Morning Report: Fed minutes show balance sheet normalization this year

Vital Statistics:

	Last	Change
S&P Futures	2419.3	-8.8
Eurostoxx Index	379.0	-4.0
Oil (WTI)	45.9	0.7
US dollar index	88.3	0.1
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4.06

Stocks are down this morning along with overseas markets. Bonds and MBS are down as European bond markets sell off. 

The German Bund is getting whacked this morning after a lousy French auction and is up 10 basis points in yield to 55 bps. The Bund yield is at the highest level since early 2016, and this is pulling yields higher globally.

The FOMC minutes didn't reveal anything market-moving. The Fed still plans to raise interest rates gradually, and there is some disagreement between members over when and how to begin balance sheet normalization (which is their term for letting bonds mature and not re-investing the proceeds). It looks like they will gradually reduce reinvestment activity, not stop all at once. The proposed idea would be to reduce reinvestment of Treasuries by $6 billion a month and increase that in increments of $6 billion every 3 months until they hit $30 billion. For MBS, it will be $4 billion a month, increasing in $4 billion increments every 3 months until they hit $20 billion a month. The FOMC members were divided over timing, with some wanting to move in Q3, while others want to begin in Q4. 

The September Fed Funds futures didn't move in response to the minutes, but the December futures did move more towards a higher probability of a rate hike. December is pricing in a 42% chance of no changes, a 47% chance of a 25 bp hike and a 10% chance of a 50 bp hike. 

The overall economic outlook was positive, however residential investment "appeared to be slowing after increasing briskly in the first quarter." The Fed suspects that weather, along with homebuyers getting ahead of expected interest rate increases drove the bump in Q1. The staff also noted that the market seems to be handicapping a smaller chance of fiscal expansion. 

Mortgage Applications increased 1.4% last week as purchases 3% and refis fell 0.4%. The refi share continues to decline and the ARM share is ticking up slightly, however it is still in the single digits. 

The ADP payrolls number came in lower than expected, at 158,000 versus expectations of 180,000. The consensus for tomorrow's payroll number is 170,000. Note that lately the ADP number has been a lousy predictor of the BLS numbers. 

Employers are hanging on to their employees, according the Challenger and Gray Job Cuts report. While job cuts continue in retail, overall they remain low, at 31k. Note that these numbers come from press releases, where companies announce job cuts they expect to make. They aren't actual job cuts. Meanwhile, initial jobless claims ticked up slightly to 248k. 

Redfin has filed for an IPO. For those keeping score, Blue Apron has been an unmitigated disaster, trading at $8.31 a share after going public last week at $10.