Morning Report: Q1 GDP weakest in 3 years

Vital Statistics:

	Last	Change
S&P Futures	2387.0	1.0
Eurostoxx Index	386.8	-1.0
Oil (WTI)	49.5	0.6
US dollar index	89.7
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	102.63
Current Coupon Ginnie Mae TBA	103.68
30 Year Fixed Rate Mortgage	3.98

Stocks are flattish after first quarter GDP misses expectations. Bonds and MBS are down.

First quarter GDP came in at 0.7%, which was lower than the 1.1% consensus forecast. A decline in spending on motor vehicles was a drag on Q1, which has been weak the past several years for some reason. The personal consumption expenditure (the inflation measure most preferred by the Fed rose 2.4%, which is higher than their target rate. This was the highest reading in several years, which means the Fed might be forced to move even though growth is weak. The savings rate jumped from 5.5% to 5.7%, which means consumers are still using increases in income to pay down debt. Inventory depletion and a drop in government spending, along with weak consumption were the main drivers. Note that this is just the advance estimate, and will be revised twice in the next month. 

Employment costs rose 2.8% annualized in the first quarter, according the BLS. Wages and salaries rose 2.5% while benefit costs increased 2.2%. We have been seeing a gradual tick up in this index, however wages are still well off their pre-crisis historical trend. 

Trump's tax plan was short on specifics, but it certainly looks like wealthier residents in high tax states will feel it the most. Killing the state and local tax deduction has been fraught with risk, but given that it will largely affect the blue states it might have a chance. Eliminating the mortgage interest deduction will be a poison pill, IMO. Will tax reform hit the residential real estate market? Probably not, as tight inventories are the dominant factor driving pricing right now. 

The homeownership rate ticked down slightly in the first quarter to 63.6% from 63.7% in the fourth quarter. It looks like it is on the rebound, however the first time homebuyer really needs incomes to rise in order to catch an asset that is increasing 7% a year. More starter home construction would help too, but multi-fam seems to be the interest of builders. Vacancy rates are largely flat MOM and YOY. 

The Chicago Purchasing Manager Index rose last month, while consumer sentiment slipped. 

Housing Wire's home price forecast for the rest of the year. Overall, looking at 3.5% growth, with a range of anywhere from 1% to 10%. 

Morning Report: Pending Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2385.0	2.8
Eurostoxx Index	387.6	-1.2
Oil (WTI)	48.7	-0.9
US dollar index	89.7
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.63
Current Coupon Ginnie Mae TBA	103.68
30 Year Fixed Rate Mortgage	3.98

Stocks are mixed this morning as markets digest the ECB non-move. Bonds and MBS are down small. 

Pending Home Sales fell 0.8% in March as tight inventory reduced transactions. On a YOY basis, they are up 0.8%, as February was an unusually strong number. NAR chief economist, says sparse inventory levels caused a pullback in pending sales in March, but activity was still strong enough to be the third best in the past year. "Home shoppers are coming out in droves this spring and competing with each other for the meager amount of listings in the affordable price range," he said. "In most areas, the lower the price of a home for sale, the more competition there is for it. That's the reason why first-time buyers have yet to make up a larger share of the market this year, despite there being more sales overall."

Durable Goods orders rose 0.7% in March, lower than the 1.1% estimate. Ex transportation and defense, they rose 0.1%. Capital Goods orders, which is a good proxy for business capital investment, rose 1.2%. Yet another data point where the hard data isn't confirming the buoyant soft data. 

Initial Jobless Claims rose slightly to 257k last week, while retail inventories rose 0.4% and wholesale inventories fell 0.1%. The consumer comfort index edged up as well. 

Regular readers of this blog know I have been discussing the post-Trump interest rate sell-off for months. I lay out the full case in the latest issue of the Scotsman Guide: Finding Comfort in History. I discuss why the Fed might not move 3 times this year (because they have invariably been high in their GDP estimates), why a 75 basis point move in the Fed Funds rate won't necessarily translate into a 75 basis point hike in mortgage rates (because the yield curve usually flattens), and why the end of QE reinvestment won't have a dramatic effect on mortgage rates. 

Trump's tax plan which was unveiled yesterday was really more of a guidance to Congress than an actual plan. FWIW, legislation originates in Congress, not the White House, so it is unrealistic to expect a detailed, CBO-scoreable plan. That said, we know that the basis plan will be to reduce the number of tax brackets, lower the rates, increase the standard deduction, and to limit itemized deductions. What does that mean for real estate? Nobody knows for sure, but the National Association of Realtors is weighing in already, urging the government to maintain the mortgage interest deduction and the state / local tax deductions. Trump's plan will probably ding upper middle class homeowners in high tax states the hardest. 

Morning Report: Is the Trump Reflation trade dead?

