Morning Report: Wages and salaries accelerating

Vital Statistics:

	Last	Change
S&P Futures	2835.5	11.0
Eurostoxx Index	396.6	0.4
Oil (WTI)	64.2	-0.3
US dollar index	83.0	0.0
10 Year Govt Bond Yield	2.71%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.19

Stocks are higher this morning after global markets recovered overnight. Bonds and MBS are flat.

We should get the FOMC decision today around 2:00 pm EST. Be careful locking around then. The consensus seems to be that this will be a no change / hawkish tone type of statement. 

This will be Janet Yellen's last FOMC meeting. Jerome Powell seems to be cut more or less from the same cloth as Yellen, so the Fed's go-slow approach to hiking interest rates will probably continue. 

Treasury increased the size of its debt issues for the first time since 2009 this morning on the back of increased deficit spending and lower purchases from the Fed. They are offering $66 billion of 3, 10, and 30 year notes this time around, an increase from $62 billion in November. Less purchasing by the Fed plus increased issuance = higher interest rates, at least at the margin.  

Mortgage Applications fell 2.6% last week as both purchases and refis fell by the same amount. The average 30 year conforming rate increased 6 basis points to 4.41%

The ADP jobs number came in at 235,000 last month, which was higher than expectations. The Street is looking for 175,000 jobs in this Friday's jobs report. 

Compensation is accelerating, according to the Bureau of Labor Statistics. The Employment Cost Index rose 0.6% in the fourth quarter, and is up 2.6% YOY. Private Industry compensation rose faster than government, with wages and salaries up 2.8% YOY. A year ago, that annual increase was 2.3%. The industry with the biggest increase? Truck drivers. 

The "typical" mortgage payment rose 12% last year, according to CoreLogic. This measure takes the median home price and calculates the principal and interest payment using the prevailing Freddie Mac mortgage rate and assumes a 20% down payment. They are looking for this payment to increase another 13% next year as home prices and interest rates continue to rise. 

Pending home sales rose 0.5% in December, according to NAR. Home sales are being depressed by tight inventory despite strong growth in wages and jobs. 

Morning Report: Housing inventory and entry level homes

Vital Statistics:

	Last	Change
S&P Futures	2839.5	-14.0
Eurostoxx Index	397.5	-2.3
Oil (WTI)	65.0	-0.6
US dollar index	83.1	-0.3
10 Year Govt Bond Yield	2.71%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.19

Stocks are lower this morning on overseas weakness. Bonds and MBS are down.

The FOMC meeting starts today. This will be Janet Yellen's last hurrah, and that will probably dominate the news more than whatever decision they make. 

Consumer Confidence improved in January, according to the Conference Board. Confidence is at levels not seen since the late 90s. 

Home price appreciation continues its torrid pace, according to the Case-Shiller Home Price Index. The housing market is partying like it is 2005, with the usual suspects (San Diego, LA, Lost Wages) leading the charge. Case-Shiller Chief Economist David Blitzer had this to say about home price appreciation: “Home prices continue to rise three times faster than the rate of inflation... Given slow population and income growth since the financial crisis, demand is not the primary factor in rising home prices. Construction costs, as measured by National Income and Product Accounts, recovered after the financial crisis, increasing between 2% and 4% annually, but do not explain all of the home price gains. From 2010 to the latest month of data, the construction of single family homes slowed, with single family home starts averaging 632,000 annually. This is less than the annual rate during the 2007-2009 financial crisis of 698,000, which is far less than the long-term average of slightly more than one million annually from 1959 to 2000 and 1.5 million during the 2001-2006 boom years. Without more supply, home prices may continue to substantially outpace inflation.”

The lack of supply is puzzling, however part of what has pushed demand higher has been affordability due to decreasing interest rates and increasing wages. Home price unadjusted for inflation are back to bubble levels, however when you take into account inflation, they are not. As I argued before, affordability is a function of interest rates as much as it is about home prices. Borrowers focus on the monthly payment, not necessarily the sticker price. As far as the lack of supply, I think a lot of this is standard post-bubble psychology, where lenders and builders become more risk-averse (and often overcorrect to the other direction). Yes, regulation does play a role here, however post-bubble recoveries generally are weaker than normal because of this change in psychology. Eventually fear of being caught with too much inventory translates into fear of missing out. Despite years of below-average inventory, we aren't there yet. 

The outlook for housing this year remains similar to what we have seen for the past several years - tight inventory constraints will keep sales down while rising interest rates will affect affordability. The bottleneck is tightest at the lower price points - where the first time homebuyer is most likely to be found. The latest NAR exiting home sales report has supply overall around 3.2 month's worth. At the entry level, it is even tighter: in the price range of $125k - $250K, it is probably around 2.7 months or so. Unsurprisingly, we are seeing the biggest price appreciation in that segment as well. Here is a chart of inventory over time: We are at levels last seen during the bubble years:

Tonight Donald Trump will give his State of the Union Speech in front of Congress. The focus will be a $1.5 trillion infrastructure plan. Part of the plan will include a process for streamlining the approval process. Gary Cohn had this to say on CNBC: "He's going to talk about a trillion and a half dollars of investment, but more importantly, he's going to talk about streamlining the approval process on infrastructure," Cohn said. "Right now, we have an infrastructure approval process that takes seven to 10 years to build relatively simple roads. We need to streamline that to less than two years." 

