Morning Report: inflation remains below the Fed's target

Vital Statistics:

	Last	Change
S&P Futures	2126.3	2.5
Eurostoxx Index	339.5	-1.3
Oil (WTI)	48.2	-0.6
US dollar index	88.8	0.1
10 Year Govt Bond Yield	1.84%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.62

Markets are up on earnings and merger mania. Bonds and MBS are down.

Personal Incomes rose 0.3% in September, which was a little below expectations. Consumer spending rose 0.5%, which was in line with expectations. Core PCE inflation - the number the Fed uses to measure inflation - rose 1.7% YOY, so we are still below the 2% target. 

The Chicago PMI Index fell to 50.6 from 54.3. 

The FBI re-opened the email investigation on Hillary late Friday night. Democrats are attacking Comey (who just went from hero to goat). This will take until mid-week to be fully reflected in the polls, and the pundits will be watching polls in VA and NC closely. 

IMO, regardless of who wins, gridlock will be the result, unless Democrats sweep. So more of the same. I don't see much of an effect happening in either interest rates or stock prices. The Fed is much more influential than who occupies the WH. 

Home prices are up 0.3% MOM and 5.3% YOY, according to Black Knight Financial Services. The index now stands at $266k, which is 0.7% below the 2006 peak of $268. The report has good state-by-state info, so check it out. 

Banks continue to hoard Treasuries, and are tightening credit to business. Deposit growth is outstripping loan demand, which is the biggest reason. As the US savings rate increases, consumer spending is affected. Part of this is demographics: The baby boom is retiring and will inevitably cut spending, while the Millennials have yet to make any real money and start spending. 

Morning Report: Strong headline GDP number

Vital Statistics:

	Last	Change
S&P Futures	2127.5	4.0
Eurostoxx Index	340.8	-0.9
Oil (WTI)	49.2	-0.6
US dollar index	88.9	0.0
10 Year Govt Bond Yield	1.85%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.58

Stocks are higher this morning as earnings reports pile in. Bonds and MBS are flat.

The first estimate of Q3 GDP came in at +2.9%, which was higher than expected. Inventory and exports drove the increase. This is a sharp rebound after 3 extremely weak reports. Disposable personal income rose 3.6% and the savings rate was flat at 5.7%. This number will be revised at least once before the December Fed meeting.

Inventories and exports are not great indicators of domestic demand, however and that is what really drives the economy. If you strip those two things out, you can see that demand increased, but it wasn't the blockbuster number that the headline GDP print suggests. This helps explain why GDP growth can be 2.9% (which is a robust expansion) and not feel like it. Consumer spending decelerated in Q3 from 4.3% to 2.1%. Back-to-school numbers for the retailers were disappointing, and this number bears that out. 

Employment costs rose 0.6% in the third quarter as comp increased 0.5% and benefits increased 0.7%. Judging by the increase in Obamacare insurance premiums, benefit cost inflation will continue to increase the costs of employees which will act as a damper on wage growth. 

Pending home sales increased 1.5% in September, according to the NAR. According to NAR Chief Economist Lawrence Yun, tight inventory remains a problem: "The one major predicament in the housing market is without a doubt the painfully low levels of housing inventory in much of the country...It's leading to home prices outpacing wages, properties selling a lot quicker than a year ago 2 and the home search for many prospective buyers being highly competitive and drawn out because of a shortage of listings at affordable prices." Of course this means the ratio of house prices to income is getting stretched. Wage inflation is needed to maintain these prices. 

The US 10 year has gotten hammered over the past month. What is going on? Economic data has generally been soft (today's GDP report notwithstanding). IMO, we are in the middle of a correction in global bonds. Using the German Bund as proxy for global bonds, you can see that yields have backed up in a big way over the past month. US Treasuries may not necessarily be rising ahead of the December GDP report and may simply be correlating with bond yields overseas. Note that the yield is higher than it was pre-Brexit. 

Morning Report: Wage inflation and asset prices

Vital Statistics:

	Last	Change
S&P Futures	2142.4	9.0
Eurostoxx Index	341.9	0.1
Oil (WTI)	49.3	0.1
US dollar index	88.7	0.0
10 Year Govt Bond Yield	1.84%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.58

Back from the MBA conference in Boston. The main chatter was about Ginnie's new plan to discourage the serial VA IRRRL shops. Consensus is that it will work because it will decimate the margins on these loans. The prepay speeds on VA loans have gotten so high that Ginnie Mae servicing prices are being affected. 

