Morning Report: Incomes rise, but wages flat

Vital Statistics:

	Last	Change
S&P Futures	2506.8	-1.0
Eurostoxx Index	386.5	0.1
Oil (WTI)	51.6	0.1
US dollar index	86.3	0.0
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	103.05
Current Coupon Ginnie Mae TBA	103.98
30 Year Fixed Rate Mortgage	3.88

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

Personal Incomes rose 0.2%, right in line with estimates. The prior month was revised downward to 0.2%. The increase in personal incomes largely came from increased rental income, transfer payments, and interest income, not wages and salaries. Consumer spending rose 0.1%, while all of the inflation numbers came in a touch light. Weak auto sales drove the low consumer spending number. The personal savings rate was 3.6%. It probably won't affect any of the Fed's thinking with respect to a December hike, however the declining annual PCE inflation will concern some of the doves at the FOMC, as will the lack of wage growth. Note that these numbers will have some effects of the TX and FL hurricanes, and BEA is unable to separate them out. 

The Chicago Purchasing Manager Index bounced back in September, hitting 65.2, way above expectations. While several regions have been reporting strength, Chicago has been an outlier. 

Consumer sentiment slipped slightly in September, showing only a modest impact of the hurricanes, according to the University of Michigan survey. 

Donald Trump reportedly met with Kevin Warsh to discuss the Federal Reserve Chairman position. The choice will probably end up either Warsh or Yellen. 

Tax reform could be a big boost for the financial sector, especially banks. Since banks generally have fewer deductions than other businesses, a drop in the tax rate disproportionately benefits them. Note that lowering rates will create issues with pass-through small businesses, and could be subject to abuse. Note that the Admin is already softening its stance on state and local tax deductions, which has always been a tough one politically. Given the probability that no Democrats will support tax reform (at least at the individual level), a few blue state Republicans could sink it. 

Most renters would like to own a home someday, however the up-front costs are the biggest obstacle. Renters need to be educated more on FHA loans, which are designed specifically to get the first time homebuyer into a home with a minimum down payment. 

An improving economy means less payday loans. I wonder how much of this has been due to the CFPB too. 

Vital Statistics:

	Last	Change
S&P Futures	2499.5	-5.0
Eurostoxx Index	385.4	-0.3
Oil (WTI)	52.4	0.3
US dollar index	86.4	-0.1
10 Year Govt Bond Yield	2.33%
Current Coupon Fannie Mae TBA	103.05
Current Coupon Ginnie Mae TBA	103.98
30 Year Fixed Rate Mortgage	3.88

Stocks are higher this morning after a strong GDP number. Bonds and MBS are down.

Second quarter GDP was revised upward to 3.1%, while the PCE price index was steady at 1%. Consumption was unchanged at 3.3% while after-tax incomes rose 3.3%.  This is a Goldilocks type report for the economy, with strong growth and muted inflation. Residential Construction was a weak spot, falling 7.3%, the biggest drop since 2010. 

In other economic data, Initial Jobless Claims came in at 272k, a touch lower than expectations. Claims in Texas are getting back to normal, while claims in Florida are still elevated. Retail inventories rose 0.7% while wholesale inventories rose 1%. Corporate profits rose 7.4%. 

Tax reform could cause a quick jump in jobs, assuming it plays out the way its drafters hope. One provision that is getting attention is the accelerated depreciation idea. Accelerated depreciation will let companies expense new capital investment in the year it is made instead of having to depreciate it over a longer time period. The net effect is to make reported profit (and therefore the tax liability) lower than it would otherwise be, and that actually adds to the cash flow of the company. The big question is whether it will encourage job growth, and that is a question that divides economists almost 50/50 and largely falls along ideological lines. Liberal economists believe that this will only reward investors, while more right-leaning economists believe that the tax effect makes some marginal projects begin to make sense economically. If you are a leftie, you think the tax savings will get plowed back into dividends and buybacks. If you are a rightie, you think the tax savings will encourage investment in the business and hiring. 

Note that one provision of tax reform includes a repatriation tax credit, which could cause bond yields to rise if companies sell Treasuries en masse to bring cash back to the US. The amount of money isn't trivial: Microsoft alone holds $133 billion in cash overseas, largely sitting in Treasuries. 

Tax reform at the individual level is still sketchy, and it looks like there will be winners and losers. The winners will be people in low-tax states as well as the super-rich. The losers will be upper middle class taxpayers in high tax states like NY and CT. Historically, the upper middle class taxpayer has been the "third rail" of tax reform and it is likely that hitting them will doom tax reform at the individual level. There is probably more support for corporate tax reform given that we have the highest statutory corporate tax rates in the world, and US corporations that don't have overseas exposure (generally the smaller ones) are disadvantaged relative to the bigger guys. 

Equifax's CEO resigned over the hacking episode and the new CEO has unveiled free credit locking for life. To prevent identity theft, locking means that a new creditor cannot access your credit file unless you specifically request it, for example if you are getting a new car or opening a new credit card. This presumably prevents someone from opening a credit line in your name. So far, we have not heard about issues with mortgage loans and the inability to access credit reports from borrowers who have locked their accounts, but the hack is still relatively recent. 