I talked about the Mick Mulvaney memo to CFPB staffers and how they intend to end regulation by enforcement action, which was the MO of the Obama / Cordray regime. The Labor Department is also ending another Obama policy of refusing to give guidance to companies that ask for it. This is yet another example of the regulatory environment taking a less adversarial approach to the private sector, and this should translate into a stronger economy and mitigate some of the risk aversion I alluded to earlier. 

Tax reform is translating into more business spending headlines. Exxon-Mobil plans to add another $35 billion to its previous $15 billion expansion, and Pfizer plans to invest $5 billion. Given that capacity utilization is still historically low, this is somewhat surprising. Eventually, these newfound animal spirits have to affect the homebuilders, right? 

Years of central bank manipulation of the risk free rate has created a slew of questionable investments. Remember the PIIGS? (Portugal, Ireland, Italy, Greece, and Spain - the high yielding Euro states with massive budget issues?) Portugal has lower yields than the US right now. The Japanese Central Bank has been directly buying Japanese equities. If there is one "black swan" out there right now, it is the mal-investment that has been driven by central banks pushing yields to the floor in order to support asset prices.  

Morning Report: Fed and Jobs report highlights of the week

Vital Statistics:

	Last	Change
S&P Futures	2867.8	-6.8
Eurostoxx Index	400.4	-0.2
Oil (WTI)	54.7	-0.4
US dollar index	83.4	0.3
10 Year Govt Bond Yield	2.71%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.19

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

This should be a big week for the bond market, with the FOMC meeting in the middle of the week and the jobs report on Friday. No move is expected at the FOMC meeting, but people will focus on the language of the statement. Since this is Janet Yellen's last meeting most of the attention will probably be on her and not the statement.

Aside from the Fed meeting this week, Treasury will announce 10 and 30 year bond issues, and the expectation is that it will be the first increase since 2009. With Treasury selling more paper, while the Fed cuts its purchases, it could be a rough week for bonds. 

Personal Incomes and Personal Spending rose 0.4% in December. The PCE price index was up .1% MOM / 1.7% YOY and the core PCE price index was up .2% MOM and 1.5% YOY. This puts the core PCE index at an increase of 1.5% for the year, and marks the 6th year in a row inflation has undershot the Fed's target. The savings rate is the lowest since 2005.

Freddie Mac's total loan portfolio increased 9% on an annualized basis in December. Their DQ rate slipped from 1.08% to .97%. 

Home prices rose annually for the 67th consecutive month to $283,000 according to the Black Knight Financial Services Home Price Index. The MOM gain was .27%. As of November, home prices were up 6.5% for the year. 

Morning Report: First estimate of Q4 GDP disappoints

Vital Statistics:

	Last	Change
S&P Futures	2850.8	9.5
Eurostoxx Index	400.8	2.2
Oil (WTI)	66.5	0.0
US dollar index	83.1	-0.3
10 Year Govt Bond Yield	2.63%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.17

Stocks are higher this morning as Trump speaks in Davos. Bonds and MBS are up small. 

The first estimate for 4th quarter GDP came in at 2.6%, a touch below the 2.9% Street estimate. THis was a drop from the 3.2% growth rate in the third quarter. A larger-than-expected trade deficit, along with some inventory adjustments accounted for the miss. It will be revised twice more in the next month or so. The GDP price deflator (a measure of inflation) was 2.4% and consumer spending was a robust 3.8%. 

Housing increased 6.8% and accounted for about .84% percentage points of the growth. Housing construction will be the engine that will pull the economy going forward. We have tremendous demand for new housing and tight labor markets. Getting back to normalcy (1.5 million units a year) in housing starts will make a big difference. If we get to what is typically observed coming out of a recession (2 MM +) we will be looking the best economy since the 90s.  

The Fed Funds futures didn't really react much to the reading, and are currently handicapping a 71% chance of a 25 basis point hike at the March meeting. Next week's meeting is expected to maintain the current Fed Funds rate. 

Durable Goods orders increased 2.9% last month, which was better than expectations. Ex-transportation they rose 0.6%. Capital Goods orders fell 0.3%. On a YOY basis, all numbers were up smartly: Durable goods up 8.2%, DGXT up 7%, Cap goods up 8.1%. More evidence of a strong economy. 

Donald Trump spoke at Davos. He stressed that America is open for business and that he is willing to negotiate multilateral trade agreements (think TPP). He mentioned tax reform and that America is open for business. 

A non-profit in New Mexico has come up with a concept to help get homeowners in their first home without much of a downpayment and without MI. They issue 2 mortgages, one for 80% of the loan, which is sold on the secondary market without MI, and then a second loan for 18%, which they hold. Supposedly the performance metrics for these loans are better than the control group. 

Morning Report: New Sheriff in Town at the CFPB

Vital Statistics:

	Last	Change
S&P Futures	2850.3	9.0
Eurostoxx Index	401.9	1.1
Oil (WTI)	66.5	0.8
US dollar index	82.9	-0.4
10 Year Govt Bond Yield	2.65%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.17

Stocks are higher after the European Central Bank left rates unchanged. Bonds and MBS are flat as well.

