Morning Report: Market handicapping a higher probability of a March hike

Vital Statistics:

	Last	Change
S&P Futures	2345.5	-5.0
Eurostoxx Index	370.4	-1.1
Oil (WTI)	53.4	0.3
US dollar index	91.0	-0.2
10 Year Govt Bond Yield	2.49%
Current Coupon Fannie Mae TBA	102.1
Current Coupon Ginnie Mae TBA	103.2
30 Year Fixed Rate Mortgage	4.11

Stocks are taking a breather after several record highs. Bonds and MBS are flat. 

Housing starts came in at 1.246 million in January, a little better than expected. Starts are up 4.6% MOM and 8.2% YOY. Single family increased, while multi-family fell. Building Permits came in at 1.285 million. We are still way below historical averages in housing starts, which is even more apparent when you adjust for population. This is why inventory is so tight right now. While the aging of the baby boom and the bubble explain some of the weakness, the Millennials are a bigger generation than their parents. If the reason for a lack of construction is credit related, we could see an improvement as there is bipartisan consensus that Dodd-Frank put too big of a regulatory burden on the smaller community banks, and they are the ones who finance the smaller builders. 

Housing starts:

And housing starts adjusted for population growth:

Separately, house flippers are relying more and more on crowd-funding as opposed to hard money loans. 

Initial Jobless Claims came in at 239k, which is one of the strongest prints since the early 1970s. Separately, consumer comfort improved last week. 

Speaking of strong indicators, the Philly Fed index hit the highest number since 1983. While improved sentiment drove some of the increase, new orders (which is a tangible number) also hit a record. Employment indicators rose, with companies increasing the number of workers, and the number of hours. While these regional Fed reports aren't really big market-moving indicators, you can't ignore what they are saying either. 

After Yellen's testimony and yesterday's stronger-than-expected CPI numbers, the Fed funds futures market increased their implied probability of a March rate hike to 42% from 30%. 

Fed Vice Chair Stanley Fischer says that inflation and employment are improving, and monetary policy remains accomodative. He expects "to be moving closer to the 2-percent inflation rate and that the labor market would continue to strengthen. If those two things happen we'll be on the (policy) path that we more or less expected." So, staying with either 2 or 3 hikes this year. 

Despite the increase in rates, refis accounted for 47% of loans in January, which is pretty much where it has been since October. FHA and VA both increased. Time to close ticked up a day to 51. The average FICO score dropped by 4 points to 722. 

Fortress Investment, a majority shareholder of Nationstar, was bought by Japan's Softbank yesterday. Masayoshi Son is interested in building a US financial services business. Fortress's distressed mortgage portfolio did reasonably well, but their macro hedge funds have underperformed, and the stock has been dead money for years. What this means for Nationstar is anyone's guess.