Housing credit risk increased in the second quarter, according to CoreLogic. Credit risk is still within the benchmark range of 2001-2003, before the housing bubble began to inflate in earnest. It seems that there have been two opposing phenomenons going on - first an increase in investor and condo loans has increased credit risk, while better DTIs and FICO scores have lowered it. The average credit score for new mortgages is 745, which is up 9 points YOY. DTI ratios were flat at 36%, while LTV ratios fell from 87.5 to 85.5. The increase in FHA loans over time has increased the number of 95+ LTVs by over 50% since 2001. 

Tennessee Senator Bob Corker said he will not stand for re-election. Corker is a big name on the Banking Committee and is instrumental in GSE reform. This will accelerate the push for GSE reform in his last 15 months in office. GSE reform is difficult and cleaves strongly down ideological lines. Bob Corker and Senator Mark Warner came up with a bill that made it out of committee, however the left opposed it. The right wants to limit exposure to the taxpayer and introduce more competition. The left wants to ensure that low-income and targeted lending are not compromised. In the current state, Fannie and Fred remain under conservatorship, with all profits going to Treasury. 

Thinking outside the box in Albuquerque:

Morning Report: Tax reform to be unveiled today

Vital Statistics:

	Last	Change
S&P Futures	2500.8	5.3
Eurostoxx Index	385.4	1.4
Oil (WTI)	51.9	0.0
US dollar index	86.5	0.4
10 Year Govt Bond Yield	2.29%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.87

Stocks are up this morning as Washington pivots to tax reform. Bonds and MBS are down. 

Janet Yellen spoke yesterday and said that it would be "imprudent" to wait until inflation hits 2% to start hiking rates. Those comments were taken as support for a December hike and the Fed Funds futures took up the odds of a rate hike in December to 81%.  

Bonds were also under pressure due to the possibility of some sort of tax deal. Here is a preview of the tax plan. Trump plans on releasing the details today. Apparently the big pieces involve cutting the corporate tax rate falls to 20%, while the top individual income tax bracket falls to 35%. There is an option for Congress to institute a higher bracket. Deductions will be limited while the standard deduction increases. The most contentious deduction will be the state and local tax deduction, which will hit taxpayers in high tax states like NY and CT the most. CT is already reeling from an exodus of high income earners and businesses, and this will only exacerbate that. This won't be good for real estate prices there. While this is largely going to hit blue states, there are enough Republican House members in blue states to deep-six it unless Trump can get some Democrats on board. No word on eliminating or lowering the cap on the mortgage interest deduction. 

Pending Home Sales fell by 2.6% in August, according to NAR. 

Mortgage applications fell half a percent last week as purchases rose 3% and refis fell 4%. The hurricanes did depress activity in Florida and Texas, however increasing rates and a lack of home inventory were the biggest drivers. 

Durable goods orders rose 1.7% in August, which beat consensus estimates. Ex-aircraft, they were up 0.2%. Capital Goods orders rose 0.9%, which is an indication that business expects to see further activity and is increasing their capacity. The bump in capital goods orders is being driven by the rebound in oil prices and drilling activity in the energy sector. Capacity Utilization rates are still low compared to historical standards.

The bond market has been in a tight range for this entire year. In fact, the 62 basis point range has been the tightest in over 50 years. Historically, that range has been closer to 175 basis points. The article is somewhat misleading, as the range is going to fall naturally when rates fall from 10% to 2%. Using volatility measured in sigma is better. That said, it isn't just the US bond market: volatility in general is down. The VIX (the volatility measure for the stock market) has been in the single digits. Historically that has been a warning sign (When VIX is high, time to buy. When VIX is low, time to go). 

Morning Report: Janet Yellen speaks at 11:50 today

Vital Statistics:

	Last	Change
S&P Futures	2495.8	-1.3
Eurostoxx Index	384.1	0.2
Oil (WTI)	51.9	-0.4
US dollar index	86.1	0.3
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.85

Stocks are lower this morning as we await a Janet Yellen speech at lunchtime. Bonds and MBS are flat. 

Janet Yellen will address inflation, uncertainty, and monetary policy at the National Association of Business Economics today. Charles Evans, Lael Brainard, and Loretta Mester also speak this morning. There probably won't be any market-moving comments, but just be aware. 

Charles Evans said he won't support further rate hikes until we see clearer signs of inflation. This puts him in the camp of Neel Kashkari, who also doesn't see the need to tap on the brakes. The dot plot from the last meeting showed 11 out of 16 members forecasting a rate hike in December. The Fed Funds futures are pricing in a 3/4% chance of a rate hike. This is the highest we have seen in this contract. Note the futures are predicting nothing happens in the November meeting. 

Case-Shiller is out this morning, and home prices are up 5.9% YOY. The Pacific Northwest continues to outperform, with Seattle up 13.5% and Portland up 7.6%. Separately, home prices rose 0.5% MOM and are up 6.2% YOY, according to the Black Knight Financial Services Home Price Index. We are starting to see the areas around DC cool down, while New York (especially upstate) is beginning to pick up. 

