.8	-0.82%
LIBOR	0.235	0.002	0.86%
US Dollar Index (DXY)	81.59	0.120	0.15%
10 Year Govt Bond Yield	2.42%	-0.01%
Current Coupon Ginnie Mae TBA	106.4	0.0
Current Coupon Fannie Mae TBA	105.5	0.3
BankRate 30 Year Fixed Rate Mortgage	4.26

Markets are lower this morning on no real news. Bonds and MBS are flat

Job openings increased slightly to 4.7 million in June, up about 100k from the May number. The hires rate was 3.5%, and the separations rate was 3.3%. Quits were 1.8% and layoffs were 1.2%. The best industries for hiring: manufacturing, leisure and hospitality, and professional / business services. Construction was actually down a little over the year. FWIW, the home builders have all been lamenting the lack of skilled labor. 

The NFIB Small Business Optimism Index slipped in July from 96.4 to 95.7. We are still well below any semblance of "normalcy" in the small business arena. Small business added .01 workers per firm in July, the 10th consecutive positive month. That said, capital expenditures remain low, and sales are deteriorating. It is hard to reconcile a relatively glum NFIB survey with the idea that the S&P 500 is just off record highs. Does small business need to catch up with the big multinationals, or is the stock market being levitated by the Fed and thus vulnerable once the Fed takes the punch bowl away? IMO the answer is "yes."

Of course the Fed may not be in any rush to raise interest rates. Federal Reserve Vice Chairman Stanley Fischer was warning about slow growth in the future. Bottom line: until you start to see wage inflation, you shouldn't worry too much about the Fed.

FHA head Carol Galante is stepping down as FHA Commissioner at the end of the year and returning to academia. Biniam Gebre, General Deputy Assistant Secretary for Housing will take over the role as Acting Commissioner. 

Bill Gross has been selling Treasuries and MBS in the PIMCO Total Return Fund. He rotated into non-US developed debt and held emerging market debt steady. Good trade as Euro sovereigns have been on a tear lately. 

As if the first time homebuyer didn't have enough issues with student loan debt and tight credit, they face another challenge: limited inventory at the low end of the price range. The number of US homes for sale in the bottom third of the market - below $198,000 - fell 17% in June compared to a year earlier, according to Redfin. The supply rose 3% in the middle market and 15% in the top third. Blame professional investors who are snapping up low-priced properties to turn into rentals. Prices are rising too, with the low end jumping 15%, the middle increasing 13% and the top end increasing 9%. 

Morning Report - Is the labor market at a tipping point?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1933.7	10.0	0.52%
Eurostoxx Index	3038.1	31.3	1.04%
Oil (WTI)	97.61	0.0	-0.04%
LIBOR	0.235	0.002	0.86%
US Dollar Index (DXY)	81.43	0.038	0.05%
10 Year Govt Bond Yield	2.42%	0.00%
Current Coupon Ginnie Mae TBA	106.4	0.0
Current Coupon Fannie Mae TBA	105.4	0.0
BankRate 30 Year Fixed Rate Mortgage	4.25

Markets are higher this morning on easing international tensions. Bonds and MBS are flat.

Not a lot of economic data this week - the highlights will be industrial production and capacity utilization on Friday and retail sales on Wednesday. Earnings season is winding down, with mainly the retailers left.

Goldman Sachs looked at student loan debt and the Millennial generation to determine how much student loan debt inhibits home ownership. It looks like $50,000 worth of debt is the tipping point - young adults with more than that in debt have a homeownership rate that is estimated to be 8 percentage points lower than graduates with less than $50,000 in debt. The conclusion of the study is this: The benefits of a college degree outweigh the costs, provided the degree helps boost income, and the student loan debt is not too large.

Bloomberg has a good backgrounder on the changing dynamics of the labor market. The balance of power is shifting more towards employees from employers. The missing piece of the puzzle has been wage inflation, and we may finally be at that point. Separately, eHarmony, the dating site, is getting into the career business.

