Morning Report: FOMC minutes slightly dovish

Vital Statistics:

	Last	Change
S&P Futures	2460.8	-6.5
Eurostoxx Index	378.5	-0.6
Oil (WTI)	46.6	-0.2
US dollar index	86.5	0.2
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.88

Stocks are lower this morning after WalMart missed earnings. Bonds and MBS are up.

The FOMC minutes from the July meeting showed that some member are still worried about inflation being too low, while some are worried about overshooting the inflation target. "Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside. Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored. One participant pointed to the stability of a number of measures of inflation expectations in recent months, but a few others suggested that continuing low inflation expectations may have been a factor putting downward pressure on inflation or that inflation expectations might need to be bolstered in order to ensure their consistency with the Committee’s longer-term inflation objective." This statement was taken as dovish and bonds rallied a few basis points on it. The rest of the minutes were uneventful as nothing much had changed economically from the June meeting. There were a few members who wanted to announce the change in balance sheet policy at this meeting but most wanted to wait. That probably means that we will get no hike and an announcement on balance sheet reduction at the September meeting. We didn't see any reaction in the Fed Funds futures either, with December still a toss-up. 

Initial Jobless Claims fell to 232k last week, which remains near historical lows. The last time we were at similar levels, the population was much smaller and there was a military draft going on. 

Industrial Production rose 0.2% last month, while manufacturing production fell 0.1% Lower auto production drove the decline. Capacity Utilization was unchanged at 76.7%. There is still a lot of slack in manufacturing, which is why capital expenditures have been so low. Separately, the Philly Fed Manufacturing Survey increased. 

Average home sizes grew in the aftermath of the housing boom, as only the luxury end of the sector was working. With Millennials not in a position to buy, aging boomers were the only game in town. From the bottom, average square footage increased from 2388 square feet to 2,622 square feet. However we are seeing this reverse as builders pivot to selling more starter homes. Average and median home size is still above the 2006 peak however. 

Household debt increased in the second quarter to $12.84 trillion, which is up about 15% from the post-bubble trough. Mortgage balances increased, however new origination fell as higher interest rates took a bite out of refis. Auto loans increased, as incredibly easy financing is being used to sell cars these days, and credit card balances increased as well. 90 day delinquencies declined to 1.5% of all mortgage loans outstanding.