New Home Sales fell to 560k in August, according to the Census Bureau. This is a drop of 3.4% MOM and 1.2% YOY. Tight inventory remains the biggest problem. The median sales price of a new home was $300,200, and inventory was about 284k or 6.1 month's worth. The Street was looking for 583k. 

Consumer confidence slipped in September, according to the Conference Board. The index came in at 119.8, a touch below expectations. Expectations concerning employment and income contributed to the strong showing. 

Morning Report: Tax reform is on the agenda this week

Vital Statistics:

	Last	Change
S&P Futures	2496.8	-2.8
Eurostoxx Index	383.9	0.7
Oil (WTI)	51.2	0.5
US dollar index	85.8	0.3
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.85

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

We have a decent amount of economic data this week, along with a lot of Fed-speak. The big economic news will be the final revision to second quarter GDP and the personal income and personal spending releases. Janet Yellen speaks on Tuesday. 

Economic activity slowed in August, according the Chicago Fed National Activity Index. The index fell from 0.4 to -.31, for the lowest reading in a year. Production-related indicators drove the decrease. Employment-related indicators were a mild positive. 

The Trump Administration is going to push for tax reform this week. The highlight is a cut in the top rate to 35% and a cut in the corporate income tax to 20%. The cut in the top rate will be paid for in part by limiting deductions for state and local taxes. Chuck Schumer has insisted that "not one penny" of tax cuts go to the top 1%, so that could make the plan doomed. The estate tax will also get the axe. Republicans are working on the procedures to pass this without Democratic votes. 

Meanwhile, Obamacare repeal and replace looks like it is going to go down as well. 

We are starting to see some of the fallout from the recent hurricanes: Homebuilder D.R. Horton cut its cash flow forecast by 50%. Lennar has also said that the hurricanes will delay deliveries. At the end of the day, there is such high demand for homes that this should be a 1 quarter effect which will be made up in following quarters. 

Lenders are easing standards given the increase in interest rates and the corresponding drop in volume. “Lenders further eased home mortgage credit standards during the third quarter, continuing a trend that started in late 2016. In particular, both the net share of lenders reporting easing on GSE-eligible loans for the prior three months and the share expecting to ease standards on those loans over the next three months increased to survey highs," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Lenders’ comments suggest that competitive pressure and more favorable guidelines for GSE loans have helped to bring about more easing of underwriting standards for those loans. We believe that the GSEs’ attempts to relieve repurchase concerns and expand credit for creditworthy borrowers have contributed to the easing trend. Meanwhile, market competitiveness also led to the fourth consecutive quarter in which lenders’ net profit margin outlook deteriorated. The share of lenders citing competition from other lenders as the key reason for a negative profit market outlook rose to a new survey high.”

Morning Report: Freddie Mac anticipates a 6% drop in originations in 2018

Vital Statistics:

	Last	Change
S&P Futures	2499.5	-5.8
Eurostoxx Index	382.9	0.1
Oil (WTI)	50.4	-0.1
US dollar index	85.7	0.1
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.85

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

We will have some Fed-speak today, however nothing should be market-moving given how recent the FOMC decision was. 

The Markit PMI flash index came in at 54, showing manufacturing remains strong. Separately, businesses expect to see about 1.9% inflation in the coming year, according to the Atlanta Fed. 

San Francisco Fed President John Williams sees the Fed gradually raising rates and considers 2.5% on the Fed Funds rate the "new normal." “Although I do expect us to need to raise rates gradually over the next couple of years, it’s not like we need to raise rates a lot over the next couple of years,” Williams said, adding that the pace “will depend on how the economy progresses.”

US household wealth hit a record in the second quarter as asset price appreciation continued. Household wealth increased to 96.2 trillion. Total debt grew at 3.8% as households and businesses borrowed more than governments. State and local government borrowing actually fell. 

Freddie Mac is out with its 2018 forecast, which basically predicts more of the same. Economic growth is expected to hang out in the 2% range, while mortgage rates are expected to rise. The increase in purchase activity will not offset the drop in refis, however and they are forecasting a 6% drop in originations versus 2017. They see home price appreciation of 5%. They expect the limited inventory problem to remain as the aging of the population and limited mobility keep a lid on home sales. They see the 30 year fixed rate mortgage increasing by 40 basis points to 4.4% and only a modest increase in housing starts to 1.33 million. 

Ray Dalio of Bridgewater on why the US economy resembles 1937. His point was that the Fed began to remove accomodation from the markets in 1937, which caused (in his opinion) the "recession within the Depression in 1937. While it is possible that monetary policy caused that recession, it is also possible policy had an effect too, especially FDR's undistributed profits tax, which basically told companies to "use it or lose it" with respect to their retained earnings. It was a political disaster from the start and only lasted two years, but it certainly was an ominous sign for business, which didn't help release the animal spirits. The Fed is going so cautiously at the moment, I don't see how they will send us into a recession by overshooting. 

Jamie Dimon doubled down on his criticism of Bitcoin, saying cryptocurrencies are a "novelty" and "worth nothing." 

