Morning Report: Don't believe the Chinese stock market indices

Stocks are lower this morning as the sell-off continues in Asia. Bonds and MBS are up small.

Mortgage Applications increased 4.6% last week as purchases increased 6.6% and refis rose 2.7%. Good numbers considering last week was only 4 days.

We will get the FOMC minutes later this afternoon. The items of interest will be the big downward revision in GDP forecasts, and of course any references to Greece. The China situation really was not ripe at that point, so I don't expect any mention there.

The EU put Greece on the clock, giving them until Saturday to come up with an agreement to stay in the EU. Europe has “a Grexit scenario prepared in detail,” European Commission President Jean-Claude Juncker said last night. Risk arbitrageurs have a term for this: showing them the downside. That is exactly what the EU is doing. The Greek ATMs are limiting withdrawals, however the Greeks have been taking out money for over 6 months, so most of them have an adequate cushion of cash at least for the time being. It won't last forever, and the EU is pushing the Greeks to make the necessary reforms to stay in the EU. While we haven't hit Venezuelan type shortages of goods, they are probably a month away.

Fun Chinese stock market fact: Last night the Shanghai composite fell 6%. Between the 1,331 stocks that are suspended, and the 747 shares that fell their daily 10% limit, approximately 72% of the index is non-tradeable. The A share index (which only Chinese can invest in) is down 33% since mid-June. The B share index (which foreigners can trade) is down around 43%. So when you hear someone point out that we are really only back to March levels, point out the index level is meaningless right now because 72% of the stocks aren't trading. Oh, and the Chinese government ordered anyone with a 5% position in any company to not sell for 6 months. This is going to be a titanic battle of wills between Mr. Market and Communist Government.

Don't forget, any economic pain in China due to the sell-off is going to be felt in commodity prices, which are already reflecting the sell-off. That will be deflationary, which the Fed fears more than inflation. IMO, unless something changes dramatically, the Fed isn't moving in September. If they truly mean it when they say they are being data-driven, the data is screaming: wait to see what happens first. Even if they do raise the Fed Funds rate a symbolic 25 basis points, just to get off the zero bound, I don't see how the long end of the curve moves all that much, if at all. Which means mortgage rates are probably not going to be affected.

The Obama administration has ordered HUD to re-integrate neighborhoods, using Federal funding as a carrot. LOs start thinking about FHA opportunities in areas that haven't historically been jumbo territory. That said, I don't know how many affluent areas get HUD grants in the first place so not sure how effective that will be. But, it might be an opportunity.