Separately, Richard Cordray took aim at servicers at the conference. 

Let's get caught up on economic data. 

Durable Goods orders fell 0.1% MOM in September. Business capital expenditures fell 1.2% MOM and are down 4.1% YOY. Some of that has been due to the strength in the dollar, and continued fallout from energy prices. 

The Chicago Fed National Activity Index improved to -.14. The 3 month moving average (the number to look at) is still negative at -.21, which means the economy is growing below trend. When the 3 month MA drops below -.7 that is a recessionary signal. 

Home prices continue to rise according to the FHFA. Prices increased 0.7% MOM and 6.4% YOY in August. Prices are now about 5% higher than the peak 2006 levels. Note that this is a subset of all homes (only those with conforming mortgages) but it is a good estimate for the "middle of the plate" housing in the US. 

Separately, Case-Shiller was up 0.2% MOM and 5.1% YOY.

New Home Sales came in a little lighter than expected, up just under 600k, however July and August were revised sharply downward. The South performed best, while the West performed the worst. Take the Census numbers with a grain of salt, however. The sample sizes are small and therefore the confidence intervals around those numbers are very wide. Homebuilder earnings usually tell the story a bit better. 

Mortgage Applications fell 4% last week as purchases fell 7% and refis fell 2%. Purchase activity is still up smartly YOY, however refis are at the worst levels since June. 

Initial Jobless Claims came in at 258k, which is a quite strong number. 

Wages are increasing for skilled labor, especially in construction. Below is a chart plotting annual wage growth for manufacturing and construction labor. Construction labor wage inflation is back to the bubble years, and manufacturing wage growth is approaching those levels as well. 

Ultimately this is good news for the economy. Wage growth has been a disappointment in this recovery. This probably isn't great news for homebuilding stocks (the SPDR homebuilder ETF XHB is down about 13% over the past 6 weeks), and is probably not great news for manufacturers either. That said, the elephant in the room is the Fed. Does this push the Fed to hike more aggressively than forecast? Given how many times the Fed has gotten cold feet already, and the fact that unskilled labor remains in a glut, I don't think so. Janet Yellen has said the Fed will let the labor market run hot for a while in order to bring back some of the long term unemployed. 

In the same article, Joe Lavorgne of Deutsche Bank has a chart that is a bit more worrisome, which looks at the ratio of household net worth to disposable income. We are back at levels associated with the stock market bubble peak and the residential real estate bubble peak. Taking this chart at face value you would probably conclude that asset prices are in bubble territory, which is definitely the case for sovereign debt. However, if wage growth is accelerating, then the ratio will fall going forward, for the right reason. However if wages continue to stagnate, then yes we could be vulnerable to a sell-off in asset prices. 

Morning Report: More rent versus buy

Vital Statistics:

	Last	Change
S&P Futures	2124.7	-12.0
Eurostoxx Index	343.3	-1.0
Oil (WTI)	50.3	-1.3
US dollar index	88.6	0.0
10 Year Govt Bond Yield	1.74%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.57

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

No economic data today, however we do have some Fed-speak.

Following on yesterday's rent-versus-buy article from Trulia, I crunched some numbers to demonstrate the relative value proposition currently. Using census data for median asking rent and median house prices, I plotted the median asking rent against the mortgage payment for a FHA loan with 3.5% down, including mortgage insurance, property taxes, homeowner's insurance, and the tax benefit of deducting interest and property taxes for a borrower making the median income. Historically, buying has resulted in a payment higher than the median rent payment. This makes sense: your mortgage payment will be more or less fixed, while rent will increase with inflation. 

The chart below plots the two numbers in absolute dollars. You can see the two lines converging which means the rent-versus-buy decision is about as far skewed towards buying than it ever has been.

In the second chart, I plotted the difference between the "median" mortgage payment and median asking rent. The range recently has been anywhere from -10% to 100%. 

The other thing to keep in mind with the rent vs buy decision is that the world's central banks are on a mission to create inflation. They will eventually succeed, and over time the asking rent is going to increase, while the mortgage payment will be largely fixed, with the exception of property taxes and perhaps homeowner's insurance. On the other side of the coin, home price appreciation will probably maintain at least a mid-single digit rate of appreciation, which is higher than the mortgage interest rate, especially when you take into account the tax benefits. 

The takeaway is that the Fed is giving the homeowner a gift in low rates, and that won't last forever. 

