Morning Report: Incomes and spending rise

Vital Statistics:

	Last	Change
S&P Futures	2362.3	-2.3
Eurostoxx Index	380.3	-0.2
Oil (WTI)	50.3	-0.1
US dollar index	90.5
10 Year Govt Bond Yield	2.42%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.36
30 Year Fixed Rate Mortgage	4.13

Stocks are lower this morning as investors take some profits after a good quarter. Bonds and MBS are flat.

Personal Incomes rose 0.4% MOM while consumer spending rose 0.2%. The savings rate increased 0.2% to 5.6%. The PCE Index (the Fed's preferred measure of inflation) rose 2.1% YOY, while the core index, which strips out some volatile commodity prices rose 1.8%. 

The Chicago PMI Index rose slightly in March as new orders rose and employment fell. 

Consumer sentiment retreated slightly in March, according to the University of Michigan Consumer Sentiment survey. Note that the spread between the "soft" economic data (like sentiment indices) and the "hard" economic data (like actual spending numbers) has never been higher. This is probably being driven by expectations of regulatory relief.

Dallas Fed President Robert Kaplan is worried about Washington and the effect policy will have on consumer spending. The fear is that any sort of protectionism via a cross-border tax or policies that could increase health care inflation would crimp spending, especially for older folks. Of course there is a demographic effect happening as well - older people tend to spend less. Their kids are still just starting out, but they will hit their peak spending years soon enough. And before everyone starts wringing their hands over the savings rate, it is still pretty low by historical standards:

Want a good statistic to demonstrate how tight the housing market is? 57% of all realtors have been involved in a sale with at least 10 offers on a single property in the past year. In fact, only 2% have not experienced a bidding war in the last year. We are starting to see home sales contingent on the seller finding a place to buy.  This is part of the problem for the first time homebuyer: The move-up buyer can't find (or afford) a better place so they are staying put. 

William Dudley of the NY Fed prefers the Fed go slowly in reducing the size of its balance sheet. So far, the consensus is that the Fed will just let maturing bonds roll off and not re-invest those proceeds back into the market. Dudley wants to be even more cautious than that, and taper the re-investment, which would mean they would start by reinvesting only half of maturing proceeds back into the market, and then stop altogether later. Regardless of how the Fed handles it, any sort of balance sheet change should have a minimal effect on MBS spreads. If QE had a de minimus effect on spreads then ending the reinvestment policy should have little to no effect. Note Dudley is also concerned about the effect this will have on long term rates, which could restrict credit. 

Morning Report: Hawkish Fed-speak yesterday

Vital Statistics:

	Last	Change
S&P Futures	2355.0	-2.0
Eurostoxx Index	378.7	0.2
Oil (WTI)	49.8	0.3
US dollar index	90.2
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.36
30 Year Fixed Rate Mortgage	4.11

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

We will have Fed-speak all day, with 4 speakers. The bond market is still digesting hawkish statements from yesterday.

The final revision to fourth quarter GDP came in at 2.1%, an uptick from the previous 2.0% estimate, based on higher consumption. The PCE price index came in at 2%, bang in line with the Fed's inflation target. 

Initial Jobless Claims came in at 258k, a slight downtick from the week before. Consumer comfort slipped. 

Corporate profits rose 22% in the fourth quarter compared to a year ago to just over $1.7 trillion. While the stock market may have overreacted to the Trump reflation trade, the backdrop of increasing corporate profits provides basis for increasing stock prices. 

Federal Reserve Bank of Boston Head Eric Rosengren suggested the Fed should hike rates 3 more times this year and warned about pushing unemployment too low. “The perception seems to be that the outcome of each FOMC meeting depends on nuances of incoming data, with the base case being no change in rates,” Rosengren said in a speech in Boston Wednesday. “My own view is that an increase at every other FOMC meeting over the course of this year could and should be the committee’s default.” Rosengren used to be a dove, and now has turned hawkish. Again, the big question is whether the unemployment rate of 4.7% is a true reflection of the labor market given the low labor force participation rate. The true "tell" is going to be wage growth, and that is improving after a long slumber, but is nowhere near igniting inflation. Remember, the Fed has two goals here: 1) to prevent inflation from getting out of control, and 2) to get off the zero bound. The Fed is soft-pedaling goal #2, but that is what is really going on here. 

A bipartisan group of senators has warned FHFA Chairman Mel Watt to not suspend Fannie Mae's dividends to Treasury, as it would affect efforts to revamp the housing finance system. Note that the dividends from Fannie Mae have been used to prop up Obamacare, and the constant draining of capital means that Fannie is becoming less safe and more likely to need a bailout should home prices fall or we have a recession. 