Morning Report: Fed maintains rates as expected

Vital Statistics:

	Last	Change
S&P Futures	2504.0	-1.3
Eurostoxx Index	382.6	0.6
Oil (WTI)	50.3	0.8
US dollar index	85.8	0.2
10 Year Govt Bond Yield	2.27%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.85

Stocks are flattish after the FOMC statement contained few surprises. Bonds and MBS are flat as well.

As expected, the Fed made no changes to interest rate policy and left the Fed Funds rate unchanged. They also announced their plan to implement their previously announced reduction in reinvestment in order to shrink their balance sheet. The projections were pretty much the same as they were in June, with the exception of June GDP, which was bumped up a tenth of a percent to 2.4%. Inflation was unchanged at 1.6% and unemployment was unch'd at 4.3%.

The dot plot reduced expected rates in 2018 by 3/16 or about 19 basis points. You can see a side by side comparison of the chart below:

The market reaction to the announcement was a drop in stocks and bonds, with the 10 year yield increasing to 2.27%, up about 3 basis points. The Fed Funds futures took up the probability of a December hike from about 60% to 70%. 

Initial Jobless Claims fell to 259k last week as Texas claims fell, more than offsetting the increase in Florida claims. 

Home prices rose 0.2% MOM and are up 6.3% YOY according to the FHFA House Price Index. We are still seeing strength out West, however New England is beginning to show some strength after lagging for a long time. The farm belt as well as the NY-NJ-PA area are still bringing up the rear. 

The OECD is forecasting that global economic growth will be the fastest since 2011 this year and that growth will accelerate into next year. Ultimately this is good for the US economy, although it won't necessarily mean lower rates. Even if US growth isn't enough to push up bond yields, relative value trading by overseas investors could do the job. 

In other economic news, the Philly Fed index continued its string of strong numbers, while the Index of Leading Economic Indicators posted a strong 0.4% reading. Expect to see a hit to growth however due to hurricanes Irma and Harvey. 

Hurricane Maria, which has just devastated Puerto Rico now moves North close to the Eastern Seaboard. There are still the remnants from Jose just off New England which makes predictions difficult. The East Coast from NC to Maine have at least some risk.  

Home equity increased over 10% YOY, according to CoreLogic. Total home equity reached $8 trillion, which is double the level of 5 years ago. Negative equity decreased by 10%, to 2.8 million homes or 5.4% of all mortgages. 750,000 homes regained positive equity. Even if rates don't go down from here, increasing home equity will create refinance opportunities, especially for cash-outs to refinance credit card debt and refis from FHA to conforming to remove MI requirements. A lot of FHA loans done 4 or 5 years ago now have enough equity to refi into a conforming. 

Morning Report: Awaiting the Fed

Vital Statistics:

	Last	Change
S&P Futures	2504.5	0.0
Eurostoxx Index	381.8	-0.4
Oil (WTI)	50.0	0.5
US dollar index	85.1	-0.2
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.85

Stocks are flat as we await the FOMC decision. Bonds and MBS are down small. 

The FOMC decision is due out at 2:00 pm EST and Janet Yellen will hold a press conference at 2:30 PM. While no changes in interest rates are expected, there could be some market movement, especially if we see surprising changes to the economic forecast or the dot plot.  At the June meeting, the FOMC was predicting GDP growth of 2.2% for 2017, unemployment of 4.3% and PCE inflation of 1.6%. GDP growth averaged a touch over 2% for the first half, so the Fed is clearly anticipating a stronger second half. The markets are also looking for some guidance on tapering MBS and Treasury purchases. Given how much rates have risen over the past couple of weeks, we could be due for a bit of a "buy the rumor, sell the fact" rally post event. 

Mortgage Applications decreased 9.7% last week due to an increase in rates and the effects of Hurricanes Harvey and Irma. Purchases decreased 11% and refis fell 9%. Treasury rates increased 11 basis points. The hurricanes were a big driver of the drop: ex-Florida and Texas, applications increased 13%, however there are all sorts of seasonal adjustments, along with the effect the Labor Day comparison that come into play as well. 

Existing Home Sales came in at 5.35 million in August, a drop of 1.7% from the July reading of 5.44 million. SFR sales fell while condos rose. Hurricane Harvey probably had some effect on August sales, however the overriding concern is lack of inventory which fell to 1.88 million homes, which represents a 4.2 month supply at current rates. The median home price rose to 253,500, an increase of 5.6% YOY. The first time homebuyer accounted for only 31% of sales, the lowest in a year. Historically, that number has been closer to 40%. 

Hurricane Maria is expected to hit bankrupt Puerto Rico and then move up the East Coast. Most of the spaghetti tracks predict it won't hit the US East Coast, but it is still very early.

Looking to buy your first house? Trulia advises you to start looking now, as starter home inventory peaks and prices bottom in the seasonally slow period. They find that inventory for starter homes actually rises 7% in fall months and prices are 3% - 4% lower compared to the spring and summer seasons. Separately, tight inventory remains an issue. On a year-over-year basis, starter home inventory is down 20% this quarter, while move up is down 12% and luxury is down 2%. Overall, inventory is down 9% YOY nationally. 