Morning Report: Buying is still a better deal than renting

Vital Statistics:

	Last	Change
S&P Futures	2135.3	-3.0
Eurostoxx Index	341.6	-2.0
Oil (WTI)	50.7	-0.9
US dollar index	88.0	0.0
10 Year Govt Bond Yield	1.75%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.57

Stocks are lower this morning after ECB President Mario Draghi said the ECB is not looking at doing more QE after the program ends in March. Bonds and MBS are up.

In economic data this morning, initial jobless claims rose 13k to 260k. Separately, the Bloomberg Consumer Comfort Index fell. The Philly Fed manufacturing index improved in September, but manufacturing has generally been weak across the board as the stronger dollar hurts competitiveness overseas. 

Existing Home Sales rebounded in September to an annualized pace of 5.47% from a downward-revised pace of 5.3 million in August. The median home price was up 5.6% to $234,200. The first time homebuyer represented 34% of all sales, which is a big improvement from the 30% - 32% range it had been stuck in for the past year. Inventory remains tight, however with about 2.05 million homes on the market, which represents a 4.5 month supply. A balanced market is closer to 6.5 months. Distressed sales (foreclosures and short sales) represented 4% of all sales, which is a post-crisis low. Days on market ticked up to 39 days from 36 in August. The increase in the first time homebuyer is definitely good news, and we may finally be seeing the pent-up demand that has been building over the past 10 years finally come to market. 

In spite of all that pent-up demand, housing starts remain anemic given where we are in the economic cycle. Housing construction has been the missing link this whole recession. Note the shaded grey areas on the chart. Those are recessions. See how housing construction historically experienced a sharp rebound after the economy bottomed? We haven't seen that this time around. Some of that was due to an overhang of inventory from the bubble years that needed to be sold, however that adjustment was made by 2011 or so. Since then, tight inventory and rising prices have been the story. The reason why this recovery has been so tepid has been the absence of a robust housing construction market.

Note that Fannie Mae thinks that housing construction will remain muted. In their latest Economic Commentary, they forecast housing starts will grow to about 1.3 million in 2017, which is about 12% higher than their forecast for 2016. The bright spot? SFR will increase to 15% to an annualized pace of 883k. SFR will cannibalize multi-fam going forward as the economy improves and more Millennials go from being renters to being buyers. Speaking of which...

Trulia has a good piece out on the advantages of buying versus renting. Buying a home is 37% cheaper than renting nationally. Naturally, the advantage differs from market to market, but even the worst markets for buying are still 17% cheaper. This assumes the buyer puts down 20% and stays in the house for 7 years. The advantage was as high as 41% in 2012, and got as low as 34% in 2014. Of course this is a moving target as mortgage rates and house prices change. Where are the tipping points to flip the relationship? For home prices, it is a median house price of $468k. For mortgage rates, it is 9.1%.

Morning Report: Housing starts disappoint

Vital Statistics:

	Last	Change
S&P Futures	2137.5	4.0
Eurostoxx Index	343.1	0.6
Oil (WTI)	51.1	0.8
US dollar index	88.0	0.0
10 Year Govt Bond Yield	1.76%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.57

Stocks are up this morning as earnings reports continue to pile in. Bonds and MBS are flat.

Mortgage Applications rose 0.6% last week as purchases rose 3% and refis fell 1%. 

Housing starts fell to a 1.05 million pace in September, driven by a big drop in multi-fam. Single fam was up around 8%. Building Permits rose to 1.23 million. Housing continues to be the biggest underperformer in the economy, but the subject hasn't really come up in this election, for either side. 

We have some Fed-speak today, with John Williams speaking at 8:45, Rob Kaplan at 1:30 and William Dudley tonight. 

The final debate is tonight, and it looks like Hillary is pulling away from Trump at this point. The black swan event for the markets is a Democratic Party sweep, which will probably cause the stock market to spit up a hairball. 

Lending standards in the jumbo space are loosening, even as the luxury end of the housing market underperforms. Loan Depot is now offering 40 year jumbo products that are interest-only for the first 10 years. Redwood is now offering a 90 LTV product that goes down to a 660 FICO. 

The NAR is releasing its latest Profile of Home Buyers and Sellers. Here are the big changes over the past 35 years.

• The first time homebuyer is a smaller percentage than it has been in the past. 
• The internet is not replacing the real estate agent
• Houses have been getting bigger of the past 30 years, but have leveled out in recent years
• Down payments have been going down
• The home search process is taking longer than ever due to tight inventory

Zillow has their own report on trends in housing. Here is the executive summary (the report is very long and detailed): 

"The home buying experience is both an intimidating financial transaction and an emotional milestone. Half of home buyers in the U.S. are under 36, meaning a new generation— Millennials—is shaping the future of real estate. Despite demographic reports about young adults’ urban lifestyles, Millennials share their parents’ aspirations for a single-family home, often in the suburbs. 

