Morning Report: Inflation at the consumer level increases moderately

Vital Statistics:

	Last	Change
S&P Futures	2567.0	-11.0
Eurostoxx Index	380.9	-3.0
Oil (WTI)	55.1	-0.6
US dollar index	87.0	-0.4
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	102.688
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.87

Stocks are lower this morning as a risk-off feel is dominating the markets. Bonds and MBS are up.

As stocks swoon, we should continue to see mortgage rates tick lower, at least at the margin. We came close to positive reprices yesterday. 

Mortgage Applications increased 3.1% last week purchases increased 0.4% and refis increased 6%. There was no adjustment for the Veteran's Day holiday, and the 30 year fixed rate mortgage was unchanged at 4.12%. 

While inflation may be picking up at the wholesale level, it hasn't translated to the consumer level, at least not yet. The consumer price index rose 0.1% MOM and is up 2% YOY. Ex-food and energy, it was up 0.2% MOM and 1.8% YOY. The Fed is targeting 2% inflation, so they still have more work to do there. It probably won't change much in the way of the Fed's thinking, which is still on a gentle path of increasing interest rates. The Fed Funds futures are currently predicting a 100% chance of a hike in December, with 92% predicting a 25 basis point hike and 8% predicting a 50 basis point hike. 

Retail sales moderated in October after spiking in September on strong gasoline sales. Retail sales increased 0.2%, while sales less autos and gasoline rose 0.3%. The control group was also up 0.3%. Separately, Target forecasted moderate holiday spending growth, although that could be specific to that company, which is locked in a price war with Wal-Mart and Amazon. 

Manufacturing in New York State decelerated last month but is still historically strong according to the Empire State Manufacturing Survey put out by the New York Fed. Employment continue to expand, albeit at a slower pace than last month. 

Household debt balances increased in the third quarter, according to the latest Fed data. Overall debt rose to just under $13 trillion, which eclipses the high set in 2006. Mortgage debt is still lower than the peak levels, however, while non-housing debt is higher. We are seeing an increase in the share of auto debt, as well as student loan debt. If you look at the historical charts, you can see just how dramatically credit scores have improved for mortgage debt. 

The Senate has added a twist to tax reform. In order to come within the statutory limits for the national debt, they have added a wrinkle to save money: eliminating the individual mandate for Obamacare. This supposedly increases savings by some $300 billion. Some of those savings may be used for additional tax cuts. This will make tax reform an easier push legally, but will probably push some of the more liberal Republicans away from it. The Republican majority in the Senate will probably get even narrower, with the special election in Alabama looking like a D pickup.