In response to Hurricanes Irma and Harvey, HUD, Fannie, and Freddie have provided some disaster relief for borrowers in areas affected by the storms. There will be a 90 day moratorium on foreclosures, as well as increases in SBA loans and 203k loans to help people rebuild homes destroyed in the storm. 

Credit card delinquencies are on the rise as consumer borrowing is outpacing income growth (again). Note subprime auto DQs are on the rise too. Mortgage delinquencies are still falling, which is good news.

Morning Report: Housing starts depressed by hurricanes

Vital Statistics:

	Last	Change
S&P Futures	2504.5	1.8
Eurostoxx Index	382.0	0.0
Oil (WTI)	50.3	0.4
US dollar index	85.3	-0.1
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.83

Stocks are flat this morning as the Fed begins its meeting. Bonds and MBS are flat as well. 

Housing starts for August came in at 1.18 million, a touch above the 1.17 million estimate. Building Permits rose 1.3 million, much better than the 1.23 million the Street was forecasting. The hurricanes did depress starts a bit, as the FEMA disaster areas accounted for about 13% of US building permits. Multi-family starts have been more or less flatlining over the past couple years, while single family has steadily increased. Note that starts will probably be depressed over the near term as construction workers in these already tight markets get drawn into rebuilding projects versus new home construction. 

Import prices rose 0.6% MOM and 2.1% YOY as the hurricanes boosted energy prices last month. The Fed will almost certainly consider that effect to be transitory and it won't affect their inflation out look all that much. 

Mortgage fraud risk is up 17% YOY, according to CoreLogic. In the second quarter, over 13,400 mortgage applications (or 0.82%) showed symptoms of fraud, compared to 12,700 (0.7%) a year earlier. “This past year we saw a relatively large increase in the CoreLogic National Mortgage Application Fraud Index,” said Bridget Berg, principal, Fraud Solutions for CoreLogic. “If the factors that influenced the increase continue, including a shift to purchase transactions and growing wholesale channel origination activity, it is likely that mortgage application fraud risk will continue to rise as well. Fraud on cash-out refinance transactions and home equity loans may become more of a factor in the coming years as home values and equity rise.”

30 day + Delinquencies fell to 4.5% in June from 5.3% a year ago. The foreclosure rate of 0.7% was the lowest in 10 years. The range went from 0.1% in the Denver MSA to 2.2% in the Newark MSA. Decent home price appreciation and job growth are pushing delinquencies back down to pre-crisis levels. 

The Fed is expected to announce that it will begin to unwind its balance sheet at the September meeting. There seems to be a lot of handwringing in the press over the implications of the Fed ending its "easy money" policy. An important thing to remember is that easy money / tight money isn't a binary choice. It is a continuum. In all reality, if you were to put Fed policy on a scale of 1 to 10, with 1 being easy money, we are basically moving from 1.0 to 1.1. Real short term interest rates (i.e the Fed funds rate less the inflation rate) are still negative. Long term real rates are barely positive. The Fed will still continue to purchase assets in the open markets, however they will let something like 10% - 20% of maturing assets simply go away. These are truly baby steps intended to cause as little negative impact as possible. The Fed is going very slow and cautiously, and the persistent low inflation numbers give them that cushion. 

Morning Report: Can the Equifax hack hurt your borrower's ability to buy or refi?

Vital Statistics:

	Last	Change
S&P Futures	2501.0	3.8
Eurostoxx Index	381.9	1.2
Oil (WTI)	49.6	-0.3
US dollar index	85.2	0.1
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.83

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

The big event this week will be the FOMC meeting, which starts tomorrow. No changes in interest rates are expected, although the markets expect the Fed to announce their plan to gradually unwind their balance sheet. The market is anticipating a "baby steps" move where they reinvest less than 100% of bonds that are maturing. While it certainly won't help MBS spreads, it probably won't have much of an effect on mortgage rates given that QE itself didn't have a huge impact to begin with. 

Homebuilder sentiment slipped in August as the NAHB Housing Market Index fell from 67 to 64. An active hurricane season, along with labor shortages isn't helping things. Rising costs of building materials is an issue as well. 

Trump's deal with Nancy Pelosi and Chuck Schumer to keep the government open may have increased the chances for tax reform. While the Democrat's red lines pretty much foreclose anything aside from making the tax code more progressive on the individual side, we might see something on the corporate side. Perhaps the Trump reflation trade isn't dead yet, but getting to agreement on tax reform will be hard since Democrats and Republicans want fundamentally different things. Here is a good discussion of what could be happening. 

The MBA released a white paper on the CFPB, urging them to provide more detailed guidance to the industry as opposed to "regulation by enforcement action." CFPB Director Richard Cordray has resisted providing guidance to the industry, believing that bright lines merely makes it easier for companies to approach, but not cross the line. The industry argues that the CFPB should provide more guidance as to how it thinks, warn the industry when it is changing rules, abide by its own guidance, and allow due process for the accused. 

Here is some background on the Equifax hack. Can Equifax's data breach affect your ability to buy a home? It probably cannot in the end, if you were a victim of identity theft. Ultimately it will be time consuming and a nuisance, however it can be overcome. Loan Officers should be aware that there could be an uptick in mortgage fraud, so be careful in the near term. 