Vital Statistics:

	Last	Change
S&P Futures	2384.0	-1.0
Eurostoxx Index	387.2	0.2
Oil (WTI)	49.2	-0.4
US dollar index	89.8	0.3
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.68
30 Year Fixed Rate Mortgage	3.98

Stocks are flat as markets await Donald Trump's tax plan. Bonds and MBS are down small. 

Trump is expected to unveil his plan for a 15% corporate tax rate today. This rate is a negotiation posture and it will almost certainly increase to 20% or higher. Trump is not only negotiating with Democrats, he is also negotiating with Paul Ryan, who wants to implement a border adjustment tax which will offset the revenue lost from the tax cut. If the tax cut is not revenue-neutral, it will need 60 votes in the Senate, which will doom it. The other option, which would be a temporary reduction in the rate, would probably not influence corporate decision making, especially if it was only for a few years.

Note that our current tax rate of 35% is the highest in the world, and our competitors are in the mid 20s. Germany has been the biggest tax cutter, taking its rate from 42% to 16% over the past 16 years. Does the Laffer Curve apply to corporate taxes? The Laffer Curve (pictured below) basically showed that tax receipts don't increase monotonically as the rate increases - it is a curve. When taxes are 0% or 100% the government will raise nothing. In between those numbers there is an optimal point. The debate in Washington has been over which side of that point we are on. The curve for corporations is influenced not only by tax policy influencing corporate incentives, it is also influenced by competition from other jurisdictions. The reason why Corporate America has trillions stashed overseas is testament to this. Outsized corporate taxes compared to our competitors incentivizes corporations to maximize overseas income and minimize domestic income. This amounts to a subsidy to foreign governments. While the CBO (who will score the proposal) poo-poos the idea of dynamic scoring, in this case it is probably appropriate, even if you discount the effect on economic growth, simply because it removes this perverse incentive. 

Will the potential tax cut breathe new life into the Trump reflation trade? A revenue-neutral tax reform will probably not be massively stimulative (it can't be, by definition) however removing these perverse incentives will certainly help. If Trump can get some foreign tax repatriation deal, that will help. The left will probably balk if there are no strings attached to it, as they fear it will only go to dividends and buybacks. However, there could be a way to convince them to go along, if some of the savings are applied to things like increasing payroll, increasing training, etc. Infrastructure spending is also going to be a hard sell, both to Democrats, who despise the privatization of infrastructure, and the Freedom Caucus, who despises government spending in general. 

Punch line: The Trump reflation trade is probably going to be based on revenue-neutral tax reform and some sort of stripped-down infrastructure spending plan (if one even materializes). The single best effect will be regulatory reform, however none of this should really push inflation higher, which is what the Trump reflation trade was all about in the first place. 

Mortgage Applications increased 2.7% last week as purchases fell 1% and refis rose 7%. The average 30 year rate fell 6 basis points. Note last week was a holiday-shortened week, which probably affected the purchase number. 

Republicans have floated a bill that funds the government through the rest of the fiscal year without funding the wall. Funding for the wall has been a sticking point and Democrats have vowed to shut down the government over it. 

Fannie Mae is rolling out new products designed to help borrowers with student loan debt. This includes cash-out refis that allow a borrower to consolidate student loan debt into a mortgage, Other measures will allow borrowers to exclude debt paid by others, and another will allow lenders to accept student loan information on credit reports. Given the high home price appreciation we have been seeing, the first time homebuyer needs all the help it can get. 

Morning Report: Strong new home sales

Vital Statistics:

	Last	Change
S&P Futures	2375.3	5.3
Eurostoxx Index	387.5	1.4
Oil (WTI)	49.2	0.0
US dollar index	89.5	0.1
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.68
30 Year Fixed Rate Mortgage	3.98

Stocks are higher this morning as it looks like cooler heads are prevailing in the continuing resolution negotiations. Bonds and MBS are down small. 

New home sales increased to an annualized rate of 621k, well above the Street expectations of 587k. New Home Sales is a notoriously volatile number, but it looks like the Spring Selling Season is off to a good start. 

Pulte announced earnings this morning, with a 14% increase in revenues and a 17% increase in earnings. CEO Ryan Marshall had this to say about the spring selling season: “Buyer interest during the spring selling season of 2017 has been high and points to the ongoing strength in recovery for the housing industry. Strong buyer demand continues to be supported by an improving economy and resulting employment and wage gains, high consumer confidence, a low inventory of new and existing homes, and the powerful demographic forces of Millennials and Baby Boomers. Given the strength of our land pipeline and our disciplined investment practices, PulteGroup is well positioned to grow its market presence and improve its financial performance within this operating environment.” Note that gross margins fell by 230 basis points, which shows costs are outpacing price growth. 

In other economic data, consumer confidence slipped in April, but is still strong, while the State Street Investor Confidence Index unexpectedly rose. The Richmond Fed Manufacturing Index improved as well. 