The German Bund is getting pounded on the ECB decision. At some point the weakness will probably flow through to Treasuries.

Treasury Secretary Steve Mnuchin noted that a weaker dollar is beneficial for trade and opportunities. He was peppered with questions over whether that amounts to a change from the government's historical support for a stronger dollar. He later clarified his remarks, however the currency is getting hit a little on the remarks and persistent dollar weakness will eventually translate into higher rates.

Mortgage Applications increased 4.5% last week as purchases rose 6% and refis rose 1%. These numbers are adjusted for the MLK holiday. Note that the Spring Selling Season is just around the corner - it unofficially starts right around Super Bowl Sunday.

New Home Sales fell to 625k in December a drop from November's downward-revised 679k print. November's number was an outlier and was sure to be revised down, which probably explains why the estimates were too high.

The Index of Leading Economic Indicators improved to 0.6% from 0.5%.

Initial Jobless Claims rose to 233k from a downward-revised 216k the week before. The last time the US hit 216k initial filings, we had a military draft.

House prices rose 0.4% month-over-month and 6.5% YOY according to the FHFA House Price Index. As usual, the West Coast and Mountain States led while the Northeast / Mid-Atlantic lagged.

Existing Home Sales fell 3.6% MOM in December and are up 1.1% YOY, according to NAR. Inventory for sale fell 10.3% to under 1.5 million units which is a record low. (going back to 1999) 1.5 million units represents only 3.2 months' worth at the current sales pace. A balanced market is about 6.5 months. The median home price rose 5.8% to $246,800. The first-time homebuyer was 32% of sales, flat YOY.

Median income in the US probably came in around 60k for the end of 2017. This would put the median house price to median income ratio at 4.1 times. Historically, that number has been in the 3.1 - 3.6 range, however differences in interest rates probably explain some of that. Given the tightness in inventory and what appears to be the stirrings of wage growth, house prices should be in for another strong year. The wild card will be the luxury properties in high tax states which are becoming less affordable due to tax reform. Note that luxury home prices did rise 7% in Q4, according to Redfin.

The Home Despot is not living up to its name. $1,000 bonuses for employees.

Many loan officers have noticed that FHA and VA pricing has been terrible as of late, especially when compared to conventional rates. This is an industry-wide phenomenon. Nobody really has a good explanation of why this is happening, although it is being driven by a lack of investor appetite for higher coupon Ginnie Mae TBAs. As a general rule, Ginnie Mae TBAs are more sensitive to rate changes than Fannie Mae TBAs, so any increase in volatility will affect Ginnies disproportionately. This is especially strange since the government has taken steps to protect MBS investors from serial refinancings. Whatever the cause, the pricing is being driven by the machinations of the primary TBA market and not internal pricing changes.

Mick Mulvaney, Acting Director at the CFPB, put out a memo to staff recently giving his philosophy going forward. Suffice it to say, he will not be another Richard Cordray. It is worth reading in its entirety, as it largely amounts to a rebuke of his predecessor. Richard Cordray was quoted in Politico saying : “We wanted to send a message: There’s a new cop on the beat… Pushing the envelope is a loaded phrase, but that’s absolutely what we did.” Mulvaney's response: "Simply put: that is what is going to be different. In fact, that entire governing philosophy of pushing the envelope frightens me a little. I would hope it would bother you as well. We are government employees. We don’t just work for the government, we work for the people. And that means everyone: those who use credit cards, and those who provide those cards; those who take loans, and those who make them; those who buy cars, and those who sell them. All of those people are part of what makes this country great. And all of them deserve to be treated fairly by their government. There is a reason that Lady Justice wears a blindfold and carries a balance, along with her sword."

Other key points:

"When it comes to enforcement, we will be focusing on quantifiable and unavoidable harm to the consumer. If we find that it exists, you can count on us to vigorously pursue the appropriate remedies. If it doesn’t, we won’t go looking for excuses to bring lawsuits."

"On regulation, it seems that the people we regulate should have the right to know what the rules are before being charged with breaking them. This means more formal rulemaking on which financial institutions can rely, and less regulation by enforcement."

"Speaking of data: the Dodd Frank Act requires us to “consider the potential costs and benefits to consumers and covered persons.” To me, that means quantitative analysis. And while qualitative analysis certainly can play a role, it should not be to the exclusion of measurable “costs and benefits.” In other words: there is a lot more math in our future."

Morning Report: Global risk appetite is at an extreme

Vital Statistics:

	Last	Change
S&P Futures	2833.5	-1.8
Eurostoxx Index	403.1	0.9
Oil (WTI)	63.7	0.3
US dollar index	84.3	-0.1
10 Year Govt Bond Yield	2.62%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.03

Stocks are down as the government shutdown is over for the moment. Bonds and MBS are up on the back of the Bank of Japan continuing its stimulative measures. 

Democrats agreed to end their filibuster over funding the government yesterday in exchange for an extension of the CHIP program. We will re-convene in 3 weeks to discuss immigration, etc. It turned out that the polls never really went the way Democrats had hoped.  

