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.