Repeal and Replace might not be dead after all. Trump is hinting that he might deal with Democrats if the Freedom Caucus doesn't come onboard. That may be an empty threat as the bridge across the aisle is pretty much a smoking hulk at this point, but you never know. Trump does have leverage with the Democrats however, if he chooses to use it. Lawsuits against Obamacare still exist, and if the Administration chooses not to defend against them anymore, they could end the subsidies to the insurance companies which would probably end the exchanges in many parts of the country. The Freedom Caucus however is about to learn the first lesson of coalition politics - nobody gets everything they want. Additional progress on this front will generally be bond bearish (in other words sending interest rates higher). 

One-of-a-kind waterfront property in VA for under $250k? Yes! Though it is a bit of a fixer-upper.

Morning Report: Pending Home Sales back to bubble years

Vital Statistics:

	Last	Change
S&P Futures	2352.5	1.0
Eurostoxx Index	377.2	-0.1
Oil (WTI)	48.6	0.2
US dollar index	90.1
10 Year Govt Bond Yield	2.40%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.36
30 Year Fixed Rate Mortgage	4.11

Markets are flat this morning on no real news. Bonds and MBS are down small. 

Mortgage Applications fell 0.8% last week as purchases rose 1% and refis fell 3%. Rates collapsed at the end of the week due to the failure of health care reform, so it is probably premature to see if that has affected things. Note that mortgage rates invariably lag moves in the 10-year as lenders wait to see if the changes are for real. 

Pending Home Sales increased 5.5% in February, which is 2.6% higher than a year ago, and the second-highest reading since the bubble years (the first was last April). A slight uptick in listings drove the increase. Demand is there, supply is not.

Deep Subprime auto loans (loans to borrowers with sub 550 credit scores) have increased to 1/3 of all auto loan ABS. In 2010, they were just 5%. As you can expect, delinquencies are increasing on these. It is surprising that institutional investors are happy to buy bonds securitized by assets that depreciate like sushi, while securitizing an overcollateralized pool of high quality non-QM loans is like pulling teeth. 

If there is anything in Washington that should have bipartisan support, it is finding a solution for Fannie Mae and Freddie Mac. The current situation is untenable, as the government is sweeping all of their profits, which is making them more and more undercapitalized. The Trump Administration has indicated that dealing with the GSEs is a high priority, but they have yet to give any sort of indication of how they think the future housing market should look. The model the MBA supports is to turn them into regulated utilities, with a capped rate of return. The Obama Administration supported nationalizing them, while another plan would get them out of the securitization business and into the mortgage insurance business. There are many stakeholders in this discussion, including the affordable housing types who want to ensure underserved areas can get credit, hedge funds who own the common and preferred shares, as well as lenders and borrowers. 

Here is a good backgrounder on how hard tax reform is going to be. Every "loophole" will have a constituency which will defend it to the death. The failure to end Obamacare (at least for now) will have taken the biggest "pay for" off the table. That leaves Republicans with a couple choices: Either pass a 10 year tax cut the way George W Bush did, or do revenue-neutral tax reform like Reagan did. 

Institutional Investors are implementing artificial intelligence into the stock picking business. How much do you want to bet that everyone's algorithms will look pretty much the same and will pick the same stocks? 

Morning Report: Consumer confidence highest since Dec 2000

Vital Statistics:

	Last	Change
S&P Futures	2334.5	-1.5
Eurostoxx Index	374.0	-1.3
Oil (WTI)	48.32	0.5
US dollar index	89.4
10 Year Govt Bond Yield	2.36%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.32
30 Year Fixed Rate Mortgage	4.15

Markets are slightly lower after recouping most of yesterday's losses. Bonds and MBS are up small. 

The trade deficit improved to $64.8 billion from $68.8 billion in February. The weakening dollar is helping things, along with lower oil prices. Meanwhile retail inventories increased 0.4%.

Janet Yellen is scheduled to speak at 12:50 pm on workforce development. I doubt there will be any monetary policy (i.e. market-moving) statements, but you never know. 

Donald Trump is hoping he can attract some moderate Democrats to vote in favor of his infrastructure spending plan. Democrats are in favor of infrastructure investment, however they want the government to spend directly, while Trump and the Republicans want to do it via the tax code. The partisan rift will almost undoubtedly fall down that line, although the failure of Obamacare repeal leaves less money for direct spending. 

Remember the debt ceiling negotiations and threats of government shutdowns in the Obama admin? The government runs out of money in a month. 

Charles Evans said that two hikes might be the right number for 2017, which is more dovish than the consensus. The collapse of the Obamacare repeal is still sinking in. Watch for more dovish statements and a lowering of growth and inflation forecasts. 