The process of finding or selling a home is much more collaborative for Millennials than for older generations. They bring all available tools to the process, including their smartphones, social media and online networks. While older generations rely on real estate agents for information and expertise, Millennials expect real estate agents to become trusted advisers and strategic partners. 

Millennial home buyers are also diverse. While only 9 percent of all homeowners are Hispanic, nearly 15 percent of the Millennials buying homes are Hispanic—reflecting the changing demographics of the American middle class. 

Homeownership remains a vehicle for wealth in the U.S., but it can also be a financial burden, as families stretch their finances to afford the space they need, and large, dated homes owned by Baby Boomers and the Silent Generation demand maintenance and improvements."

Morning Report: Inflation returning

Vital Statistics:

	Last	Change
S&P Futures	2137.5	15.0
Eurostoxx Index	342.3	5.0
Oil (WTI)	50.4	0.4
US dollar index	88.1	-0.2
10 Year Govt Bond Yield	1.78%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Stocks are higher this morning on no real news. Bonds and MBS are down. 

It looks like the Fed has made some progress in getting inflation up to its goal of 2%. The Consumer Price Index came in at 0.3% MOM. Ex-food and energy it is up 2.2% on a YOY basis. The Fed doesn't really look at CPI all that much - it prefers the Personal Consumption Expenditure Index - but it looks like we are moving further away from the deflation ledge that central bankers fear. 

What drove the increase in the core index? Owner-equivalent rent, which is a proxy for real estate prices. It rose 0.4%, which is the highest reading since 2006.

What does increasing inflation mean for the mortgage business? Assuming higher inflation translates into wage inflation, you should see a pick-up in the purchase business as Millennials get jobs / raises. On the other hand, the refi business is going to take a hit. 

One Texas builder is focusing on the entry-level homebuyer and using USDA loans to help make the sale. LGI Homes, based in Houston, is marketing to people in apartment complexes with flyers discussing the monthly payment they could have if they bought. These are largely properties in the exurbs around Dallas and Houston, where lower land acquisition costs translate into lower average selling prices. ASPs for LGI are below 200k, while ASPs for new homes in general is over $350k. LGI reports seeing the steadiest demand in entry-level. 

Sentiment for the builders is high in general. The NAHB Housing Market Index fell 2 points in October, from its record in September. 

High property taxes got you down? Here is something you can do about it. 

Morning Report: manufacturing disappoints

Vital Statistics:

	Last	Change
S&P Futures	2126.5	-0.5
Eurostoxx Index	338.0	-2.0
Oil (WTI)	40.4	0.0
US dollar index	88.3	-0.2
10 Year Govt Bond Yield	1.78%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.58

Stocks are lower this morning on overseas weakness. Bonds and MBS are down.

Manufacturing in the US rose slightly in September, but came in lower than expected. August's numbers were revised downward. Industrial Production rose 0.1%, while manufacturing production rose 0.2%. Capacity Utilization rose to 75.4%. The strength in the dollar is probably driving the weakness. 

Manufacturing dropped in New York last month, according to the Empire State Manufacturing Index. The index fell for the third month in a row. 

The black swan event for the financial markets? A democratic party sweep in November. If so, buy infrastructure stocks, sell pharma and financials. 

Meanwhile, turnout is looking to be low this year as voters dislike both candidates and are tuning out all the rhetoric. 

Elizabeth Warren fired a shot across the bow of the SS Hillary, directing her to demote SEC Chair Mary Jo White. Her sin? Not going along with the left who wants more disclosure of political activities and donations for corporations. Of course this has absolutely nothing to do with investor protection: it is more about using the regulatory power of the SEC to silence opinions that she doesn't approve of (mainly businesses that donate to the Chamber of Commerce or other groups that argue for lighter regulation or lower taxes). 

Morning Report: Bank earnings

Vital Statistics:

	Last	Change
S&P Futures	2137.5	11.0
Eurostoxx Index	340.8	5.0
Oil (WTI)	50.7	0.3
US dollar index	88.3	0.2
10 Year Govt Bond Yield	1.78%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.58

Stocks are higher this morning on good overseas economic data. Bonds and MBS are down.