Confounded by the rally in bonds this year. You are not alone.

Ellie Mae is buying AllRegs for $30 million in cash.

Stonegate reported second quarter numbers last week. Originations grew 37% versus Q1 and were up 59% year-over-year. These are not "apples-to-apples" numbers are Stongate bought Medallian and Nationstar's wholesale business. Gain on sale margins increased 23 basis points. 

Morning Report - Strange revision to Q1 unit labor costs

Vital Statistics:

	Last	Change	Percent
S&P Futures	1909.9	4.7	0.25%
Eurostoxx Index	3015.6	2.8	0.09%
Oil (WTI)	97.53	0.2	0.20%
LIBOR	0.234	-0.003	-1.22%
US Dollar Index (DXY)	81.42	-0.100	-0.12%
10 Year Govt Bond Yield	2.39%	-0.02%
Current Coupon Ginnie Mae TBA	106.5	0.0
Current Coupon Fannie Mae TBA	105.9	0.1
BankRate 30 Year Fixed Rate Mortgage	4.24

Markets are higher this morning on no real news. Bonds and MBS are higher on international tensions. The 10 year bond yield is sporting a 2.3 handle this am. 

Nonfarm Productivity rebounded to +2.5% in the second quarter. The first quarter was revised downward to - 4.5%. Unit Labor Costs rose .6%, while the prior quarter was revised upward from +5.7% to + 11.8%. BLS attributes the increase in costs to the downward revision in productivity and and a big upward revision in compensation from .4% to 4.8%. Not sure why BLS's initial numbers were so far off.

Gutsy call on the bond market: Komal Sri-Kumar is predicting the 10 year will be trading with a 1 handle in six months. He thinks international tensions will be a drag on consumer confidence and he even suggests the Fed could re-start QE in 2015. 

FWIW, economists are predicting 2.9% GDP growth in Q3 and 2.6% growth in Q4. 

Wholesale sales and Wholesale inventories both came in lower than expected. 

Morning Report - Why the economic recovery has been so tepid

Vital Statistics:

	Last	Change	Percent
S&P Futures	1922.8	8.0	0.42%
Eurostoxx Index	3043.5	-6.9	-0.23%
Oil (WTI)	97.02	0.1	0.10%
LIBOR	0.237	0.000	0.00%
US Dollar Index (DXY)	81.51	0.063	0.08%
10 Year Govt Bond Yield	2.47%	-0.01%
Current Coupon Ginnie Mae TBA	106.3	0.0
Current Coupon Fannie Mae TBA	105.6	0.0
BankRate 30 Year Fixed Rate Mortgage	4.27

Markets are higher on earnings and a low initial jobless claims number. Bonds and MBS are down small.

Today is the first Thursday of the month, which means same store sales from the retailers. So far it looks like they are coming in a bit better than expected. 

Initial Jobless Claims came in at 289k, the lowest level in 8 years. Bloomberg's weekly consumer comfort index fell to 36.2. 

Mortgage delinquencies fell to 6.04% in the second quarter, according to the MBA. Foreclosures fell to 2.49%. 

Fannie Mae earned $3.7 billion in Q2, of which all went to Treasury. They modded 32,000 loans in the quarter as well. Delinquencies dropped to 2.05%. 

The next global economic headache is the bursting of China's real estate bubble and the potential for a protracted slowdown. There is a "buyer's strike" going on and so far developers are not lowering prices yet. So inventory builds. Inventory is 23 months worth of sales in the top 20 cities. To put that number into perspective, 6 months is considered normal, at least in the US. This is generally how busts begin. If it becomes "the one" then trophy properties in the US, particularly the West Coast will become vulnerable. 