Home price appreciation accelerated in February, according to the FHFA House Price Index. Prices were up 0.8% MOM and are up 6.4% annually. Prices have risen 6.2% annually since bottoming in early 2012. Regionally, the Mountain states had the biggest increase, coming in at 9.5%. Even New England, historically a laggard, increased by 6.5%. The worst area - Mid atlantic - rose 4.6%. 

Meanwhile, the Case-Shiller Home Price Index rose 0.7% MOM and is up 5.9% YOY. 

In politics, Donald Trump seemed to moderate his comments about marrying the wall with funding the government through the end of the fiscal year. Given that Republicans hold all 3 branches of government, why does Trump need Democrats? The reason is the same thing that vexed Obama: The House Freedom Caucus, who won't support anything that doesn't repeal Obamacare or cut spending enough. This gives Chuck Schumer and the Democrats more leverage than they would ordinarily have. Note Congress can play some accounting games to move the deadline back a couple of weeks, so this Friday isn't necessarily a drop-dead date. A government shutdown is probably unlikely, but LOs should be thinking about ordering 4506-Ts if they need them. 

Donald Trump is targeting a corporate tax rate of 15%, which will be unveiled tomorrow. House Speaker Paul Ryan is closer to 20%, and believes that 15% is too low to be revenue-neutral. While even Democrats recognize our corporate taxes are too high, they won't get onboard anything that amounts to a tax cut. Take a look at the chart below. It has our taxes (and our competitors') tax rates from 2000 to 2016. Pretty much everyone has cut taxes except for us. Trump will also reveal a plan for individual income taxes as well. 

Having trouble saving? There's an ap for that. New fintech companies are micro-analyzing an individual's earnings and spending patters, and using credit and savings sweeping to normalize their client's income (think a freelancer or an Uber driver). Some will pay all your bills for you, and others will ensure your checking account doesn't overdraft. Some will extend credit at high rates, however those rates are generally better than payday lenders. 

Another blow for cheap new housing construction. The US is imposing tariffs on Canadian softwood exports in an ongoing trade dispute. Softwood (basically pine) is primarily used for framing in housing, so we could see lumber prices increase further. While "sticks and bricks" are not the main driver of housing construction cost, this doesn't help matters. It is getting to be a problem when the typical starter home is unaffordable to its target market. 

The MBA has rolled out its plan for the GSEs. The idea would be to turn Fannie and Freddie into public utilities and to take steps to open up the market for private mortgage guarantors. They estimate it could take up to 10 years to implement. Note the clock is ticking: As the government continues to sweep all of Fannie's profits to Treasury, their net worth is decreasing. 

Morning Report: Markets bounce on French election news

Vital Statistics:

	Last	Change
S&P Futures	2374.8	27.3
Eurostoxx Index	386.0	7.9
Oil (WTI)	49.9	0.3
US dollar index	89.5
10 Year Govt Bond Yield	2.29%
Current Coupon Fannie Mae TBA	102.78
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.98

Stocks are higher this morning after the French election had no surprises. Bonds and MBS are down on the risk-on trade.

We will have a lot of real estate related economic releases this week, however we don't have much in the way of market moving data until Friday when we get the first look at Q1 GDP. We have Fed-Speak today and Friday. 

The French election will pit a centrist against a right wing candidate. The far left candidate did not make it to the next round. Given this is just a first round election, the market's sugar high probably won't last all that long. 

After the French election, the next big event is the the potential government shutdown on Friday. The sticking point is that Trump wants funding for the border wall, which Democrats are calling a non-starter. If Trump and the Democrats can't get a deal (or Trump can't get Republicans to help him out), we will get a partial government shutdown starting Saturday. This will be the big event this week, although markets are probably used to this sort of drama. 

Note that the last time we had a shutdown, people weren't able to get 4506-T's out of the IRS during the shutdown. LO's should plan accordingly to keep closings on track.

Economic activity took a step back in March, according to the Chicago Fed National Activity Index. Employment related indicators drove the decrease. Not sure how much of that is coming from retailers, who have been struggling as of late. This is a meta-index of leading and lagging indicators, however it certainly shows that the hard data (actual spending / employment / production numbers) is not catching up to the soft data (sentiment surveys).

Tight inventory has home prices on a tear, with the Black Knight Home Price Index up 0.8% MOM and 5.7% YOY. The index has now passed its bubble peak and is making new highs. The FHFA index and the CoreLogic indices have hit new highs as well, leaving only the Case-Shiller index still underwater. Mortgage originators are issuing tons of pre-qual letters, but the offers are not forthcoming since the market is so competitive. Buyers are now making offers without contingencies in order to get the home they want. The hottest market? Seattle, where prices rose 2.7% on a month-over-month basis. This is hard for the first time homebuyer who often needs some help paying closing costs. VA loans allow for seller's concessions (which don't cost the seller any money), which means you can get up to a 103% LTV loan. 