The global risk appetite is about as extreme as it has ever been, according to Goldman. So far this year, stocks have been the big winner, while bonds have been the big loser. Is this misplaced? Global growth is the best it has been in a decade, and the world's second biggest economy (Japan) may have finally turned the corner. Bank executives in Davos are worrying about financial complacency and the possibility of bubble-style thinking. I think it pays to differentiate between what the markets are saying and what is actually happening for businesses right now. While investors may be willing to pay anything for growth, business in general is not. US business has been in maintenance mode with respect to capital expenditures for the past decade and the fear of having too high of a cost structure is still greater than the fear of missing out on business. It has been this way since the stock market bottomed, and might have more to do with global central bank liquidity measures than actual business psychology. The million dollar question: does this circle get squared via a more robust business expansion? Or does it happen via a stock market deflation as global central banks normalize policy? 

China is mulling a property tax to tame its real estate bubble. The normal transaction costs that are seen in the US (6% brokerage fees, property taxes) are much lower in China, which has helped fuel their bubble. When it bursts, they will probably deal with it the way Japan did - imposing so many costs to transacting that sales dry up. It prevents fire sales, but it also means the economy will be stuck in a deflationary environment for a long time. 

Delinquencies increased in December, primarily driven by the hurricanes last fall and general seasonality. On the other hand, foreclosure starts hit a post-crisis low, falling to 44,500. The number of homes in foreclosure decreased by 32% YOY. 

Morning Report: Government still shut down

Vital Statistics:

	Last	Change
S&P Futures	2811.5	0.5
Eurostoxx Index	401.9	1.0
Oil (WTI)	63.3	-0.1
US dollar index	84.4	-0.1
10 Year Govt Bond Yield	2.65%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.03

Stocks are flat as the government shutdown goes into a third day. Bonds and MBS are flat. 

For all of the sturm and drang about the government shutdown, the markets don't care. Hopefully people who needed tax transcripts took care of business early. 

Bond yields blew through support last Friday, and the Ginnie Mae TBAs are in a bit of a transition. The higher coupon TBAs hadn't really begun trading with any sort of volume, which made it hard to get note rates above 5 1/8%. Since bonds are pretty much unchanged this morning we should see those note rates open up (hopefully) today. 

Note some bond bears see the early part of the year as the time to sell bonds. This is similar to the "sell in May and go away" advice that stock investors sometimes heed. It turns out that since 1998, bond yields have increased ever so slightly in the first 5 months of the year, and have fallen pretty dramatically in the final 7 months. Is there any sort of economic explanation? No. Which means it is just a coincidence. 

The upcoming week won't have much in the way of market-moving data except for Friday, which will have durable goods and GDP. Fed-speak is also minimal ahead of the FOMC meeting next week. The markets are predicting nothing is going to happen at the Jan meeting. We will get some non-market moving housing data with new home sales, existing home sales, and the FHFA House Price Index. We are in the heart of earnings season, and that will dictate stock price movement. 

The World Economic Forum begins this week in Davos, which means we will get to see a lot of economists get interviewed in the snow on CNBC and Bloomberg TV. Don't expect to hear anything market-moving. The global economy is doing just fine at the moment, although I am sure bigwigs at the IMF, World Bank, and various Central Banks will find something to fret about. They should probably worry more about their economic forecasts. The Bank of England was dead-set against Brexit, and thought that leaving the EU would crash the economy. Their forecasts missed the mark by a country mile. As a general rule, investors should leave their political preferences at the door when it comes to making investment decisions.  Combining political ideology with economic / market forecasting is inevitably a recipe for disaster. 

Economic activity continued to exhibit strength in December, according to the Chicago Fed National Activity Index. Production-related indicators (sales, orders, inventory) improved in December, while employment indicators were more or less flat compared to November.  

The post-crisis financial regulatory environment has created a shortage of appraisers. While this has largely affected mortgage lending, banks are now using Broker Price Opinions (BPOs) for transactions that involve rental properties. These used to be called "drive-by" appraisals, as the analyst would drive past the property and look at it without entering. Nowadays, these appraisals are outsourced to India, where analysts basically come up with a valuation using Google Earth and comps. Even Fannie Mae used BPOs for a transaction last year. The ratings agencies will haircut the BPO valuation by 10% or so when doing a collateral evaluation. 

One of the telltale signs at the peak of a market bubble, according to Charles Kindleberger in his book Manias, Panics, and Crashes is the emergence of swindles. The largest private bank in China has turned out to be a fraud. China has a massive real estate bubble on its hands, and it will burst at some point (this year, next decade, who knows?) However, once it bursts, the economic playbook says that China will export deflation the way Japan did in the 90s, which means lower interest rates and lower inflation overall. 

Speaking of bubbles, the liberal Brookings Institute thinks that 40% of student loans from the 2004 cohort could default. This isn't chump change, either: a total of $1.4 trillion in student loan debt is outstanding. This is another reason why the Fed is so interested in creating inflation (despite what they say about it). Inflation is a debtor's best friend, as wages rise with inflation, but fixed rate debt stays the same, which reduces the drag on spending and economic growth over time. Until that happens, the first time homebuyer will probably continue to rent, at least at the margin. 

Home prices increased 7% in 2017, according to Redfin. As usual, inventory remains the biggest problem in the real estate market. 

Morning Report: Shutdown day.