The WSJ has a good piece on the weakness of housing, particularly housing construction. As we know, housing starts have been mired below 1 million units for what seems like forever. Normalcy is around 1.5 million units historically. When you look at residential construction's contribution to GDP, it is been about 2.5% - 3%, much lower than its pre-bubble level of 4% to 5%. Not only that, but residential construction usually leads an economy out of recession. I had hoped this would be the year starts got back to normalcy, but the homebuilders have seemed content to increase the top line through price hikes, not volume increases. 

Morning Report - Bonds hit yearly lows - are they telling us something about the economy?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1905.9	-7.1	-0.37%
Eurostoxx Index	3035.4	-36.8	-1.20%
Oil (WTI)	97.57	0.2	0.20%
LIBOR	0.237	-0.001	-0.42%
US Dollar Index (DXY)	81.62	0.294	0.36%
10 Year Govt Bond Yield	2.44%	-0.04%
Current Coupon Ginnie Mae TBA	106.3	0.1
Current Coupon Fannie Mae TBA	105.7	0.1
BankRate 30 Year Fixed Rate Mortgage	4.25

Stocks are lower after some bearish economic news out of Europe. Bonds and MBS are rallying. The 10 year bond is right at its May highs. 

Mortgage Applications increased 1.6% last week, according to the MBA.  Purchases fell 1.3% while refis increased 3.8%. It looks like overall mortgage rates increased 3 basis points or so over the week, while the 10 year was flat. Refis accounted for 55% of all loans, the highest percentage since May.

Wells is getting even more aggressive in the jumbo space. Minimum FICOs for a fixed rate jumbo have been lowered to 700 from 720. They also now do cash-out refis on jumbos and are buying jumbos on second homes on a correspondent basis. This is why the jumbo space is so competitive - banks can subsidize the jumbo mortgage and use that as an opening to pitch other bank services to the customer, particularly asset management. 

Walgreen's has decided to not pursue the tax inversion trade after intense political pressure from Washington. They will still purchase the remaining part of Alliance Boots, but will keep their headquarters in Chicago. This change will cost the company about a billion in excess taxes. If I was an arb, I would be nervously looking at my Abbvie / Shire position, and my Covidien / Medtronic positions, which are blowing out this morning.

Corporate inversions are going to be a political football going into midterms. First of all, nobody likes them. Companies don't really want to do them, but they have to honor their fiduciary responsibilities. Politicians on both sides of the aisle despise them. The tax code is going to be changed to prevent them in the future. However, Republicans don't feel much need to negotiate now, as they are pretty much guaranteed to keep the House and may in fact take the Senate. So their negotiating power can only get bigger. The Administration is pushing the "fix the inversion part of the tax code first, and then let's do full tax reform later" argument. Of course Obama knows that he is going to have to trade closing loopholes for lower rates, so he wants to sneak in a freebie before negotiations start. That is a nonstarter for Republicans. Which gives Obama an opportunity to demagogue the issue and paint Republicans as defenders of corporate tax dodgers as the consolation prize. 

Arbs are already reeling as Rupert Murdoch withdrew his offer for Time Warner last night. Fox also announced a big buy back, so arbs are getting killed on both sides of the trade. Tough, tough day to be in the risk arbitrage business...

Watch the data. The latest ISM numbers were quite strong, and Dallas Fed President Richard Fisher is predicting that rates will have to increase sooner than it projected in the June dot plot if this economic strength continues. Remember the Fed's "dot graph" - the dots for a tightening will move up. Fisher also said that the debate among the central bankers is "coming in my direction." Bottom line - for the last 6 years you have been able to dismiss the hawks. The ground is shifting.

Counter-argument: The bond market is warning about a slowdown. At least one market strategist thinks the 10 year is heading to 2.2%. True, when the stock market and the bond market disagree, you usually want to side with the bond market. However, you have to keep in mind what is happening overseas and the concept of relative value. The German 10 year Bund yield has hit fresh lows - 1.104%. When rates are falling overseas, they will inevitably drag US Treasuries with them, simply due to relative value. FWIW, I don't think the US bond market is signalling weakness in the US economy. Nor does Goldman.