Morning Report: Housing starts disappoint again

Vital Statistics:

	Last	Change
S&P Futures	2399.0	0.5
Eurostoxx Index	395.5	-0.5
Oil (WTI)	49.0	0.1
US dollar index	89.9	-0.1
10 Year Govt Bond Yield	2.34%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	4.09

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

Housing starts for April disappointed, rising 0.7% YOY to an annualized rate of 1.17 million. The Street was looking for 1.26 million. This was the lowest reading in a year. Building Permits rose to 1.26 million on an annualized basis, up 5.7% YOY. It is strange to see disappointing starts alongside the strong builder sentiment number reported yesterday, but builders seem content to build fewer homes and to grow the business by raising prices. 

Industrial and manufacturing production came in stronger than expected however, growing 1% in April. Capacity Utilization rose to 76.7%. Auto assembly drove the increase, pardon the pun. 

The Washington Post broke a story that Donald Trump shared classified info with Russia. There seems to be a shift in the political winds. You are starting to see mainstream Republicans distance themselves from the Administration. Don't know if this becomes a stampede, but the crowd is looking for their coats and nervously eyeing the exits. I don't think this is impeachment material (what he did was legal) however, you can probably stick a fork in the Trump legislative agenda. 

The machinations in Washington so far are not affecting the stock market, but the dollar is beginning to take notice. Bonds are not yet reacting however don't forget the 10 year was trading around 1.8% before Trump's surprise victory. The Trump reflation trade is running on fumes at this point. 

The National Association of Realtors estimates that if the mortgage interest deduction and the state & property tax deduction is eliminated, you would see a 10% drop in real estate values. The Trump plan would double the size of the standard deduction, which will go from roughly 12k to 24k. The increase in the standard deduction will make the mortgage interest deduction meaningless for anyone with a sub $600k mortgage because they will be better off taking the standard deduction. This will eliminate one of the advantages of buying versus renting for first time homebuyers, which in theory should create more renters and less buyers. Given all the other advantages of buying, this will probably be a second-order effect. I have a hard time seeing a 10% drop in prices - the FHFA House Price Index only had a 22% drop peak to trough - and inventories are tight. 

Absent any changes to the tax code, NAR is looking for prices to rise 7% - 8% this year.

Ex Fed Head Narayan Kocklerakota recommends that the Fed maintain its balance sheet and not let its QE assets run off as they mature.