Vital Statistics:

	Last	Change
S&P Futures	2799.3	3.0
Eurostoxx Index	400.2	1.4
Oil (WTI)	63.0	-0.9
US dollar index	84.4	0.0
10 Year Govt Bond Yield	2.62%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	103.25
30 Year Fixed Rate Mortgage	4.03

Stocks are higher this morning as we head into the deadline to keep the government open. Bonds and MBS are flattish.

Consumer sentiment slipped in early January, according to the University of Michigan Consumer Sentiment survey. The reading fell to 94.4 from 97 in December. 

The House passed a 1 month continuing resolution yesterday and all eyes turn to the Senate, where Democrats are demanding action on immigration in exchange for a vote to keep the lights on. If they can't come to a deal, the government will shut down at midnight. This will be a little different than it was during the Obama years: Obama wanted the public to feel the pain of the government shutting down, so he made it as visible as possible. Trump is going to do the exact opposite. National Parks will still be open, although the rangers will be off duty. Tax transcripts were held up the last time the government shut down, so hopefully everyone planned accordingly. 

So far, the markets are treating the drama in DC as a sideshow. The US dollar, bond yields, and stock prices don't care. The 10 year is trading right at technical support right now, so if it breaks through that level, technical analysts are thinking the next level is 3%. 

Are credit scores preventing people from getting mortgages? Some are arguing that the old FICO scores are outdated and the GSEs should open up credit scores for competition. There is always the fear that competing credit scores will create a race to the bottom, where the most lax score wins, but that is probably overblown. Most originators won't touch the lowest permissible scores to begin with, so changing the number will probably only result in them changing their overlays to maintain the same credit profile as before. 

They say all real estate is local, and from what we have seen prices are rising rapidly. Are there pockets of weakness still? In fact there are, in the super-rich bedroom community of Greenwich, CT. Last quarter, prices fell at high end by almost 14%, the most since 2008 when Lehman Brothers collapsed. Sellers are tired of waiting years to get the price they want, and are finally getting realistic about the new market conditions. One estate, which was originally listed at $65 million ended up going for $21 million. The bottom line for Greenwich is that the financial industry, which really supported the area, has changed and probably isn't coming back to pre-bubble levels. This also explains Connecticut's budget issues as well - the rich communities in Fairfield County largely supported the state. 

Labor shortages are starting to push up wages, especially for skilled workers. Yesterday's initial jobless claims number was the lowest in 45 years. The markets and the Fed are forecasting 3 rate hikes this year. The risk is probably that this estimate is too low. The markets have been bumping up their March forecast. which currently stands at a 73% chance of a 25 basis point rate hike, up from 61% a month ago. 

The CFPB made its budget request for the first quarter, and the number is.... $0.00. The agency has $177 million in the bank (so to speak) and has a budget of $145 million, so they aren't asking for any more money. 

The Senate is working on a housing reform plan that would wind down Fannie and Fred and replace them with up a large number of private guarantors with a catastrophic government backstop. The Senate differs from FHFA here - FHFA wants a small number of guarantors to operate under a regulated utility model to prevent a race to the bottom, while the Senate envisions no limit. One other big change - the elimination of affordable housing goals, which will be replaced with incentives. This will almost certainly anger liberals, who were able to kill housing reform in 2014 over that exact issue. 

Want to be master of the universe? Try the Monetary Policy Game. 

Morning Report: Housing starts disappoint

Vital Statistics:

	Last	Change
S&P Futures	2802.5	-1.3
Eurostoxx Index	398.1	0.1
Oil (WTI)	64.0	0.1
US dollar index	84.5	-0.2
10 Year Govt Bond Yield	2.62%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	103.25
30 Year Fixed Rate Mortgage	4.03

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

The House looks ready to pass a one-month stopgap measure to keep the lights on. Senate Democrats are considering blocking it in order to push immigration reform, but nothing is set in stone. Bottom line, the odds of a government shutdown tomorrow are falling. 

Initial Jobless Claims came in at 220,000 last week. This is a 45 year low. When you take into account population growth and the fact that we had a military draft back then that number is astounding. 

The Beige Book was released yesterday, and contained no major surprises. Growth is "modest to moderate" in most districts and the labor market is tight, to the point of constraining growth. They mentioned that we are seeing wage inflation more broadly in some districts, while inflation is generally under control. Separately, the Philly Fed report showed that growth eased somewhat, however it is still very strong. 

Housing starts came in at 1.19 million units (annualized), which was a big disappointment. Hurricane effects probably played a part, as many construction workers are being diverted to repair work. We did see a substantial (14%) drop in starts in the South. Building Permits came in at 1.3 million. All told, 1.2 million housing units were started in 2017, which was more or less flat with 2016. This is about 80% of the pre-bubble average of 1.5 million units a year. 

Mel Watt discussed housing reform in a letter to the Senate Banking Committee. He urged lawmakers to establish a guarantor framework where shareholder-owned entities guarantee mortgages with a government backstop and a utility model. The utility model means that pricing will be set by the government in order to set an allowable rate of return for the company and nothing more, similar to how gas and electric companies are run. If one of the guarantors runs into trouble, they will be allowed to fail, however the mortgages they guarantee will be backstopped by the government, thus protecting MBS investors. The document also recommended that these guarantors offset their credit risk in the private market when economically feasible and that they hold enough capital to withstand another 2007. 