Inflation at the producer level is picking up, according to the Producer Price Index, which rose 0.3%, higher than expected. The core index is up 1.5% YOY. Inflation remains under the Fed's target, but we are seeing it creep up towards their preferred 2% range.

Retail sales increased 0.6% last month, in line with expectations. Retail Sales ex autos and gasoline rose 0.3%. Housing-related sales did particularly well, with furniture up 1% and building materials up 1.4%. I wouldn't be surprised to see some strategists take up their Q3 GDP estimates on this number. 

Consumer sentiment unexpectedly fell in early October, according to Reuters and the University of Michigan. 

Business inventories rose 0.2%, a little higher than expected. This will have the effect of goosing Q3 GDP growth at the expense of Q4. 

Wells Fargo reported earnings this morning. Origination was up 11% QOQ to $70 billion. Purchase activity accounted for 58% of originations. The stock is unchanged in early trading. 

JP Morgan reported earnings this morning as well. Mortgage origination was up 8.4% QOQ to $27.1 billion. On an annualized basis, it is down 9.4%. 

The typical homeowner's perception of the value of their home is about 1.25% lower than where the appraised value has been coming in. Appraised values are up almost 8% YOY, which is a faster rate of appreciation than we have been seeing in the real estate indices like FHFA or Case-Shiller. 

Morning Report: PIMCO is buying mortgages

Vital Statistics:

	Last	Change
S&P Futures	2116.0	-15.0
Eurostoxx Index	334.4	-4.0
Oil (WTI)	50.0	-0.1
US dollar index	88.4	0.1
10 Year Govt Bond Yield	1.75%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Stocks are lower this morning after weak Chinese data. Bonds and MBS are up.

The FOMC minutes showed that September was a close call with respect to raising rates, and definitely set up the markets for a December rate hike. The Fed noted that third quarter GDP was stronger than the first half of the year, and the labor market is strengthening. The consensus for a December tightening doesn't necessarily indicate that there is the same consensus for further rate hikes. Interestingly, the Fed views consumer spending as"growing strongly" when the actual data does not suggest much strength at all. Bottom line, it looks like we are getting a rate hike in December, and the November meeting will be a non-event. The Fed Funds futures are assigning a 68% probability of a December hike of 25 basis points. 

Initial Jobless Claims fell to 245k last week, which is the lowest since the early 70s.  Consumer comfort increased last week as well.

Import prices rose 0.1% MOM and are down 1.1% YOY. Export prices rose 0.3% MOM and are down 1.5% YOY. Strategists are warning that the rise in the dollar is going to hit corporate profits.

PIMCO is getting into a defensive posture, buying mortgage backed securities and inflation-linked securities. Mortgage backed securities now account for 55% of the Total Return portfolio from 49% in August. Why mortgages? Think about what will happen to long term bonds as the Fed hikes rates. If long term bonds don't really move all that much (in other words, the yield curve flattens) the yield on mortgage backed securities will be much better than the yield on Treasuries. If the long end of the curve increases in line with the increase in the Fed funds rate, PIMCO is betting that the decrease in prepayment speeds will offset (at least partially) the interest rate effect. You can see over the past 5 tightening cycles, the yield curve has flattened.

John Stumpf is out at Wells. COO Tim Sloan, will take over. While the scandal was in the retail banking are and not the mortgage division, there probably will be fallout there too. 

Morning Report: The Fed shrinks its balance sheet using this one weird trick...

Vital Statistics:

	Last	Change
S&P Futures	2130.8	-4.0
Eurostoxx Index	339.6	-0.6
Oil (WTI)	50.8	0.0
US dollar index	88.4	0.1
10 Year Govt Bond Yield	1.79%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Stocks are down again after getting roughed up yesterday. Bonds and MBS are down as well. 

Mortgage applications fell 6% last week as purchases fell 3% and refis fell 8%. 

Job openings decreased by 400k to 5.4 million in August, according to the BLS. The quits rate (which is probably the best indicator for strength in the labor market) was steady at 2.1%. I wonder if we are seeing employers begin to hire the long-term unemployed, which would account for the drop in openings and the flat quits rate. The labor force participation rate is beginning to pick itself off the floor, as we saw in the latest jobs data. 

We will get the FOMC minutes from the September meeting at 2:00 pm EST today. Be aware of possible market movement around then, especially if the minutes turn out to be a bit more dovish than expected. On Sunday, Fed Vice Chairman Stanley Fischer said that September's decision to wait on hiking rates was a "close call." The minutes will hopefully shed further light on that statement. 