Economic confidence fell last week according to Gallup and is at the lowest since the election. It is still higher than pre-election however. It will be interesting to see the numbers post the health care vote. 

That drop in confidence was not apparent in the Consumer Confidence numbers, which came in way higher than expected in March. The reading of 125.6 was the highest reading since December 2000. Note the cutoff for this survey was mid-March. 

The Richmond Fed Manufacturing Index is showing further strength, echoing the strength we have been seeing in the other regional Fed indices. 

Home prices rose smartly in January, increasing 5.9% and hitting a 31 month high, according to the Case-Shiller home price index. Seattle, Portland, and Denver led the charge all reporting over 9% growth. Seattle increased by over 11%.

Home inventories are at the lowest level in 2 decades, according to NAR at just under 4 months' worth. The first time homebuyer is being squeezed by tight inventory, rising prices, and increasing mortgage rates. Unless incomes begin to catch up with prices, something has to give: either home prices or building. According to NAR, the median home price February was $228,400, while the median income (from Sentier Research) was $58,056, putting the median house price to median income ratio at 3.9x, which is higher than the historical range of about 3.2- 3.6 times. Given the continued acceleration in home prices, professional investors who bought properties during the bust years and rented them out are happy holders. And to be honest, as an investor, you would sell real estate to buy what, exactly? Stocks? Bonds? Bitcoins?

Meanwhile, the homebuilder stocks are almost back to 2 year highs heading into the Spring Selling Season. Note that KB Home recently reported strong earnings, while Lennar disappointed on the the gross margin side. Increasing land costs are the biggest problem, while rising material and labor costs are an issue. The question for the bigger builders is what is going to drive revenue growth going forward once home prices plateau. At that point, they may begin to start building again. We aren't there yet however, as Stuart Miller of Lennar commented on an earnings call: "In this environment of accelerating sales pace, together with limited land and labor, and tight inventory particularly at the lower price points, we believe we are positioned for increased pricing power and solid earnings going forward." Translated, that says that Lennar plans to keep inventory tight and let price increases drive the top line going forward.

Despite the increase in rates, lenders are still optimistic about the economy, according to the latest Fannie Mae Investor Sentiment Survey, however a challenging purchase environment and the death of refis remain huge issues. Lenders are beginning to increase the size of the credit box in response, although the changes are modest. Increasing the credit box meaningfully will require some sort of return of the private label securitization market, which remains largely dormant. Addressing the issues here will be a huge part of Dodd-Frank reform. The US taxpayer currently stands behind something like 90% of all new origination, which almost nobody in government wants. 

The regulators are using AI and machine learning to deal with the markets. 

Morning Report: The Trump reflation bubble deflates

Vital Statistics:

	Last	Change
S&P Futures	2324.5	-19.5
Eurostoxx Index	374.0	-1.3
Oil (WTI)	47.62	-0.35
US dollar index	89.4
10 Year Govt Bond Yield	2.35%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.32
30 Year Fixed Rate Mortgage	4.17

Stocks are lower after the Trump reflation trade is being unwound. Bonds and MBS are up.

Not much in the way of data this week - probably the biggest number is the final revision to Q4 GDP on Thursday. We will have a lot of Fed-speak however. 

The Republican House couldn't agree on a replacement for Obamacare and pulled the vote. This puts Trump's planned infrastructure spend and tax cuts in jeopardy as reduced spending on healthcare was the pay-for. That said, tax reform will probably be easier as there is bipartisan agreement that the current corporate tax structure isn't really working for anyone. Tougher will be individual tax reform, where Republicans want to lower rates in exchange for reduced deductions. The mortgage interest deduction will stay, but the deduction for state and local taxes may not. 

Even though the markets are re-adjusting their forecasts for fiscal stimulus, central bankers still seem committed to getting off the zero bound. Amidst all the furor in the US over the last month, Europeans have completely re-assessed what they think the ECB is going to do, taking the implied probability of a rate hike by the end of the year from a long shot to a coin toss.

In the aftermath of the Obamacare vote, the next thing to watch for is whether the regional Fed banks and strategists start taking down their estimates for 2017 GDP. Remember, the Fed's forecast of 2-3 hikes this year was predicated on fiscal stimulus, which now looks less likely. 

Treasuries remain under some selling pressure as Japanese fund managers sell. Note that speculative short positions in Treasuries were pretty high going into this defeat on healthcare, so interest rates may be pushed lower as hedge funds unwind the trade. Not sure how long that lasts, but this is good news for homebuyers entering the Spring selling season. 