Morning Report: Possible deal on funding the government

Vital Statistics:

	Last	Change
S&P Futures	2791.8	9.5
Eurostoxx Index	398.3	0.0
Oil (WTI)	63.6	-0.2
US dollar index	84.6	0.0
10 Year Govt Bond Yield	2.55%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	103.25
30 Year Fixed Rate Mortgage	4.03

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

Slow news day. 

Builder sentiment fell somewhat last month, but is still strong, according to the NAHB.

Mortgage Applications increased 4% last week as purchases rose 3% and refis rose 4%. This is a bit of a surprise given that bond yields moved up aggressively on stronger economic data and speculation that China would reduce its Treasury purchases. The 30 year fixed rate mortgage rose 10 basis points to 4.33%. 

The deadline to fund the government is fast approaching, and it looks like we will only get another temporary (one-month) deal. The deal won't include anything on immigration, however it will fund the Children's Health Insurance Program for 6 years, and delays some Obamacare taxes. Bond Traders are not so sanguine on a deal, and are selling Treasuries maturing in early March. 

Rising input costs are the biggest challenges to homebuilding. 84% of all builders surveyed said that rising labor costs and rising material costs are going to be a problem this year. High land prices are also an issue. Affordable housing is one of the nation's biggest problems right now, and it is extremely difficult to build at price points that are affordable for the entry-level homebuyer. 

Industrial Production rose 0.9% in December and manufacturing production rose 0.1%. Capacity Utilization jumped to 77.9% from 77.3%. Utilization is still relatively low, and indicates that we still have plenty of unused capacity. High utilization rates (85%-ish+) are usually associated with increasing inflation. 

Bitcoin is now trading below $10,000. Easy come, easy go. 

Morning Report: Possible government shutdown?

Vital Statistics:

	Last	Change
S&P Futures	2801.3	12.5
Eurostoxx Index	399.0	1.2
Oil (WTI)	63.9	-0.4
US dollar index	84.6	0.2
10 Year Govt Bond Yield	2.54%
Current Coupon Fannie Mae TBA	101.75
Current Coupon Ginnie Mae TBA	102.875
30 Year Fixed Rate Mortgage	4.03

Stocks are higher this morning as on overseas strength. Bonds and MBS are up small. 

Not a lot of market-moving data this week, however we do get housing starts and the FHFA House Price Index. Bank earnings will dominate the releases this week. 

The Empire State Manufacturing Survey came in a little weaker than expected, but was still pretty strong. Employment-related indicators (number of workers and average workweek) decelerated a touch, however the inflation indicators (both prices paid and prices received) increased. The bond market seems to be taking the inflation data in stride. 

The big thing this week will be a continuing resolution to keep the government open. The government will shut down if a budget deal isn't reached by Friday. Democrats are holding out over immigration. Republicans are weighing another short-term funding measure that will last until mid-February. 

So far, it looks like the meta-issue for 2018 will be inflation. Numerous companies have announced wage increases in response to the tax bill, and some states have raised the minimum wage. Commodity prices remain firm (especially food and energy). In order to really get inflation, we need wage inflation and so far we haven't really seen a lot in the BLS numbers. That said, with all the company announcements over raises this could be the year. 

Dallas Fed President Robert Kaplan believes we are going to "overshoot full employment" and he thinks we will need to see 3 rate hikes this year. His personal GDP forecast is 2.75% growth. "The history of overshooting full employment in this country has not been a happy one," he added. "Normally, what happens is you get an overheating, the Fed has to play catch up, and what happens then is you tend to often have a recession." Historically (post-Great Depression) that has been the case: the economy grows, inflation starts, and the Fed causes a recession to beat back inflation. That model probably works 90% of the time, but post-bubble economies are different, and have longer (and shallower) recoveries. The excesses of the bubble years may have been worked off, however the psychology of the bust instills a risk-aversion on the part of the business community that isn't necessarily conducive to inflation. Japan has been trying to create inflation since the early 90s and they still haven't been able to do it. The US isn't necessarily Japan, however the Japanese experience shows that the usual economic playbook goes out the window after asset bubbles. 

The black swan for US inflation? The bursting of the Chinese real estate bubble. This will be a drag on overall global growth and commodity demand. 

Morning Report: Congress cracks down on serial VA refinancings

Vital Statistics:

	Last	Change
S&P Futures	2769.0	-0.5
Eurostoxx Index	397.5	0.2
Oil (WTI)	63.2	-0.6
US dollar index	85.3	-0.2
10 Year Govt Bond Yield	2.58%
Current Coupon Fannie Mae TBA	101.75
Current Coupon Ginnie Mae TBA	102.875
30 Year Fixed Rate Mortgage	4.01

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

Inflation on the consumer level continues to be under control, according to the Consumer Price Index. The headline number was up 0.1% MOM and 2.1% YOY. The core rate, which excludes food and energy) was up 0.3% MOM and 1.8% YOY. Housing and medical costs drove the increase in the rate. 

Retail Sales were up 0.4% in December, which was a touch below expectations. The control group was up 0.3%, which was in line with expectations. The MOM numbers may seem low, however November was exceptionally strong. 

Robert Kaplan said the Fed has upped their 2018 economic forecast to 2.5% - 2.75%. The current estimate is at 2.5%. After having been too high in their GDP estimates for 9 years, the Fed finds itself in the position of consistently being too low. 

