Morning Report: Construction spending rises, manufacturing contracting

Vital Statistics:

	Last	Change	Percent
S&P Futures	2086.6	6.8	0.33%
Eurostoxx Index	3503.9	-2.5	-0.07%
Oil (WTI)	41.29	-0.4	-0.86%
LIBOR	0.414	0.003	0.61%
US Dollar Index (DXY)	99.96	-0.213	-0.21%
10 Year Govt Bond Yield	2.22%	0.01%
Current Coupon Ginnie Mae TBA	104.4
Current Coupon Fannie Mae TBA	103.6
BankRate 30 Year Fixed Rate Mortgage	3.82

Stocks are higher this morning on economic strength out of Asia. Bonds and MBS are down.

Construction spending rose 1.0% in October. This is up 13% year over year. Residential construction rose 16.8% year over year, however the growth appears to be in multi-family construction, not SFR. 

The ISM Manufacturing Index fell to 48.6 from 50.1 last month. A reading below 50 indicates that the manufacturing economy is generally contracting. This is the biggest decline since June of 2009. Inventory build is a problem, which has also been confirmed in the inventory to sales ratio. In fact, third quarter GDP was revised upward based on inventory build, however that inventory build essentially "borrows" growth from the following quarter. A reading of 48.6 would generally correspond to a GDP growth rate of about 1.7%. 

Chart: ISM Manufacturing:

The weakness in manufacturing is a dollar issue, as commodity based companies and exporters are feeling the pinch. Since the US is the only economy contemplating tightening (while everyone else is deciding how much additional stimulus to put out), the dollar strength looks to continue. 

Chart: US dollar index:

Vehicle sales are coming in this morning, and it looks like GM, Fiat-Chrysler, and Ford have missed their market forecasts. Most were reporting growth of about 3%. Auto loans are the new subprime. 

Loews CEO and famed investor James Tisch said the Fed is "woefully behind the curve in waiting to raise rates. It should have been done years ago." He is one of the people that is making the argument that raising rates could be positive for the economy as it will eliminate some of the misallocated capital (especially in the energy patch) and remove the penalty on savers. 

Silicon Valley is attempting to disrupt the mortgage industry with a new model of non-QM, stated income loans where human interaction with the borrower is kept to a minimum. The Millennial generation generally prefers to interact with technology instead of a human. These firms are making huge investments in technology (in fact at one firm 7 or the 12 employees are IT people). They are also taking regulatory risks that many in the industry are unwilling to take. One CEO said: "There isn’t a banker out there that doesn’t look at me and shake his head and say, ‘You don’t know what you’re doing...But we’re doing it.”  They are also making a bet that the private label market will return at some point early next year. Interestingly, LOs are compensated on "customer satisfaction" and not commission. 

Speaking of disruption, Morgan Stanley is laying off about a quarter of its fixed income trading team. Last year was a lousy year for fixed income trading in general, and the fee income just hasn't been there. While the Fed has basically spoon fed rate expectations to the market, the exit of market makers will probably make the markets more volatile. Don't forget, traders are generally young, and the majority of the ones who are left have never seen a tightening cycle before. 

While Black Friday looks to have been a disappointment, initial indications suggest Cyber Monday went a little better.