The biggest problem with QE is what to do with all of these assets that now sit on the Fed's balance sheet. The Fed can't sell the Treasuries it bought without withdrawing liquidity from the system. That would be contractionary, and the economy (or at least the financial system) might be too fragile to handle it. That would be the case even if the Fed just lets it run off by not re-investing maturing proceeds. There is now a school of thought that the Fed's balance sheet should simply remain the size it is now, and we shouldn't return to pre-bubble levels. The thinking is that governments should simply consolidate the Fed's assets onto its own balance sheet. (called "permanent monetization") Given that central banks are ultimately owned by the government, its Treasuries would effectively "cancel out" the debt issued by the government. This is why looking at the debt to GDP ratio is somewhat misleading: about a quarter of our debt is owned by the central bank. It is like taking out a loan and leaving the money in your savings account. In nominal terms, your debt is up, but your net worth is unchanged. One thing is for sure: none of this is in the econ textbooks. We are all making it up as we go along. 

A Federal Appeals court ruled yesterday that the CFPB's structure is unconstitutional. The director of the CFPB is appointed for a 5 year term, and can only be fired for cause by the President. The court found that this structure puts too much power in the hands of one person, and is more or less unaccountable. Rob Chrisman takes a look at what is going on. 

A study from the Urban Institute forecasts that the homeownership rate will continue to decline. The question ultimately rests on whether the Millennials are going to follow a different path than previous generations, or are they simply late bloomers who will eventually marry, have kids, and want a place in the suburbs. Note that the homeownership rate started going vertical in 1994, with the Clinton Administration's policies to encourage homeownership, as a tool for social engineering. Post-crisis, the rates has returned to its previously undisturbed rate. 

Morning Report: Optimism remains in short supply

Vital Statistics:

	Last	Change
S&P Futures	2152.8	-6.0
Eurostoxx Index	342.3	0.3
Oil (WTI)	51.0	-0.3
US dollar index	87.9	0.3
10 Year Govt Bond Yield	1.77%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

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

Alcoa kicked off Q3 earnings season with a miss. Earnings season gets into full swing next week when all the big banks announce. 

While bond yields rose pretty dramatically during September, there are still $10.7 trillion worth of negative bond yields worldwide. Half of it is from Japan. The German Bund is now trading at a yield of 6 basis points.  A years' interest on a 1 million euro Bund would cover one night at the Bayerische Hof hotel in Munich. Happy Oktoberfest.

Small business optimism dipped in September, according to the NFIB. Sentiment came in at 94.1, well below the historical 98 average. The bright spot was an improvement in economic expectations (basically improving to neutrality) while job openings and inventories fell. Small business is also firmly in maintenance capital expenditure mode, choosing not to deploy capital for expansion. The election is probably having a negative effect on sentiment as well. 

Meanwhile, the US economic confidence index continues to languish in negative territory. Historically, you would see a jump in confidence around election times, as candidates promise to make things better. Not this time around, however. This also makes the Fed's job more perilous, as they don't want to depress what little animal spirits are out there at the moment. 

Tim Duy argues that Friday's jobs report is bad news for Fed hawks who want a December tightening. He sees November as a long shot, and December as not a foregone conclusion. Lots of wonky labor economics, but he does give you a good idea on how the Fed thinks. 

Goldman is out with a "be cautious" call for the rest of the year. A vulnerable European economy, combined with high US stock prices means the market could be looking at a 2% decline over the next couple of months. 

Morning Report: RIP the mortgage interest deduction?

Vital Statistics:

	Last	Change
S&P Futures	2158.0	12.0
Eurostoxx Index	341.2	1.6
Oil (WTI)	50.6	0.8
US dollar index	87.6	-0.2
10 Year Govt Bond Yield	1.72%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Bonds are closed today, but overseas bond markets are weaker. Stocks are up.

No economic data today. The week after the jobs report is typically data light to begin with, and there really isn't anything market-moving this week, except for may the PPI on Friday. 

Dave Stevens of the MBA raised the issue of eliminating the mortgage interest deduction, albeit with the caveat that it be done in the context of tax reform, with lowering rates and eliminating deductions. He wasn't advocating eliminating it in a vacuum. 

If Donald Trump wins, tax reform is a definite possibility. If Hillary wins, will she be more like her husband, willing to deal with Republicans to get something done, or will she be more like Obama, where both sides had hardened positions? If you were going to eliminate the mortgage interest deduction, it will certainly make housing less affordable and would have a dampening effect on home price appreciation. That said, with rates as low as they are, interest payments as a percentage of your mortgage payment are at all-time lows. So if you wanted to eliminate it at the time when it causes the least amount of pain, now is the time to do it. 