Morning Report: DC focused on Equifax

Vital Statistics:

	Last	Change
S&P Futures	2491.5	-2.8
Eurostoxx Index	380.8	-1.0
Oil (WTI)	50.0	0.1
US dollar index	85.0	-0.2
10 Year Govt Bond Yield	2.20%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.83

Stocks are lower this morning as September options and futures expire. Bonds and MBS are flat.

Retail Sales fell 0.2% last month, and prior months were revised downward. The control group which excludes autos, gas, and building materials fell 0.2% as well. August retail sales included some early hurricane effects, but overall it points to a lousy back-to-school shopping season. I wouldn't be surprised to see strategists start to cheat down their Q3 GDP estimates. Separately, business inventories rose 0.2%.

Consumer confidence slipped slightly in August, but is still reasonably robust. Consumer confidence is often an inverse of gasoline prices, so this number should fall going forward as gas prices have been increasing.

Hurricane Harvey affected industrial production and manufacturing production, both of which fell in August. Industrial production fell 0.9%, while manufacturing production fell 0.3%. Utilities and mining (really energy production) drove the decrease. September should also come in depressed as well due to Irma. Capacity Utilization fell 0.8% to 76.1%. The national industrial numbers have been exhibiting a bit of volatility over the past few months. Interestingly, the regional Fed indices (like the Empire State Manufacturing Index, which improved to a strong 24.4 reading this morning) have not been confirming the overall weakness. 

Bond yields have been rising over the past week as Hurricane Irma had less damage than expected. Inflation numbers have come in slightly strong as well, and Goldman has upped its probability of a rate hike to 60% in December. The Fed Funds futures echo that sentiment right now: over the past week or so, we have gone from a 40% chance of a hike to a 53% chance of a hike.

The FTC announced an investigation into Equifax's security breach. This is pretty unusual for the agency to comment on ongoing investigations, which demonstrates how seriously the government is taking it. Elizabeth Warren introduced a bill to require credit reporting agencies to freeze a person's credit for free and would restrict their ability to profitably use that data during the freeze. Chuck Schumer called the security breach "one of the most egregious cases of corporate malfeasance since Enron." He further said that "the company's chief executive and board of directors should step down unless they take five steps to correct their mishandling: notify affected consumers; provide free credit monitoring to them for at least 10 years, offer to freeze their credit for up to 10 years; remove forced arbitration clauses from their terms of use; and comply with fines or new standards that come out of investigations." Here are some tips if you were affected. 

North Korea fired a missile last night that flew over Japan before crashing in the Pacific. The missile had a long enough range to hit Guam. US Secretary of State Rex Tillerson called on China and Russia to do more to contain NK. China supplies most of North Korea's oil and Russia is the biggest employer of their forced labor. Both Russia and China have veto power for any UN sanctions. 

Morning Report: Government zeroing in on VA IRRRL churning

Vital Statistics:

	Last	Change
S&P Futures	2489.0	-6.0
Eurostoxx Index	381.9	0.6
Oil (WTI)	49.8	0.5
US dollar index	85.5	0.0
10 Year Govt Bond Yield	2.20%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.81

Stocks are down this morning after the Bank of England made no changes to monetary policy. Bonds and MBS are flat.

Inflation at the consumer level was a little hotter than expected, but still came in below the Fed's target rate. The Consumer Price Index rose 0.4% MOM and 1.9% YOY. Ex-food and energy it rose 0.2% / 1.7%. Damage from Hurricanes Harvey and Irma are creating temporary shortages which is pushing up the price of gasoline as well as some foodstuffs. This should be out of the system by the holiday shopping period and won't affect the Fed's thinking. 

Initial Jobless Claims fell to 284k last week, as Hurricane Harvey is still keeping jobless claims elevated. We will see a similar effect with Irma as well, though it should be less pronounced. Meanwhile, Target anticipates hiring 100,000 employees for the holiday season. 

The government is taking a look at lenders who push veterans to do VA IRRRLs that offer a de minimus benefit to the veteran. They have already addressed part of the issue in the secondary market by creating a separate Ginnie Mae security for VA IRRRLs that replaced a loan less than 6 months old. The IRRRL is subject to abuse since the fee can be financed. It ends up adding thousands to the principal of the loan in exchange for a slightly lowered payment. In a response to Elizabeth Warren GNMA President Michael Bright said they have identified some companies which seem to "churn" VA loans and they have identified some patterns of behavior that they will try to curtail. GNMA didn't identify which companies they were, but being accused of taking advantage of veterans will be a PR nightmare for some. Serial refinances were a problem with GNMA MBS as well, which depressed the prices of these securities. This drop in price directly translates into higher mortgage rates for unrelated loans, like FHA and non-IRRRL VA loans. 

Home prices rose 7.7% in August according to RedFin. The national median sales price was $293k, flat with July. Inventory continues to decline, falling 12.4% YOY, which was the biggest decrease in inventory over the past 2 years. Inventory stands at 2.8 months' worth, which is well below the 6 months that represent a balanced market with respect to supply and demand. Median days on market fell by 5 days YOY to 39.