Home prices are just shy of their 2006 peak, according to the Black Knight Financial Services Home Price Index. In December, they rose 0.1% MOM and 5.7% YOY. The report has a good state-by-state analysis too. 

Morning Report: Investor optimism at a 16 year high

Vital Statistics:

	Last	Change
S&P Futures	2344.5	4.5
Eurostoxx Index	376.0	-1.3
Oil (WTI)	47.5	-0.7
US dollar index	90.0
10 Year Govt Bond Yield	2.41%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.32
30 Year Fixed Rate Mortgage	4.17

Stocks are higher this morning after durable goods orders came in strong. Bonds and MBS are flat

We have a lot of Fed-speak today with 5 speakers, mainly in the morning. 

Durable Goods orders rose 1.7% last month versus a 1.5% expectation. Aircraft orders drove the increase. Ex-transportation they rose 0.4%. The only disappointing part was capital goods orders, which fell 0.1% versus expectations of a 0.1% gain. Capital Goods orders is a proxy for business capital investment, and this number shows that while business may be more optimistic for the future, they aren't putting their money where their mouth is quite yet. 

Donald Trump challenged the GOP to either pass health care reform today or to forget it. Health care reform is being fought by both Democrats (who oppose any cuts whatsoever) and the GOP Freedom caucus (who oppose the program on general principles). Here are some of the proposed amendments and negotiation points. Health care reform is a critical piece of his planned infrastructure spending plan, so if that goes, then it will be much smaller than advertised and tax reform will probably have to be revenue-neutral. Note that revenue-neutral tax reform could still do a lot for the economy just by getting rid of the distortions caused by the tax code. At the margin, the failure to pass health care reform should make the Fed slightly less hawkish. 

Regardless of the state of health care reform, Treasury Secretary Steve Mnuchin says tax reform will get done by the August recess. 

Investor optimism is at a 16 year high, according to Wells Fargo. Interestingly, this is not based on taxes, as more people expect their taxes to increase (39%) than decrease (29%). Investors are also sanguine about the Fed's proposed interest rate hikes, with equal percentages thinking they will be good, bad, or have no effect. 60% say now is a good time to invest, which is the highest number since 2011, when Wells started tracking that number. Note that extremely high investor sentiment can be a contrary indicator, however betting on that is usually a losing trade. 

Suburbs and exurbs are again out-growing cities and their near suburbs, according to new Census data. This trend was upended during the post-bubble years as young Millennials stayed in the city. 

Morning Report: New home sales surprise to the upside

Vital Statistics:

	Last	Change
S&P Futures	2346.3	3.8
Eurostoxx Index	375.2	1.1
Oil (WTI)	47.5	-0.7
US dollar index	90.0
10 Year Govt Bond Yield	2.40%
Current Coupon Fannie Mae TBA	102.22
Current Coupon Ginnie Mae TBA	103.45
30 Year Fixed Rate Mortgage	4.17

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

Initial Jobless Claims came in at 258k, a small uptick from the week before. This is a 7 week high, but still very low historically. 

New Home Sales rose to 592k, higher than expectations. New home sales are approaching historical normalcy, however they are well lower than what is needed to meet pent-up demand and population growth. There are currently 266,000 homes for sale This represents a 5.4 month supply. 

Congress and Donald Trump are making last minute changes to the replacement for Obamacare in an attempt to swing conservatives who feel the bill doesn't go far enough. Democrats are united in opposition. Dealing with healthcare (and the future spending cuts it entails) lays the groundwork for infrastructure spending and tax reform. This in turn will affect the bond market, so progress on healthcare = higher interest rates, at least at the margin. 

As the bond market re-adjusts its expectations for fiscal stimulus, longer - term rates have been falling, which means the yield curve is flattening. This is generally bad news for stocks. Know who it is good for? Borrowers who have adjustable rate mortgages and want the certainty of a 30 year fixed rate payment. ARMs reset based on short term rates, which the Fed is moving upward. As the curve flattens, the relative attractiveness of 30 year fixed rates versus ARMs increases. The other big opportunity is refinancing older FHA loans which have built up sufficient equity to go into a conventional loan. There are still refi opportunities even in a rising rate environment. 

Prepayment speeds (i.e. refinance activity) are down 40% YTD according to Black Knight Financial Services. Delinquencies are down to 4.21%, a drop of .98% MOM and 5.51% YOY. Foreclosure starts fell 18% MOM and are down 37% YOY to just over 57,000. The Deep South remains the area hardest hit by foreclosures, while the Northeast saw the biggest improvement, with New Jersey and New York leading the way. 

House Financial Services Chairman Jeb Hensarling says that reforming Dodd-Frank remains a 2016 priority. Meanwhile, the bankers are adjusting their expectations for any changes. Getting any reform through the Senate is going to be a difficult job to say the least and will require bipartisan support. 