Republicans will never support eliminating deductions without cutting rates, and the historical bargain between right and left (Democrats trading increased taxes and spending for increased defense spending) might not work this time around. Believing in that trade was what got us the sequester, where Obama found his bluff called, as Republicans tolerated lower defense spending in exchange for lower discretionary spending. Given the general war fatigue of the American voter, Republicans are probably not going to be willing to trade increases in defense spending for more social spending, and certainly not for tax increases. 

Punch line: the mortgage interest deduction probably isn't going anywhere.

That said, the US subsidizes the residential real estate market six ways to Sunday, with the mortgage interest deduction, the 30 year fixed rate mortgage (try finding that anywhere else on the planet), taxpayer backing of almost all new origination, and the cornucopia of subsidies for affordable housing. Not to mention the central bank targeting of mortgage rates and real estate prices. And the powers that be still scratch their heads wondering why we had a real estate bubble...

Mortgage credit availability improved in September, according to the MBA. 

Morning Report: Decent jobs report

Vital Statistics:

	Last	Change
S&P Futures	2156.0	-1.0
Eurostoxx Index	340.7	-2.0
Oil (WTI)	50.2	-0.3
US dollar index	87.7	0.0
10 Year Govt Bond Yield	1.76%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Stocks are flat this morning after an ok jobs report. Bonds and MBS are down.

Jobs report data dump:

• Nonfarm payrolls increased by 156,000 (August revised upward)
• Unemployment rate 5%
• Labor Force Participation Rate 62.9%
• Average weekly earnings up 0.2% (2.6% annually)
• Average weekly hours 34.4

Overall, a decent report, but nothing to write home about. The best news in the report was the increase in the participation rate as the labor force increased by about 440k while the number of employed increased by about 350k. The labor force participation rate looks like it may have bottomed, at least for now.

Global sovereign debt continues its sell-off, with the German Bund venturing back into positive yield territory. Overnight we had a flash crash in the British pound, which fell 6%. For currency traders, a 6% move is gargantuan. 

We will have a lot of Fed-speak today, with Stanley Fischer at 10:30, Loretta Mester at 12:45, Esther George at 3:00 pm and Lael Brainard at 4:00. 

Bank of America is out with a report saying that the new populism and push-back against globalization represents a possible sea-change in asset pricing. The big picture is that we are moving from a "deflation" asset pricing environment to an inflation asset pricing environment. Corporate profitability will suffer as wages increase, regulation increases, and people push back against using globalization as a means of cost-cutting. Government attempts to goose the economy will transition from monetary stimulus to fiscal stimulus. Overall, bad for bonds, but probably good for real estate. 

Assuming Hillary wins, she may face the same nemesis her husband did early in his first term: bond market vigilantes. Every time Bill Clinton talked about stimulating the economy, bonds would sell off, which would offset any potential stimulative effect. Bob Woodward said that Bill Clinton's reaction to this dynamic as :"You mean to tell me that the success of my program and my reelection hinges on the Federal Reserve and a bunch of f*****g bond traders?" Clinton political adviser James Carville said at the time that “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody." 

Regardless of what this does to the refi market, it should positively affect the purchase market. Currently, the homeownership percentage for the Millennials is about 34%. That number should increase to above 40% as the Millennial age cohort hits homebuying age. The homeownership rate for the 35-45 age cohort has historically been 60%+. So there is a lot of pent-up demand for homes, which should keep the purchase business humming for many years to come. 

Morning Report: Rates heading back up on central bank comments

Vital Statistics:

	Last	Change
S&P Futures	2148.0	3.0
Eurostoxx Index	343.7	-2.0
Oil (WTI)	49.6	0.9
US dollar index	87.0	0.0
10 Year Govt Bond Yield	1.68%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.48

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

Bonds sold off yesterday as Chicago Fed President Charles Evans said he expected a rate hike at the December FOMC meeting. Global bonds are also selling off after the ECB discussed tapering its bond purchase program in a move similar to what the Fed did. The German Bund is at -4 basis points after closing last week at -15. 

We will have some Fed-speak today, with Neel Kashkari speaking at 9:30 and Jeffrey Lacker speaking at 1:00 pm. 

Regardless of who wins in November, there will probably be some changes at the Fed. Donald Trump will probably pursue more wall street types (like Neel Kashkari) while Hillary will focus on diversity. There has been speculation that Janet Yellen would resign if Trump wins, but that looks like a long shot and would weaken the non-political perception of the Fed. 