Chris Whalen has a good piece on what the origination business will look like for 2017. Punch line: lower volumes, increasing purchase activity, and a widening of the credit box. He also speculates that CFPB Chairman Richard Cordroy's response to Trump staffer Gary Cohn's request to resign was to launch a new assault on Ocwen. There are rumors that JP Morgan might get back into the FHA lending business, and Wells has cut pricing on FHA loans as well. In terms of home price appreciation, housing affordability is stretched, but low inventories will proved price support. 

Homebuilder DR Horton reported strong Q2 earnings as revenues and income rose 17%. New orders were up 14% in units and 17% in value. They took up guidance as well. 

Morning Report: Existing Home Sales highest in 10 years

Vital Statistics:

	Last	Change
S&P Futures	2355.0	3.0
Eurostoxx Index	378.8	0.7
Oil (WTI)	50.6	-0.1
US dollar index	89.8
10 Year Govt Bond Yield	2.23%
Current Coupon Fannie Mae TBA	102.97
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.98

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

Existing Home Sales rose to their fastest pace in 10 years, according to the NAR. Existing Home Sales increased at a 5.79 million annual rate, which was the fastest since January 2007. Lawrence Yun, Chief Economist of NAR said: The early returns so far this spring buying season look very promising as a rising number of households dipped their toes into the market and were successfully able to close on a home last month," he said. "Although finding available properties to buy continues to be a strenuous task for many buyers, there was enough of a monthly increase in listings in March for sales to muster a strong gain. Sales will go up as long as inventory does." The median existing home sale price was $236,400, up 6.8% from a year ago. Inventory increased, however it remains at about 3.8 months' worth. Days on market dropped to 34, a huge decrease from a year ago, when it was in the mid-high 40s. Inventory remains the biggest problem as homebuilders have yet to pump out the required supply to meet demand. 

More Millennials (ages 18-34) live with their parents than with a spouse. Of course we have seen a general trend of waiting until later in life to get married and have kids, so this is somewhat just the extension of a trend. How many of these young adults would like to move out of their parent's home but find rents / house prices too expensive? 

The next big issue for the bond market (and markets in general) is the debt ceiling debate. The government will run out of money by the end of the month, although it can play some accounting games to keep the lights on until a new CR is passed. If not, we could see a partial government shutdown on April 29. It appears that Trump will need some Democrats to pass a CR, and they are demanding that funds be appropriated to shore up the Obamacare exchanges. Trump wants more money for a wall, immigration enforcement and defense spending, which the Democrats oppose. So far, the markets view this as so much theater, but we will see how far the brinkmanship goes. 

Delinquencies have hit an 11 year low, according to Black Knight Financial Services. Total non-current inventory (30 days down +) is at 2.3 million. Prepay speeds increased however, as rates fell. Foreclosure starts ticked up slightly MOM, but are down 18% YOY. 

Why the exurbs are the new high growth area, and what that means for urban living (and politics). Technology is lowering the cost of transportation (basically lowering the cost of distance), and more manufacturing does not need to be near the big cities, and it looks like the exurbs will take up the slack. This has enormous implications for politics, as Democrats dominate the cities and Republicans dominate the suburbs. 

More problems for Backwards Newco. North Carolina is prohibiting them from acquiring new servicing until it fixes defects in how it handles escrow accounts. Separately, the CFPB is going after them as well. The stock was down over 50% yesterday on about 20x normal volume. 

Legendary macro trader Paul Tudor Jones is sending a warning about the stock market. You are seeing more and more strategists fretting about valuations as the Trump reflation trade deflates. If the stock market takes a swoon, that will not be lost on the Fed. Yet another reason why we may have seen the highs for mortgage rates and the 10 year already. 

That said, Treasury Secretary Steve Mnuchin says the Administration is "pretty close" to bringing major tax reform. It will probably be an end-of-year event, as the previous August deadline is not going to happen. The Administration has a narrow window to get things done, as politicians will turn to the 2018 midterms soon after the new year. 

Morning Report: Hard data vs. soft data

Vital Statistics:

	Last	Change
S&P Futures	2340.3	6.5
Eurostoxx Index	377.6	0.3
Oil (WTI)	50.6	0.1
US dollar index	89.7
10 Year Govt Bond Yield	2.23%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104.04
30 Year Fixed Rate Mortgage	3.95

Stocks are up this morning as earnings continue to roll in and oil rebounds. Bonds and MBS are down small. 

Initial Jobless Claims ticked up slightly to 244k last week, while the Philadelphia Fed Business Outlook survey cooled from its earlier torrid pace. 

The Index of Leading Economic Indicators came in better than expected at 0.4%, but is a drop from February. 

Since the election, we have seen a disconnect between the hard data and the soft data. Hard data includes things like the Philly Fed survey, which are often sentiment-heavy indices. These have been exceptionally strong over the past few months, while the actual hard data releases (manufacturing production, retail sales, etc) have been tepid. Stock market bulls have been betting that the hard data would eventually catch up (in other words the optimism would begin to manifest itself into real spending). Instead, it looks like the the opposite is happening - the actual hard data is remaining more or less where it has been for the past 8 years and the sentiment indicators are coming back down to Earth. It is still early days, and regulatory relief will take some time to manifest itself in the numbers, but optimists hoping for a quantum leap in economic activity look like they are going to be disappointed. 