Ray Dalio of Bridgewater has a long paper on populism and how it may affect the economy more than monetary or fiscal policy. Populism has been largely dormant since the 1930s, but seems to be expressing itself in developed countries as well as emerging ones. 

Morning Report: Existing Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2340.3	-2.0
Eurostoxx Index	373.1	-2.6
Oil (WTI)	47.5	-0.7
US dollar index	90.2
10 Year Govt Bond Yield	2.42%
Current Coupon Fannie Mae TBA	102.09
Current Coupon Ginnie Mae TBA	103.39
30 Year Fixed Rate Mortgage	4.21

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

Mortgage Applications fell 2.7% last week as purchases fell 2% and refis fell 3%. Mortgage rates were more or less unchanged on the week. 

Existing home sales fell 3.7% YOY to 5.48 million in February, according to NAR. Low inventory and lower affordability offset the increased foot traffic. The median price rose 7.7% YOY to $228,400. Inventory represented a 3.8 month supply, which was an uptick from January, but is still lower YOY. Days on market dropped to 45 days from 50 in January and 59 a year ago. 42% of the homes sold in February were on the market less than a month. 

Home prices were flat on a month-over-month basis and are up 5.7% YOY, according to the FHFA House Price Index. The mountain states had the highest home price appreciation, while the northeast lagged. 

The story in the markets is that stocks and bonds are beginning to give back the Trump reflation trade, where bonds sold off and stocks rallied on the prospect of fiscal stimulus out of Washington. Donald Trump is getting a lesson in the limitations of the bully pulpit as health care reform appears to be stalling. Repealing and replacing Obamacare is the "pay for" for fiscal stimulus and tax reform, so if it doesn't happen then part of the basis for the post-Trump stock market rally is in jeopardy. Meanwhile, Neil Gorsuch seems to be sailing through his Senate Confirmation hearings, albeit with a little kvetching from the usual suspects. 

Punch line on Washington: health care reform is supposed to go to the House this week. If it passes, that is good for stocks and bad for bonds. If it fails, it is bad for stocks and good for bonds (in other words, if it fails, interest rates are probably heading lower). FWIW, a couple big market technicians (Ralph Acampora and Dennis Gartman) went bearish yesterday as the S&P 500 broke below the post-election uptrend. 

As anyone shopping for a home can tell you, it's slim pickings out there. We are seeing the biggest squeeze in the starter home category. It appears that part of the problem is a lack of confidence to move up to the next category. People in starter homes are staying put, which is keeping homes off the market. 

One potential issue for tax reform is affordable housing construction, which relies on tax credits to entice investors to put up money. If the corporate tax rate falls from 35% to 20% - 25%, then the value of those tax credits decreases. Affordable housing has always been a money-loser for developers and landlords, so tax incentives are used to paper them over. They used to be called tax shelters back in the day. Apparently the value of the credits (which actually trade) has dropped by 10% - 20% since Election Day. This is going to make life more difficult for Ben Carson and HUD.

Dealing with Fannie and Freddie is not an immediate priority, at least not for this year. Staffers are now starting from scratch to come up with a plan. One possibility is to end the profit sweep for the GSEs and let them retain that profit in order to build up their capital, which would take a decade or more. This would not require a legislative fix: Under the 2008 law, HUD Secretary Mel Watt has the authority to make that change. Note that Fannie is expected to pay $10 billion to the government for its fourth quarter gains. 

The Cleveland Fed takes a look at wage growth and posits that the huge capital for labor swap that has been in place since the end of the 20th century could be taking a breather. 

Interesting story in the FT about commodity trading advisors and how they are using momentum-trading strategies to put the old "portfolio insurance" wine in a new bottle. Portfolio insurance was a technique developed in the 1970s, which was largely credited with causing the Crash of 1987. These new strategies are similar, and use algorithms to follow the momentum of the markets, which would potentially add selling pressure to crashes. In the brave new world we live in, there are no longer market makers and specialists that take the other side of the trade, and we could see selling in a vacuum. The next market crash, investors may find out the downside of sub penny bid-ask spreads and commissions. 

Morning Report: Credit risk at post-crisis lows

Vital Statistics:

	Last	Change
S&P Futures	2373.8	3.5
Eurostoxx Index	378.3	0.6
Oil (WTI)	48.4	0.2
US dollar index	90.2
10 Year Govt Bond Yield	2.49%
Current Coupon Fannie Mae TBA	101.703
Current Coupon Ginnie Mae TBA	102.98
30 Year Fixed Rate Mortgage	4.22

Stocks are up small this morning while bonds and MBS are flat.