In the wake of their hacking attack, Equifax is waiving fees for people who want to put a lock on their credit report. Basically, this allows you to prevent potential lenders from pulling your credit, unless you specifically authorize it. This will help prevent identity theft, however it won't be completely effective unless you do the same thing at the other two credit reporting agencies: Transunion and Experian. The stock is down 31% since announcing the hack.

Vital Statistics:

	Last	Change
S&P Futures	2490.8	-3.5
Eurostoxx Index	381.0	-0.5
Oil (WTI)	48.7	0.5
US dollar index	85.0	0.0
10 Year Govt Bond Yield	2.17%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.82

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

Mortgage applications increased 10% last week as purchases rose 11% and refis rose 9%. This includes an adjustment for the Labor Day holiday. Rates hit a low of 2.03% last week on fears that Hurricane Irma would cause major damage. Rates have fallen almost 20 basis points since July, although much of that was given back early this week after Irma turned out to be much less destructive than originally feared. 

Inflation at the wholesale level increased 0.2% in August and is up 2.4% YOY. Ex-food and energy, it rose 2% YOY, more or less right at the Fed's target. Surging gasoline prices at the end of the month pushed up the PPI. Note that Hurricane Irma will cause higher food prices, so we may see a temporary spike in inflation over the next few months. 

Vikram Pandit (who ran Citigroup back in the day) says that AI and automation will replace up to 30% of all banking jobs, primarily in the back office. For the mortgage business, I suspect we will see AI and automation help increase the capacity of personnel, but not necessarily replace them. Underwriting a mortgage is much more complicated than clearing a foreign exchange trade. Still, there is no doubt that technology is impacting the business. 

Cryptocurrencies are all the rage these days, but J.P. Morgan CEO Jamie Dimon thinks they are a fraud on par with tulip bulbs. In fact, he said he would fire any employee trading bitcoin for "stupidity." His view is that governments will not tolerate an extra-governmental medium of exchange that they cannot control. In fact, China recently shut down its Bitcoin exchanges. Bitcoin prices are up fourfold this year. 

Donald Trump is beginning to work on selling tax reform by hosting 3 Democrats to dinner at the White House last night. He is targeting Democrats in states he won. All Democratic Senators except these 3 (Manchin, Heitkamp, and Donnelly) have signed a pledge that they will only support tax reform if (a) it doesn't add to the deficit, (b) doesn't increase the burden on the middle class, and (c) goes through the regular order process. 

The gap between the homeowner's and the appraiser's perception of a house's value decreased in August, according to Quicken's Home Price Perception Index. In August, the difference was 1.35%, while in July it was 1.55%. Interestingly, out West, the appraised value is coming in higher than the homeowner's perception, while in the Midwest and Northeast it is lower. I have to say I am surprised to see that appraisals ever come in higher than the homeowner's perception, but it does happen. Note that their home value appraisal index (which only tracks appraisal prices) rose 0.2% in August and is up 2.6% YOY, well below the more popular home price indices like Case-Shiller or FHFA. 

Morning Report: Small Business Optimism at 12 year highs

Vital Statistics:

	Last	Change
S&P Futures	2490.0	4.3
Eurostoxx Index	381.8	2.4
Oil (WTI)	48.3	0.2
US dollar index	85.2	0.1
10 Year Govt Bond Yield	2.15%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.73

Stocks are higher this morning on overseas strength. Bonds and MBS are down. 

Small Business optimism remained strong in August, according to the NFIB Small Business Optimism Index. Increases in capital spending and higher sales expectations drove the increase. The index now matches the 12 year high set earlier this year. Interestingly, small business cited "quality of labor" as their second biggest problem, behind higher taxes. 59% reported trying to hire, and of those 88% reported few or no qualified applicants. In fact, both manufacturing and construction reported low labor quality as their biggest problem. Compensation is on the rise, as a net 28% of small businesses reported increasing comp. So, even though we aren't getting much in the way of legislation out of DC, the drop in new regulations are helping sentiment. A net 9% of firms reported an increase in average selling prices, which is good news to the Fed. 

Job openings totaled 6.17 million in July, according the JOLTs report. The quits rate, which is a leading indicator of increasing wages, was steady at 2.2%, and has been in a tight 2.1% to 2.2% range. The Fed watches this indicator closely. 

Delinquencies continue to fall, driven by job growth and home price appreciation, according to CoreLogic. 30 day + DQs were 4.5% in June, down from 5.3% a year ago. The foreclosure rate was 0.7%, the lowest level in 10 years. The foreclosure rate varied between 0.1% in Denver and 2.2% in New York - Newark - Jersey City MSA. 

Trump is planning on hitting the road to pitch tax reform. He was criticized for not doing more to sell the repeal of Obamacare, so he is trying not to repeat that mistake. Congress has yet to determine the particulars over what individual and corporate rates will be, but the purpose of these rallies is to make the case that we need tax reform to improve our competitiveness. Business friendly groups are also going to spend money on ads pushing for reform. 

Banks with exposure to Florida are breathing easier after the damage from Irma turned out to be lower than expected. CoreLogic estimated that uninsured flood losses from Harvey could turn out to be $18-$27 billion. 