Fed Vice Chairman Stanley Fischer doesn't foresee another 2013-esque "taper tantrum" when the Fed begins to wind down its balance sheet. His view is that the current pace of policy normalization is appropriate and is designed to balance risks to the US and global economy. "A gradual and ongoing removal of accommodation seems likely both to maximize the prospects of a continued expansion in the U.S. economy and to mitigate the risk of undesirable spillovers abroad," 

Refis fell to 37% of all originations in March, according to the Ellie Mae Origination Insight Report. Time to close fell as well, to 43 days, which is the shortest time in 2 years. Interestingly, closing rates fell in March to 68%. Closing rates were 73% at the end of last year, so it is unclear what changed. The average FICO score ticked up a point to 721. 

Want an idea of how hot real estate is in the Bay Area? A two bedroom, 988 square foot teardown bungalow in Oakland went on the market at 495k and ended up selling for over $750k. 

Morning Report: A tell in the mortgage REITs

Vital Statistics:

	Last	Change
S&P Futures	2346.0	8.8
Eurostoxx Index	377.5	1.1
Oil (WTI)	52.4	0.0
US dollar index	89.7
10 Year Govt Bond Yield	2.20%
Current Coupon Fannie Mae TBA	103.15
Current Coupon Ginnie Mae TBA	104.3
30 Year Fixed Rate Mortgage	3.97

Stocks are rebounding this morning after yesterday's big sell-off. Bonds and MBS are down small. 

Mortgage applications fell 1.8% during a holiday-shortened week. Purchases were down 3% while refis rose .2%. Note that the 10 year yield fell 15 basis points last week, so we should continue to see follow through in refis. 

The 10 year bond yield slipped below 2.2% yesterday, hitting the lowest point since the immediate post-election rate rise. The Trump reflation trade is unwinding as the market reckons that nothing is going to get done in Washington, which is probably a safe bet at this point. 

While the rest of the world frets about what will happen when the Fed starts shrinking its balance sheet (can we call it quantitative tightening?), there is one sector that is surprisingly sanguine: the mortgage REITs. American Capital Agency and Annaly Capital are both up some 18% since rates peaked in December. Yes, some of that is simply the natural correlation between MREITs and bond prices, however this also comes as the Fed discusses unwinding its balance sheet. If REIT investors were worried that decreased demand for mortgage backed securities would affect the value of their portfolios, you would expect to see it in their stock prices. So far, they are shrugging it off. For originators, this means that mortgage spreads to Treasuries should be safe as well, which is good news. Meanwhile, the homebuilders continue to move higher, despite the disappointing housing starts we have been seeing. Building permits are still depressed as well, so there isn't any indication the tight inventory situation is going to change. 

CFPB Chairman Richard Cordray is supposedly pondering a run for the Governor of Ohio. If so, his days at the CFPB could be numbered. 

The digital mortgage is only going to become more and more common. Here is how lenders should approach it. Punch line: the programmers need to focus on the consumer experience as much as the back end functionality. 

Since housing prices bottomed, condo price appreciation has outstripped single family residence appreciation. Historically that has not been the case, as there is generally more demand for SFR. My guess is that condo prices are more volatile than SFR prices, and that they declined more in the sell-off and are now increasing faster in the rebound. There probably isn't any secular change going on, although many are quick to point out that the Millennials (so far at least) prefer living in urban areas. 

Morning Report: Housing starts miss

Vital Statistics:

	Last	Change
S&P Futures	2339.5	-5.5
Eurostoxx Index	377.0	-3.6
Oil (WTI)	52.3	0.4
US dollar index	89.8
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	104.31
30 Year Fixed Rate Mortgage	3.97

Stocks are lower this morning after housing starts disappoint. Bonds and MBS are higher.

Housing starts fell 9% MOM to 1.215 million in March. This was below the 1.26 million estimate. Building Permits rose 1.26 million, which exceeded the 1.25 million estimate. A big drop in single family starts in the Midwest drove the decrease, which may have been weather-related. Multi-fam continues to be volatile, while SFR is slowly creeping upward. 

Industrial Production rose 0.1% in March, however manufacturing production fell 0.4%, which was a big miss from the 0.3% increase that was expected. Capacity Utilization bumped up to 76%. This is another example of the disconnect between the soft data (sentiment surveys) and hard data (actual spending patterns etc) that has been a hallmark of the post-election landscape. 

We had a nice rally in the 10 year bond last week, with the yield falling about 15 basis points to 2.23%. The mortgage rate has lagged the move, falling about 10 basis points. Generally speaking this is typical, as the mortgage rate is less volatile than the 10 year. If the 10 year stabilizes here, we could see a move lower in mortgage rates. 

