Morning Report: Home Purchase sentiment slips

Vital Statistics:

	Last	Change
S&P Futures	2123.5	-6.0
Eurostoxx Index	333.4	-0.4
Oil (WTI)	44.7	-0.2
US dollar index	88.1	0.1
10 Year Govt Bond Yield	1.82%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.61

Markets are flattish as Americans head to the polls. Bonds and MBS are flat.

The NFIB Small Business Optimism index improved in October, however it remains below historical norms. Labor markets remain tight: 55% of all respondents tried to hire in the past month, and 48% reported few or no qualified candidates. A net 25% of all respondents reported increasing employee compensation. A net 19% plan to increase wages over the next six months, which is among the strongest post-recession numbers. Earnings trends are negative, however which means companies are unable to pass along cost increases to customers, at least not yet. Overall, a net 7% of all respondents expect the economy to worsen over the next 6 months.

Job openings were little changed in September, according to the BLS's JOLTS jobs report. JOb openings were at 5.5 million, while separations were 4.9 million. The quits rate was unchanged, while layoffs decreased. The quits rate is the best indicator for wage growth going forward. 

There were 36,000 completed foreclosures in September, according to CoreLogic. The current foreclosure inventory is about 340,000 homes, which is down 31% from a year ago and represents about 0.9% of all homes with a mortgage. The seriously delinquent rate fell to 2.6% which is the lowest since late 2007. Foreclosures remain concentrated in the judicial states.

Fannie Mae's Home Purchase Sentiment Index slipped in October to 81.7 from 82.8 the month before. Sentiment about the direction of home prices over the next 12 months slipped to a net 31% of bullish respondents from 34% in September. The most surprising statistic out of this survey was the decline in the number of people who say their net income is significantly higher: A net 4% said it was significantly higher versus 12% a month ago. Not sure what is happening there, and it doesn't comport with some of the other labor indicators we have been seeing, but there it is. Overall, respondents think the economy is on the wrong track by a wide margin: 56% to 36%. 

Dodd-Frank and the Volcker rule have reduced the market-making functions of banks. Historically, when a large customer like a mutual fund would want to sell a large order of Treasuries, they would call up someone like J.P. Morgan, who would buy the bonds and then try and sell them to their customers. The specialist on the floor of the NYSE did something similar. If a big buyer (or seller) came in for Apple stock and created an imbalance, the specialist would send out an imbalance notification to the newswires in hopes of attracting investors to take the other side. This had the effect of taking volatility out of the market. That function doesn't really exist anymore, and the net result will be more volatility. It won't matter until the next crash, and many investors who call their brokers asking to sell will find a no-bid market. Know where this could get particularly ugly? Munis.