The two year bond yield topped 2% for the first time since the financial crisis. The 2 year is much more sensitive to the Fed Funds rate than the 10 year is, and is part of the reason why we are talking about a yield curve flattening and what it means. A common narrative these days is that the yield curve is flattening (that is, the difference between long-term rates and short-term rates is falling) and that signals a recession. That could be the case if the Fed tightens more aggressively than they are now, however they are going at such a slow pace that it probably won't knock the economy into a recession. Plus there is so much pent-up demand from the last 10 years that a lot of the necessary pieces for a recession simply aren't in place. 

Where do we stand with the market's prediction of rates? The Fed Funds futures are now pricing in a 73% chance of a 25 basis point hike in March. This is up from 59% a month ago. 

Wells Fargo reported higher earnings, however part of that was due to a one-time benefit due to the tax bill. On the mortgage side, originations came in at $53 billion for the fourth quarter, down 10% QOQ (largely explained by seasonality) and down 26% from a year ago. Margins were up a basis point from the third quarter and were down 43 basis points from a year ago. 

The Administration and the Senate continue to work on hammering out a deal on funding the government. The current continuing resolution expires in a week, and Democrats are holding out for an immigration deal in order to sign off on a new CR. It is still too early to predict a shutdown, but remember that a shutdown will affect the IRS and getting tax transcripts. Plan accordingly. 

Washington is looking to do something about serial VA refinances.  Many veterans were refinancing their mortgages (and adding to their principal by folding in the funding fee) for a de minimus drop in monthly payment. The Protecting Veterans from Predatory Lending Act of 2018 will make the following changes to VA lending. 

• A lender may only submit a refinance loan for VA insurance if it certifies that all fees associated with the refinance would be recouped through lower monthly payments within three years;
• A lender may only receive VA insurance for a refinance loan if the refinance loan has a fixed rate 50 basis points lower than the earlier fixed-rate loan (or 200 basis points lower if the new refinanced loan is an adjustable rate mortgage).
• A lender may only receive VA insurance or get a Ginnie Mae guarantee for a refinance loan if the refinance comes more than six months after the initial loan.   

At the margin, this legislation is bullish for Ginnie Mae TBAs and Ginnie Mae servicing, which should translate into better FHA and VA rates going forward. 

Morning Report: Bonds rally after a decent 10 year auction

Vital Statistics:

	Last	Change
S&P Futures	2754.3	3.8
Eurostoxx Index	397.0	-1.6
Oil (WTI)	63.9	0.3
US dollar index	85.6	-0.2
10 Year Govt Bond Yield	2.56%
Current Coupon Fannie Mae TBA	101.75
Current Coupon Ginnie Mae TBA	102.875
30 Year Fixed Rate Mortgage	4.01

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

Inflation came in weaker than expected at the wholesale level, with the producer price index falling 0.1% MOM and increasing 2.6% YOY. The core index (which strips out food, energy, and trade services) rose 0.1% and is up 2.3% YOY. 

Bonds were trying to break through support yesterday, however a decent 10-year auction pushed rates lower. The 10 year yield dropped 2 basis points on the result and is holding those levels this morning after the weaker than expected PPI. The Chinese government said that yesterday's Bloomberg story of a potential slowdown or suspension of Treasury purchases could be fake news. 

Initial Jobless Claims rose to 261k in a holiday-shortened week. I would bet most of this is being driven by post-holiday retail layoffs. 

Wal-Mart is raising its starting wage to $11 an hour and handing out bonuses to employees. They are just the latest in a string of companies that announced raises and bonuses recently. We'll see if this moves the needle in the official wage inflation numbers out of BLS. It is interesting that most of the wage inflation seems to be occurring at the bottom end of the scale. 

Mortgage Credit Availability decreased in December, according to the MBA. Government programs (FHA/VA) especially at lower FICO and higher LTVs were the biggest decliners. Note that GNMA servicing values did get hit in 2017 as prepay speeds were generally higher than the benchmark TBAs were forecasting. That said, we saw a tightening of credit in all products, including jumbo. Despite the monthly drop, credit availability is still up substantially from a year ago. 

The Kansas City Fed is out with their housing outlook for 2018, and it predicts continued price increases as pent-up demand remains unsatisfied. Household formation remains below the benchmark forecast done in 2000 based on demographics. Part of this is a continuation of the decades-long trend of Americans marrying and having kids later than previous generations. Student loan debt is also a factor. That said, the shortfall is astounding - about 3.5 million households. That is almost 3 years' worth of housing starts at current levels! Housing starts would need to double to satisfy that demand. If we get 2 million plus housing starts, we are looking at the strongest growth since the 90s. Lack of workers, available land, and land use regulations remain the bottlenecks. 

Last year, the Fed paid $80 billion in profits to Treasury. Long-term rates fell slightly during the year and that number was lower than 2016. For those keeping score at home, that works out to be a 1.8% ROA, which is pretty punchy for a bank. The big question is what happens if rates move up faster than the Fed anticipates? 

The Trump Administration is reviewing the Community Reinvestment Act, to make compliance easier and more transparent. 