Part of the post-election rally was due to the Trump reflation trade, which assumed tax cuts and infrastructure spending. Tax cuts really mean tax reform, as the plan is to increase the size of the standard deduction and reduce itemized deductions. While the mortgage interest deduction is too popular to eliminate, the state and local tax deduction is being targeted. This will hit taxpayers in high tax areas like CA and the Northeast the hardest. Democrats are opposing this however, even though the people most likely to be affected are the very rich (90% of the increase will fall on the wealthy), and will raise something like $1.3 trillion over 10 years. 

The Trump Administration has said that health care reform will take precedence over tax reform this year. Note that we are coming up on the period where health insurers will announce whether they are staying on the Obamacare exchanges or not for 2018. That will most likely color the debate. As hard as it is to get anything through Congress right now, it will only get harder in 2018 as midterms loom on the horizon. 

The punch line is that bonds and stocks are telling you different things, and when that happens the bond market is usually correct. If the Trump reflation trade is indeed dead, and we don't see a big increase in growth, we should start thinking about the possibility of the 10 year trading below 2%. The pre-election yield on the 10 year was 1.78%. 

Note that the IMF may be catching on as well. They are taking up their global GDP growth numbers, probably on the bet that protectionist policies in the US aren't going to happen. 

Both the Atlanta Fed and the NY Fed took down their Q1 GDP estimates after the lousy retail sales numbers last week. A CNBC survey of economists is pegging Q1 GDP at about 90 basis points. The Fed Funds futures are now pricing in an under-50% probability of a rate hike in June. You can see that the Fed Funds futures have been cheating down their estimates for hikes over the past month or so:

Treasury Secretary Steve Mnuchin said that the Administration prefers a strong dollar "over time." There had been some confusion in the markets over the Administration's exact policy on the dollar, since Trump had said early on it was too strong, in reference to China. Note that there is some horsetrading going on between the US and China over currencies, trade, and North Korea. Trump is willing to tone down his comments on Chinese currency manipulation in exchange for action from China in reining in NK. A strong dollar policy out of the Admin will generally make for lower interest rates. 

The CFPB is soliciting input for possible changes the Home Mortgage Disclosure Act. 

Morning Report: Regulatory relief proposals

Vital Statistics:

	Last	Change
S&P Futures	2329.3	-1.8
Eurostoxx Index	380.6	-1.3
Oil (WTI)	52.8	-0.3
US dollar index	89.9
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	102.78
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.98

Stock futures are largely flat this morning as many overseas investors are on holiday. Bonds and MBS are flat as well. 

Bond yields have broken decisively to the downside over the past week as international tensions escalate. North Korea's failed missile launch, combined with developments in Syria have sent bonds and gold higher. The 10 year yield is at the lowest level since mid-November. 

While international tensions have certainly played a part in the bond rally, weak retail sales and inflation data have as well. The Fed Funds futures are now factoring a less-than-50% probability of a June rate hike, down from a 2/3 probability only a week ago. 

Business conditions softened in New York State last month after the Empire State Manufacturing Survey fell after two unusually strong months. We are starting to see bottlenecks in the supply chain. Employment rose.

Homebuilder sentiment slipped slightly in April, however sentiment remains strong. 

Jamie Dimon of JP Morgan took aim at regulations in his annual letter to stockholders. He was especially critical of the FHA's use of the False Claims Act to hammer lenders who commit unintentional clerical errors but had no intention of committing fraud. This has caused FHA lending (which is the only game in town for subprime borrowers) to become restricted, especially at the big banks. He also called for new uniform standards for mortgage servicing. The cost of servicing delinquent loans has skyrocketed, and this has caused lenders to further restrict credit. JPM estimates that $1 trillion in additional lending could have increased GDP by half a percentage point. 

Rep David Kustoff penned an editorial at CNBC calling for a reform of Dodd-Frank, especially in how it affects smaller community banks. The regulatory burden that was imposed on the system is more easily borne by the JP Morgans and the Wells Fargos of the world than it is by the smaller banks who are the lenders to small business. There is a general bipartisan consensus in DC that something needs to be done to give the smaller lenders some relief, however the political environment is so entrenched and partisan that it is hard to imagine much getting done legislatively. 

The MBA sent its proposals to the Senate. The first one includes a request for more clarity from the CFPB, while the second includes a suggestion to widen the QM safe harbor to all loans that satisfy the QM rule and to increase the ceiling for small loan status under QM to $200k from just over $100k now. The remainder of the suggestions largely concern capital requirements for banks and servicing.