We have no economic data this morning, but will have a lot of Fed-speak during the day. 

CoreLogic took a look at credit risk of mortgages going back to 2001 and came up with an index to describe the credit risk of a typical mortgage, using things like credit scores, LTVs, and DTI ratios. Credit risk is now re-approaching the lows of 2011-2012. This is somewhat interesting as you would expect lenders to loosen standards as rates rise - basically using a larger credit box to offset some of the volume lost from refis. So far (this data is through December) we don't have evidence of lenders doing that. Even the Ellie Mae data had a de minimus change in FICOs. 

Speaking of increasing the credit box, we are seeing signs of life from the private label securitization market, which has largely been dormant since 2006. Angel Oak did a $148MM deal securitized by non-QM mortgages that got a AAA rating from Fitch. The new deals are much different than the past deals in that they documented, have large downpayments, and are much more overcollateralized than they were in the past. Part of the problem in bringing them back has simply been interest rates. Banks have been unable to structure anything that provides a high enough rate of return to interest the traditional MBS investor. As rates rise, that problem should go away. We are a long way from the no-no loans of 2005 - the typical loan is either a high quality jumbos or non-QM loans for the self-employed. 

 

Morning Report: Neel Kahskari explains his dissent

Vital Statistics:

	Last	Change
S&P Futures	2372.5	-2.8
Eurostoxx Index	377.7	-0.6
Oil (WTI)	48.0	-0.7
US dollar index	90.6
10 Year Govt Bond Yield	2.50%
Current Coupon Fannie Mae TBA	101.53
Current Coupon Ginnie Mae TBA	102.87
30 Year Fixed Rate Mortgage	4.24

Stocks are lower on no real news. Bonds and MBS are flat. 

Should be a relatively quiet week coming up with not a lot of market-moving data. 

Economic growth increased in February, according to the Chicago Fed National Activity Index. The 3 month moving average is the highest since December 2014. Employment-related indicators accounted for most of the growth in the index. 

Chicago Fed's Evans expects GDP to grow 2.3% this year, and says that 3 rate hikes is reasonable. 2 hikes are appropriate even if inflation progress remains uncertain. 

Minneapolis Fed Governor Neel Kashkari was the lone dissenter from last week's Fed decision, preferring to maintain rates at current levels. His rationale: inflation remains below the Fed's target rate and there is still too much slack in the labor market. “I dissented because the key data I look at to assess how close we are to meeting our dual mandate goals haven’t changed much at all since our prior meeting, We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains.” He also supports unwinding the Fed's balance sheet once conditions warrant tightening monetary policy, however he believes the Fed should announce their plan well in advance of taking any action in order to let the markets adjust. 

The internet has disintermediated the middleman in just about every profession - from retail to stockbroking. One area that hasn't been affected: realtors. It turns out people still value the human touch. “Who is going to write a contract? Fill out a disclosure statement? Anticipate what’s coming on the market?” asked association president Bill Brown. “There’s a human element to buying and selling a home that can’t be replaced.” It is amazing that the traditional 5% - 6% commission has been impervious to technology, but it has. 

The Department of Justice is taking PHH's side in the lawsuit over the structure of the CFPB. This is an amicus brief, and the judges may pay close attention, however the DC District Court of appeals is a liberal stronghold and will probably side with the CFBP. However the CFPB would need DOJ on its side if it goes to SCOTUS. 

As we begin the spring selling season, inventories are at record lows and we are seeing bidding wars even in places like the Midwest. In fact, buyers are bidding on contracts. It is truly a strange state of affairs when there is record low inventory, bidding wars, and housing starts remain well below historical averages. 

Here is what the proposed cuts to HUD means for US cities. The biggest cut will be the Community Development Block Grant program, which provides Federal funding for parks and bike paths etc. Unsurprisingly, the biggest beneficiaries are the counties surrounding Washington DC. This program also provides some of the funding for Meals On Wheels, which provides food to senior citizens. Needless to say, the media has focused all of its attention on that piece, which is a tiny fraction of the CDBG program. 

That said, we do have a housing shortage, especially at the lower price points. The Campaign for Housing and Community Development Funding makes its case for continuing public investment in low income housing. 

Supreme Court nominee Neil Gorsuch will start his Senate hearings this week. It will be interesting to see if the left filibusters him, and whether Mitch McConnell goes nuclear (eliminates the filibuster for SCOTUS nominees) in retaliation. 

