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.