Median house prices rose 7.5% to $273,000 according to RedFin. Sales growth was also up a strong 8.9%. Inventories were down 13%, however. The typical home went under contract within 49 days, which is pretty fast for a March. The average sale to list price was 93.7%, which was a decrease. Perhaps the bidding wars in the hottest markets are cooling off a bit. Note this statement by a real estate agent: 

“As a seller’s agent, the first thing I do when I receive an offer is ask who the lender is. The best offers come from buyers who are pre-approved by a local lender with a strong reputation for speed and reliability. If I’ve worked with the lender before and know they can fund the loan and close on time, I am sure to highlight that for my client.” — Tiffany Aquino, Redfin Agent in Woodbridge, VA

The Fed is assembling its plan to shrink its portfolio of Treasuries and mortgage backed securities, and may actually begin the process this year. The Fed currently owns just under $2 trillion in mortgage backed securities, and we could see that number cut in half over the next decade, according to a paper released in January. The big question for MBS holders is whether they will stop reinvesting maturing proceeds all at once or whether they will phase that in. Given that QE didn't materially affect MBS spreads when it was implemented, it is hard to imaging tapering re-investments will make much of a difference either. 

Morning Report: Jobs report surprises to the downside

Vital Statistics:

	Last	Change
S&P Futures	2352.5	-1.3
Eurostoxx Index	379.9	-0.8
Oil (WTI)	52.1	0.4
US dollar index	90.7
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.78
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.06

Stocks are lower this morning after a surprisingly weak jobs report. Bonds and MBS are up.

Jobs report data dump:

• Nonfarm payrolls up 98,000. Expectations were for 175k so this is a huge miss
• Unemployment rate down to 4.5%
• Employment to population ratio increased to 60.1%
• Average hourly earnings up 0.2% MOM and 2.7% YOY
• Labor force participation rate flat at 63%

Part of the payroll miss could be explained by bad weather in the Northeast and the Midwest in March. We saw jobs increase in professional and business services while payrolls contracted in retail. The labor force increased by 145k, while the number of employed people increased by 472k and the number of unemployed fell by 326k. The number of involuntary part time employees (people who would like a full time job but can only get a part time one) fell, as did the number of long term unemployed and discouraged workers. While the payroll number will garner all the attention, the internals of the jobs report show the slack is being used up in the labor market, so it isn't as bad as it initially appears. 

The Fed Funds futures took down their probability of a June hike from 71% to 66% on the jobs report. 

Two things happened yesterday which could push bond yields lower. First the US attacked air bases in Syria in retaliation for using chemical weapons. International tension is almost invariably bond bullish as investors put on the flight to safety trade. The other is the Democratic filibuster of Neil Gorsuch. This probably forecloses any sort of possibility for bipartisan legislation, particularly stimulus plans or tax cuts. In fact, the debt ceiling battle could become an epic game of chicken as the government is rapidly running out of borrowing capacity. While the second scenario is not necessarily bond bullish the first one definitely is. 

Fannie Mae's Home Purchase Sentiment index fell last month as high prices and low inventories take their toll. The number of people who think it is a good time to buy fell by 10 percentage points while the number tho think it is a good time to sell rose by 9 percentage points. People are less bullish on their economic future as well. 

Neel Kashkari disputes Jamie Dimon's assessment of the regulatory environment for banks, citing the Fed statistic that there is a 70% chance of a bailout in the next century.  Jamie Dimon declared the era of too big to fail is over, while Kashkari disagrees. Forecasting banking scenarios over a 100 year time period is probably a fool's errand. I wonder what banking regulators thought in 1917 (The Fed had only been established a few years earlier). Kashkari is a bit of a regulatory hawk and thinks the capital standards should be doubled.

San Francisco Fed President John Williams says it should take about 5 years for the Fed's balance sheet to shrink to a normal level once they start reducing it. Of course the open question is "what constitutes normal?" Prior to the financial crisis, the Fed's balance sheet was under $1 trillion. It is now pegged at $4.5 trillion. 

Morning Report: FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2348.0	1.5
Eurostoxx Index	379.8	-0.3
Oil (WTI)	51.4	0.2
US dollar index	90.5
10 Year Govt Bond Yield	2.35%
Current Coupon Fannie Mae TBA	102.53
Current Coupon Ginnie Mae TBA	103.813
30 Year Fixed Rate Mortgage	4.07

Stocks are lower this morning after the FOMC worried about stock prices. Bonds and MBS are down small. 

Job cuts rose 17% in March, according to outplacement firm Challenger, Gray and Christmas. Telecom and retail were the two main sectors to trim staff. Note that this report only measures announced job cuts (in press releases), not actual job cuts. We are still seeing losses in the energy patch, however it is much slower than the past two years when we lost over 200k jobs. 

On the other side of the coin, hiring announcements continue to hit records, with the Home Despot announcing 80,000 seasonal hires in March. 

Initial Jobless Claims fell to 234k last week, while the Gallup Good Jobs index improved. The drop in initial jobless claims was the most in 2 years. 

The FOMC minutes showed the Fed is beginning to discount the possibility of a big Trump fiscal expansion. The failure of health care reform means that the available resources for a big infrastructure spend or tax cuts is much less. The Fed also discussed what to do with their $4.5 trillion balance sheet, and how to go about shrinking it. The terms "gradual" and "phase out" were used, which means they probably aren't going to stop reinvesting maturing principal all at once and will perhaps take a couple of meetings to see how it goes. The Fed's fear is that the additional contractionary effects of reducing the balance sheet along with rate hikes will be too much and push the economy into a recession. 