Morning Report: Hurricane Irma does less damage than expected

Vital Statistics:

	Last	Change
S&P Futures	2472.5	11.5
Eurostoxx Index	379.0	3.5
Oil (WTI)	47.7	0.2
US dollar index	84.8	0.3
10 Year Govt Bond Yield	2.10%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.73

Stocks are higher this morning after Hurricane Irma does less damage than predicted. Bonds and MBS are down. 

The week should be relatively quiet for the bond market: there isn't much in the way of market-moving data, and there won't be any Fed-Speak as we have entered the quiet period before next week's FOMC meeting. 

Hurricane Irma did less damage than expected, and is weakening as it heads northward. Damage estimates have been cut by as much as $150 billion. 

Equifax's hacking has some people livid. The hack potentially affected 143 million people compromising social security numbers, addresses, drivers' licenses, birthdays and more. Equifax's initial site to check if you were affected had issues as well, which added insult to injury. If you have been affected by this hack, Equifax is offering a free year of credit monitoring (TrustedID), however if you accept the deal, you waive your right to sue. Equifax claims the arbitration waiver would only affect damages from TrustedID, not the cybersecurity incident. A class action lawsuit was filed on Thursday. Note several executives sold $1.8 million worth of stock after the hack (they supposedly didn't know yet). Here is what you need to know. 

The NAHB took a look at where the building activity was in 2016. Unsurprisingly, the activity was concentrated in the South and West, while the Northeast lagged. Between New York, New Jersey, and Pennsylvania there were less than 38,000 units started in 2016. This is less than a third of what Texas, Arkansas, Louisiana, and Oklahoma did. 

Rising rates have taken a bite out of refinancing volume, which hit a 16 year low in the second quarter. Overall, volumes were up 20% from Q1 to Q2, to $467 billion, but were down 16% on a YOY basis. Purchases have been driving the increase, however they remain 30% below pre-crisis levels (and this doesn't even take into account population growth and home price inflation). To give you an idea of how much credit standards have tightened, 720+ FICOs accounted for 3/4 of all loans in Q2. Pre-crisis, they were under half. Delinquencies did tick up 2.8% in the second quarter, to 3.9% of all mortgages. Hurricane Harvey could push up DQs by 300k.

Morning Report: Beware of Hurricane deductibles

Vital Statistics:

	Last	Change
S&P Futures	2458.8	-6.0
Eurostoxx Index	374.7	-0.3
Oil (WTI)	49.0	-0.1
US dollar index	84.3	-0.4
10 Year Govt Bond Yield	2.05%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.74

Stocks are lower as markets fret over the possible damage due to Hurricane Irma. Bonds and MBS are flat. 

Donald Trump cut a deal with Democrats to fund the government until December and increase aid for Harvey and Irma. Republicans were caught off guard here, however the optics of making a stand on a completely symbolic hill like the debt ceiling during a couple of major hurricanes would have been awful. Trump and Schumer are reportedly planning a bill to repeal the debt ceiling altogether. 

Credit reporting agency Equifax suffered a cyberattack which potentially gave social security numbers, addresses and drivers license numbers for 143 million people. The company has set up a website https://www.equifaxsecurity2017.com/  where people can see if their data was stolen. Banks generally eat the charges for fraud, so something of this size could potentially hit bank earnings if the fraud is big enough. The stock is down 16% on the open this morning. 

Initial Jobless Claims jumped to 298k last week due to the effects of Hurricane Harvey. This number is probably understated as many areas in Texas were unable to report. 

Productivity rose by 1.5%, which beat the 1.3% estimate. The employment cost index came in at 0.2%, below the 0.3% estimate. As long as inflation stays low, wage growth will be low as well. 

Trump has some vacancies to fill at the Fed. Janet Yellen's term expires in February, while the Deputy Fed Chairman Stanley Fischer recently resigned as well for personal reasons. Frontrunner Gary Cohn is supposedly losing favor, partially because the sense is a Goldman banker would have difficulty attracting Democrat votes. Chances are looking better that Trump renominates Yellen for another term. Former Fed Governor Kevin Warsh is also a good possibility. Warsh is slightly more hawkish than Yellen, which means he would pursue higher rates at a faster pace than Yellen, at least at the margin. 

The latest Fed funds futures prediction has a 63% of no move in December now. They are predicting no move in September as well. 

Homeowners in Florida and Texas should read the fine print on their policies. These storms could trigger "hurricane deductibles" that allow insurers to push more of the damage costs to homeowners. These became widespread after Hurricane Katrina in 2005, but haven't been used. These allow insurers to increase the size of the deductible in certain coastal states if a hurricane occurs. These deductibles are usually a percentage of the policy, as opposed to a flat dollar amount. They generally run in the 1% to 2% range. Sandy did not trigger these due to the fact it was a tropical storm when it hit the East Coast. Bottom line, someone who was expecting a deductible of $1,000 might find themselves with a $5,000 or $10,000 deductible. 

Fannie Mae is offering forbearance up to 12 months in some situations. Borrowers affected by Harvey or Irma are encouraged to contact their servicer to see if they are eligible for some relief. Details are here: http://www.fanniemae.com/portal/about-fm/hurricane-relief.html