Bill Gross takes aim at central banks worldwide in his latest investment outlook.While central bankers are on a mission to reflate economies via low and negative interest rates, they are undermining the process via which capital gets allocated. Pension funds and insurance companies have to buy overvalued paper simply because there are no alternatives. Ultimately the financial markets exist to allocate capital to new businesses and projects based on risk and reward. Interest rates act as critical inputs into the risk and reward calculation. Central bank activity is distorting the signal that interest rates ordinarily provide, and the longer they do it, the more likely we will increase the misallocation of resources (generally known as bubbles) which will hinder the economy going forward. Exhibit (a) is Japan. 

Despite the sell-off in the bond market, mortgage rates seem to be holding steady. This is par for the course, as mortgage rate movements typically lag bond market movements. 

Speaking of mortgages, mortgage applications rose 2.9% last week as purchases fell 0.1% and refis increased 5%. 

The ADP employment report came in weaker than expected, with 154k jobs added in September, which was less than the 170k forecast. The Street is looking for 168k jobs in Friday's report. The big number will be wage growth.

Morning Report: Home prices within 6% of peak levels

Vital Statistics:

	Last	Change
S&P Futures	2155.0	1.0
Eurostoxx Index	346.0	3.0
Oil (WTI)	48.9	0.1
US dollar index	86.4	-0.2
10 Year Govt Bond Yield	1.64%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.49

Stocks are up this morning on no real news. Bonds and MBS are down.

Slow news day, with no economic data.

Economic confidence improved slightly in September, according to Gallup. 

Former Minneapolis Fed Head Narayana Kochlerakota discusses why people feel like the economy is struggling. Per-capita GDP growth is coming in around the high single-digits over a period of 10 years. Historically, that number has been much higher. The US economy has had "lost decades" like this before (basically the 1950s and the 1970s), and growth eventually rebounded. Unsurprisingly, he calls for higher inflation, and further monetary and fiscal stimulus.

 

Interesting comparison between the peak of the housing bubble and labor today. In both situations, investors and employers aren't seeing the ground shift underneath them. The piece also included a chart of housing supply over the past 16 years. Believe it or not, we still have more inventory than we did in the early bubble days, although I wonder how much of this supply consists of abandoned homes that are uninhabitable. 

Home prices increased 6.2% YOY according to CoreLogic. This puts home prices at about 6% below the 2006 peak. Increasing prices combined with stagnant incomes is creating an affordability crisis. 

Morning Report: Construction spending falls

Vital Statistics:

	Last	Change
S&P Futures	2155.5	-5.0
Eurostoxx Index	343.2	0.2
Oil (WTI)	48.6	0.4
US dollar index	86.6	0.4
10 Year Govt Bond Yield	1.60%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.46

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

The big event this week will be the jobs report on Friday. We will also have a lot of Fed-speak as well. 

The PMI Manufacturing Index slipped in September, while the ISM manufacturing index rose. 

Construction spending fell 0.7% in August.  It is also down 0.3% on a year-over-year basis. Residential construction spending fell 0.2% and is up 1.3% for the year. Public construction was down 2.2% and is down 8.8% on a year-over-year basis. Note both Hillary Clinton and Donald Trump support a big infrastructure spending program. 

Delinquencies are down in August according to the Black Knight Mortgage Monitor. The pre-sale foreclosure inventory is now down around 1%, although the inventory is still concentrated in the Northeast, Florida, and Chicago areas. Cash-out refinances increased to 42% of all refis. 

After Friday's weak consumer spending data, the Atlanta Fed took down their estimate of Q3 GDP to 2.4% from 2.8%. 

Portfolio Managers are forecasting the bond bull market will continue into the 4th quarter as global growth is simply too weak to push up inflation. Of course they are talking their books, but they are probably correct. Separately, Henderson of the UK bought Janus Capital this morning. 

Over the weekend, the New York Times got ahold of Donald Trump's taxes from 1995, where he showed a $916 million loss, which he has used to write off taxes owed going forward. Of course, using business losses to offset business income is as legal as eating a hot dog at the ballpark, so there probably isn't a lot of political "there" there. Separately, Julian Assange claims he has emails which will finish Hillary Clinton, though WikiLeaks is delaying the release.

China continues to grapple with its housing bubble in hopes of engineering a soft landing. Watch the video at the end of the story, where investors storm an entrance in order to buy property.