The staff also noted that stock values are above historical norms, which is undoubtedly another reason for them to go slowly. The worst-kept secret in financial markets is that the Fed targets asset prices and uses them to guide policy. 

Goldman Chief Economist Jan Hatzius says that reducing the Fed's balance sheet is probably a good step to clear the decks for whoever will be the new Fed President ahead of the end of Janet Yellen's term in early 2018. 

The left has set up a new website to keep track of HUD and what they are doing. They want to ensure that affordable housing targets don't fall by the wayside as HUD works on housing reform. Given the tight housing inventory these days, affordable housing is a huge need. 

Donald Trump economic adviser Gary Cohn supports some sort of return to the Glass-Steagall days, where consumer banking is separated from the underwriting and trading functions of investment banks. Some Senators and policy types were surprised to hear a Wall Street type advising that. The conversation regarding deposits will be further complicated by the emerging fintech sector which wants access to those deposits as well. 

The Senate is expected to exercise the nuclear option today and eliminate the filibuster for Supreme Court nominees. Neil Gorsuch will probably be confirmed on Friday. 

Morning Report: Awaiting the FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2361.0	4.5
Eurostoxx Index	380.8	0.7
Oil (WTI)	51.7	0.7
US dollar index	90.5
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.53
Current Coupon Ginnie Mae TBA	103.813
30 Year Fixed Rate Mortgage	4.07

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

The minutes from the FOMC meeting are coming out at 2:00 pm EST today. Investors will be focused on plans to shrink the balance sheet and also any sort of discussion about DC. Be careful locking around that time - we could see some volatility. 

Richmond Fed President Jeffrey Lacker resigned yesterday for making unauthorized disclosures to a consulting firm owned by the Financial Times. Lacker was a non-voter, so it should make no difference to monetary policy. 

Mortgage applications fell 1.6% last week as purchases rose 1% and refis fell 4%. Refis fell to 42.8%, the lowest since October 2008.

The ADP jobs number came in at 263,000 which means we should expect a strong employment situation report this Friday. The Street is predicting 178,000 jobs were added in March. Construction added 49k jobs while IT lost 10k. This is the third month in a row with more than 240k jobs added:

The Gallup US Job Creation index also hit a new high. The US PMI Services index fell however. The ISM Services index fell as well. 

Don't forget, we are exiting Q1, which for some reason has been a weak quarter for over a decade. If past trends hold, we should be seeing a pickup during the spring and summer. 

Jamie Dimon weighed in on banking regulation in JP Morgan's annual letter to shareholders. The system is much safer today than it was in 2008, however he argues that many of the regulations put in place were hastily drawn up and should be reviewed. He mentioned that new regulations surrounding mortgage lending have raised costs to consumers and restricted lending to people with low credit scores needlessly. Interesting comment since JP Morgan pretty much got out of the FHA business years ago. 

Morning report: Hard vs soft data

Vital Statistics:

	Last	Change
S&P Futures	2345.5	-10.5
Eurostoxx Index	378.7	-0.6
Oil (WTI)	50.5	0.3
US dollar index	90.5
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	103.41
Current Coupon Ginnie Mae TBA	103.7
30 Year Fixed Rate Mortgage	4.09

Stocks are lower this morning after auto sales disappointed. Bonds and MBS are up. 

Factory orders rose 1% last month, in line with expectations.

US economic confidence decreased last week, according to Gallup, however confidence is still strong. Meanwhile, consumer spending was flat. 

These data points (economic confidence, consumer spending, and auto sales) illustrate the conundrum we have been seeing for the past few months: soft data like confidence and ISM reports show a strong economy, while the hard data like sales have been showing a mediocre economy. Much of this is Washington-driven as investors realize that Trump will have a difficult time pushing through his agenda in the face of unified Democratic opposition and a Freedom Caucus that wants less government, period. Unrealistic expectations are being brought back to Earth. Despite gridlock, much is being done on the regulatory front and with executive orders which don't require Congressional approval. That will help. But there seems to be a shift in the psychology of investors: the markets seem to be worrying less about the Fed and worrying more about tepid growth. Bonds have noticed as well, with the 10 bond yield down about 30 basis points over the past 3 weeks. 

Home prices rose 7% YOY in February, according to CoreLogic. We are seeing the highest price appreciation at the lower price points. The first time homebuyer is getting hit with a double-whammy of higher prices and borrowing costs. 

Housing's share of GDP came in 15.6% in the fourth quarter. Historically, that number has been around 18%. Housing continues to punch below its weight, as evidenced by tight inventory. It is hard to know exactly why homebuilding continues to be weak - credit is an issue, as is the general post-bubble caution, along with local land use regulations.