Morning Report: Bonds testing support

Vital Statistics:

	Last	Change
S&P Futures	2741.5	-10.8
Eurostoxx Index	398.0	-216.0
Oil (WTI)	63.6	.06.6
US dollar index	85.6	-0.4
10 Year Govt Bond Yield	2.58%
Current Coupon Fannie Mae TBA	101.75
Current Coupon Ginnie Mae TBA	102.875
30 Year Fixed Rate Mortgage	4.01

Stocks and bonds are lower this morning on news that China may slow or halt its purchases of Treasuries. 

Bonds are currently trading at 2.58% after Chinese officials recommended slowing or halting purchases of US Treasuries. Driving this decision are the relative attractiveness of US Treasuries and the possibility of a trade war. Between the Fed tapering their purchases of Treasuries, and potential disinvestment of the Chinese, Treasuries are heavy. Ultimately, this is about the trade deficit, which is the difference in value between what we import from China and what we export to China. The deficit is simply filled in by Treasury purchases. While a trade war is probably just saber-rattling, a drop in trade will probably mean a drop in the trade deficit, which means less demand for Treasuries. Ultimately, the US would prefer the Chinese to buy less Treasuries since that would mean they are buying more goods and services. 

Note that the recent peak in the 10 year was 2.62% in March this year. We are close to breaking through support, which would probably trigger at least some technically-driven selling. We have a 10 year bond auction this afternoon at 1:00 pm EST. If we get a lousy bid / cover ratio that could be the catalyst to break through that level. 

We have a lot of Fed-speak today, with Charles Evans, Robert Kaplan and James Bullard speaking. 

Mortgage Applications rose 8.3% in a holiday-shortened week, as purchases rose 5% and refis rose 11%. The average contract rate for the 30 year conforming rate rose a basis point to 4.23%. 

Import prices rose 0.1% MOM and 0.3% YOY, while export prices fell 0.1% MOM and rose 2.6% YOY. 

Lennar reported fourth quarter earnings of $1.29 a share which missed analyst expectations. An undisclosed "one-time strategic transaction" was delayed until the first quarter, which apparently drove the miss. Revenues increased 12%, while deliveries were up 5% in units. Backlog was up 17% in units and 23% in dollars. Gross margins fell by 90 basis points to 22.4%. Lennar is also in the process of buying CalAtlantic, and that deal should close in February. 

The National Association of Homebuilders projects that 653,000 new homes will be sold in 2018, an increase of 5.4% from 2017. This won't be enough to meet demand. Lack of labor and land are the limiting factors, as well as government regulations. It seems that "urban villages" are the flavor du jour, with apartments and walkable developments that mix commercial and residential. 

Morning Report: What low bond volatility means for mortgages

Vital Statistics:

	Last	Change
S&P Futures	2751.3	4.5
Eurostoxx Index	400.3	1.9
Oil (WTI)	62.0	0.2
US dollar index	86.0	0.1
10 Year Govt Bond Yield	2.50%
Current Coupon Fannie Mae TBA	102.313
Current Coupon Ginnie Mae TBA	103.063
30 Year Fixed Rate Mortgage	3.92

Stocks are higher this morning on good economic data out of Europe. Bonds and MBS are down.

Small Business Optimism slipped slightly in December, capping the strongest year in the index since the early 80s. Hiring was sluggish in December, with a lack of qualified workers being the biggest problem in construction and manufacturing. Compensation is trending up as well, as a net 23% of small businesses intend to raise compensation this year. 

Job openings were little changed in November, according to the JOLTs survey. This was a slight drop from October, and a touch below expectations. Openings increased for retail, and fell for government, transportation, and utilities. The quits rate was unchanged at 2.2%. Until we start seeing the quits rate move up, we probably won't be seeing broad-based wage inflation. 

Volatility in the bond market has hit a 52 year low, according to a Bank of America / Merrill Lynch report. This is not surprising: volatility in the stock market is also at record lows. Volatility is generally a sign of stress in the system, and it tends to fall during periods of stronger growth.

The drop in bond market volatility has major implications for the mortgage market as well, and helps explain a bit of why mortgage rates are behaving the way they are. While the 10 year has been steadily moving higher over the past few months, mortgage rates have been relatively stable. While mortgage rates do tend to lag Treasuries, something else has been going on, and that something has been low volatility. 

30 year fixed rate mortgages have an embedded option in them, which is the right of the borrower to prepay their mortgage without penalty at any time. That right to prepay is worth something, and that value explains the yield differential between government backed mortgage debt and Treasuries. The value of the prepayment option is determined largely by the volatility of the bond market - when volatility rises, the right to prepay is worth more, and when volatility falls, it is worth less. So, when the market is stable, investors bid up mortgage backed securities as the value of that option falls, which translates into tighter MBS spreads and lower mortgage rates. In fact, the difference between a 30 year fixed rate mortgage and an adjustable rate mortgage is driven by the value of that prepayment option and risk-shifting between borrower and lender. When volatility is low, the borrower is paying less for that option and 30 year fixed rate mortgages will be more attractive than ARMS. When volatility is high, ARMS will be much cheaper. During periods of low volatility, it makes sense to scoop up that prepay option on the cheap and take out a 30 year fixed rate mortgage. When volatility is high, you will end up getting a much lower initial rate with the ARM. Co-incidentally, the economic backdrop (stronger growth, accelerating inflation, and a Fed raising short term rates) also favors the 30 year fixed over ARMS.