Morning Report: strong economic numbers

Vital Statistics:

	Last	Change
S&P Futures	2379.3	0.3
Eurostoxx Index	378.1	0.4
Oil (WTI)	49.0	0.2
US dollar index	90.6
10 Year Govt Bond Yield	2.52%
Current Coupon Fannie Mae TBA	101.53
Current Coupon Ginnie Mae TBA	102.87
30 Year Fixed Rate Mortgage	4.27

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

Industrial production was flat in February, while manufacturing production increased 0.5%. Capacity Utilization fell to 75.4%. The low industrial production number was largely driven by weather and lower-than-expected utility expenditures. The manufacturing production number was actually strong and the Jan-Feb numbers were the strongest back-to-back reading in 3 years. Capacity Utilization is still relatively low compared to historical numbers, and is one reason why inflation remains under control.

Consumer sentiment increased to 97.6 from 97.2 in February, while the Index of Leading Economic Indicators ticked up to 0.6%.

Trump's new budget involves cuts to HUD. Here is a list of the specific cuts. Initially it appears that rental support and mortgage origination are untouched, and other areas like community development block grants will take the hit. Community Development Block Grants are known primarily for Meals on Wheels, but that is not really what they do. CDBGs are mainly Federal grants to local governments to build parks or other nice-to-haves. Unsurprisingly, the biggest beneficiaries are the counties surrounding DC.

Refinances dropped to 43% of all originations in February, according to Ellie Mae. Refis have been falling due to the change in VA IRRL securitization treatment and rising rates. The refis that still make sense however, are refinancing old ARMs into 30 year fixed rate mortgages, as LIBOR (which is what the interest rates is pegged to) is definitely going up, while longer term rates may or may not increase. The other trade is refinancing out of FHA loans from a few years ago, where the borrower has enough equity to qualify for a conforming loan with no MI. Time to close dropped to 46 days, which was down 5 days from January, but flat YOY.

UBS is out with a call saying the bond market sell-off is almost over. They are making the argument that the yield curve typically flattens in a tightening cycle, and the the long end adjusts first then stagnates. I made a similar argument here.

Morning Report: The fed hikes, but markets are calm

Vital Statistics:

	Last	Change
S&P Futures	2384.5	4.0
Eurostoxx Index	377.3	2.2
Oil (WTI)	49.2	0.3
US dollar index	90.7
10 Year Govt Bond Yield	2.53%
Current Coupon Fannie Mae TBA	101.53
Current Coupon Ginnie Mae TBA	102.87
30 Year Fixed Rate Mortgage	4.29

Stocks are higher this morning after the Fed hiked rates. Bonds and MBS are up.

As expected, the Fed hiked rates yesterday. The statement was taken as relatively dovish, and the dot plot showed a slight increase in the 2017 Fed funds rate projection, however it was only about 4 basis points from December. In the press briefing, Yellen's main message was that the economy is doing well. The dovish language and the modest increase in the dot plot caused bonds to rally, which pushed the 10 year below 2.5% yesterday.  We saw a similar reaction in the 2 year, which went from a 1.4% yield to a 1.3% yield. The economic projections were pretty much unchanged from December. You can see a comparison of the dot plots below, where the central tendency (or average of the 2017 dots) increased from 1.49% in December to 1.53% in March:

Housing starts came in at 1.29 million in February, slightly better than expected. This is 3% above January, and 6% higher than last year. Single family starts increased to 872k, which was 3% above last year. Building Permits came in at 1.21 million which is up 3% YOY, but below January's numbers. Housing starts are still surprisingly depressed given the dearth of inventory.

Job openings increased to 5.6 million in January, according to the JOLTS data. The quits rate (which usually leads wage growth) inched up to 2.2%. The quits rate is a big number to the Fed and one they watch closely. 

In other economic data, initial jobless claims fell to 241k, while the Philly Fed fell from 35 year highs. Consumer comfort edged up as well. 

Donald Trumps's proposed budget increases defense, while cutting discretionary spending pretty much everywhere else. Entitlements stay untouched. HUD will see a decrease, although it appears (at least as of now) that Ginnie Mae and the mortgage area will not feel it. It is too early to tell if it has much support. If he can't get a budget deal, then we continue to fund the government on continuing resolutions, which more or less means the first Obama budget. 

Morning Report: Small business confidence remains strong

Vital Statistics:

	Last	Change
S&P Futures	2372.0	1.0
Eurostoxx Index	374.3	1.1
Oil (WTI)	48.3	-0.2
US dollar index	91.7
10 Year Govt Bond Yield	2.60%
Current Coupon Fannie Mae TBA	101.03
Current Coupon Ginnie Mae TBA	102.5
30 Year Fixed Rate Mortgage	4.21

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

Should be a quiet day in the markets as the FOMC meeting begins and most of the Northeast gets buried with snow. 

Inflation remains tame at the wholesale level, as the producer price index rose at 0.3% MOM and 2.2% YOY. Ex food and energy, the index rose 0.3% and 1.5%. The core index was up 0.3% and 1.8% MOM / YOY respectively. 

Small Business optimism slipped in February, but remains close to 43 year highs, according to the NFIB. Optimism on the regulatory front, along with the potential for tax reform drove the increase. The job openings component of the index hit levels not seen since 2000, and a tight labor market is squeezing margins for business owners who don't yet have to confidence to pass on those increased costs to customers. Small businesses continue to report higher sales, and we are beginning to see businesses invest in plant and equipment, something that has been dormant since 2007. 

CoreLogic takes a look at the foreclosure crisis 10 years on. A total of 7.8 million homes were lost to foreclosure, and at the peak of the crisis, there was 1.5 million foreclosed homes in inventory. 

The Congressional Budget Office scored the GOP's healthcare plan yesterday. It basically is as expected: cheaper and covers less people. A few GOP defections in the Senate will kill it. 

Morning Report: Fed will almost assuredly hike this week

Vital Statistics:

	Last	Change
S&P Futures	2372.0	1.0
Eurostoxx Index	374.3	1.1
Oil (WTI)	48.3	-0.2
US dollar index	91.7
10 Year Govt Bond Yield	2.59%
Current Coupon Fannie Mae TBA	101.03
Current Coupon Ginnie Mae TBA	102.5
30 Year Fixed Rate Mortgage	4.21

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

We will be getting a lot of important economic data this week, with housing starts, inflation, and retail sales. That said, the biggest event this week will be the FOMC meeting on Tuesday and Wednesday. A major snowstorm is expected to hit the East Coast on Tuesday, so that could affect things, especially if the government tells all non-essential government employees to stay home on Tuesday. DC is expected to get 6 - 10 inches, while the Northeast could get up to 2 feet. 

The era of easy money is supposedly over at the Fed, although even if the Fed hikes 3x this year, monetary policy will still be extraordinarily accommodative. With its giant balance sheet and still negative short term rates, it will take a long time to get to neutrality. Not only that, the Fed is going much slower than it has in the past. You can compare the different cycles in the chart below. Another big break from the past was communication: Over the past month, Fed governors have been singing from the same sheet of music and preparing the markets for hikes. This time around, the markets believe the Fed will actually hike rates; in 2016 the markets called the Fed's bluff. 

FWIW, Goldman is saying it will be a close call between 4 hikes this year and 3 hikes plus a balance sheet adjustment. The Fed Funds futures are now 90% on a hike this week. The big question is how much of this is the Fed getting ahead of expected expansionary fiscal policies which may or may not happen. 

Here is a good cheat sheet of how various asset classes have performed during Fed tightening cycles. Cash outperforms bonds, but stocks outperform both. Who says you can't fight the Fed?

Morning Report: Decent jobs report

Vital Statistics:

	Last	Change
S&P Futures	2378.0	11.8
Eurostoxx Index	374.8	1.9
Oil (WTI)	49.9	0.6
US dollar index	91.9
10 Year Govt Bond Yield	2.60%
Current Coupon Fannie Mae TBA	101.438
Current Coupon Ginnie Mae TBA	102.784
30 Year Fixed Rate Mortgage	4.21

Stocks are higher this morning after a strong jobs report. Bonds and MBS are up small. 

Jobs report data dump:

• Payrolls up 235k vs 200k expected
• unemployment rate 4.7%
• labor force participation rate 63%
• average hourly earnings up 0.2% MOM, up 2.8% YOY

Overall a decent report. Didn't match the ADP number on payrolls, but ADP generally correlates with the revised BLS report, not the first one. Looks like the Fed is going to hike next week. Note another big increase in construction employment, to 58k, which is the highest since 2007. Bonds had already sold off on the strong ADP number, so they are recouping some of those losses today. 

Donald Trump met with community bankers yesterday and promised to ease the regulatory burden the state has imposed on them. There has generally been bipartisan agreement that the regulatory burden on small banks has been too heavy, and that it is inhibiting credit to small business. 

Goldman is out with a call this morning forecasting that the Fed will hike 3x this year: March, June, and September. They expect the Fed to end their reinvestment of maturing assets in the fourth quarter this year. The end of reinvestment shouldn't have a major effect on mortgage rates, since spreads were largely insensitive to QE in the first place. 

The Fed funds futures are now forecasting a 50% chance of a June rate hike, up from about 20% a couple weeks ago. 

Household net worth increased to record levels in the fourth quarter, according to the Federal Reserve. The ratio of net worth to disposable income hit 6.5x, which matches bubble-era highs.