Morning Report: Jerome Powell spooks the bond market

Vital Statistics:

S&P Futures	2751.5	4.0
Eurostoxx Index	381.0	-1.3
Oil (WTI)	63.0	0.0
US dollar index	84.1	0.1
10 Year Govt Bond Yield	2.89%
Current Coupon Fannie Mae TBA	102.313
Current Coupon Ginnie Mae TBA	102.531
30 Year Fixed Rate Mortgage	4.4

Stocks are marginally higher this morning after the second revision to fourth quarter GDP came in as expected. Bonds and MBS are flat.

Fourth quarter GDP increased at 2.5%, which matched Street expectations. The price index was revised downward a touch and consumer spending was revised upward. For the year, GDP increased at 2.3% versus 1.6% for 2016. Inflation is picking up, as the price index rose 2.5% versus 1.7% in the third quarter. Excluding food and energy, the index was up 1.9%, compared to 1.3% in the third quarter. 

The Chicago PMI decelerated last month, but still came in at a strong 61.9. The number was below estimates however. 

Pending Home Sales fell 4.7% in January, according to NAR. This is down 3.8% YOY and the lowest since October 2014 after the Taper Tantrum. Despite higher rates and smaller inventory, traffic was up YOY in January, except for the Northeast, which could have been weather-driven. 

Jerome Powell spooked the bond markets yesterday during his testimony in front of the House. He acknowledged that inflation is accelerating and that the economy has improved since the meeting in December, and that statement pushed bond yields higher. He said he didn't want to "prejudge a new set of projections," referring to the dot plot at the March meeting. Powell will testify in front of the Senate tomorrow. 

The Fed Funds futures didn't really do much in response: The March futures are now handicapping an 87% chance of a hike and the consensus is still for 3 hikes this year. 

Mortgage applications increased 2.7% during the holiday-shortened week, with the refi index falling 1% and the purchase index increasing 6%. The average contract rate was 4.64%, unchanged from the prior week. 

The NAR and ATTOM weigh in on the real estate outlook for 2018. Unsurprisingly, they expect the inventory issue to continue, and homebuilders to modestly ramp up production while constrained by labor shortages. They point out also that the churn of move-up buyers has largely collapsed post-crisis. The average tenure (or amount of time that someone has lived in their home) has doubled since the crisis, from just over 4 years to 8 years. This lack of churn depresses the number of homes available on the market. I wonder if the churn was simply an issue related to underwater homeowners - short sales are tough to do. Second, as the foreclosure inventory is largely worked through, with the exception of the Northeast and a few other states, distressed homes are drying up. I suspect the professional investors who bought these homes will want to ring the register at some point, but that will be a function of interest rates and home price appreciation. 

Lowe's missed Street estimates and is down 8% pre-open. It looks like this is a company-specific problem and doesn't reflect on the home improvement market. The Despot beat earnings recently. 

Morning Report: Jerome Powell Addresses Congress

Vital Statistics:

	Last	Change
S&P Futures	2782.0	-2.5
Eurostoxx Index	381.8	-1.3
Oil (WTI)	63.6	-0.3
US dollar index	83.7	0.2
10 Year Govt Bond Yield	2.88%
Current Coupon Fannie Mae TBA	102.313
Current Coupon Ginnie Mae TBA	102.531
30 Year Fixed Rate Mortgage	4.4

Stocks are down small on no real news. Bonds and MBS are down as well.

Durable Goods Orders fell 3.7% in January MOM, but rose 6.8% YOY. Ex-transportation, they fell 0.3% MOM and rose 6.9% YOY. Core Capital Goods (a proxy for business capital expenditures and expansion) fell 0.2% MOM and is up 6.3% YOY. 

In other economic news, the trade deficit widened to 74 billion, while retail inventories rose 0.8%. Wholesale Inventories rose 0.7%.

Home prices rose 6.3% YOY in December to close out 2017 up 6.3% overall. House price inflation will be subject to a bit of a push-pull effect: Strong demand and limited supply will provide support for home prices, while increasing interest rates will reduce affordability and should have a dampening effect on home price inflation. That said, by historical standards, these mortgage rates are still extremely low, and affordability is still extremely high, at least on a long-term basis when you use monthly payment as a percentage of income. 

The FHFA House Price Index rose 0.3% and it is up 6.5% for the year. 

Fed Chairman Jerome Powell testifies in front of Congress this morning at 10:00 am. Here are his prepared remarks. Nothing in the remarks jumps out at me as anything all that new, although Powell argues that the stability of the labor force participation rate over the past few years is a sign of strength, not weakness. Yes, baby boomers are retiring but their kids are entering the workforce so it should balance out. Below is a chart of the labor force participation rate going back to WWII. Note the steady rise beginning in the 1960s. That is the baby boom entering the workforce, and the secular change of more women entering the workforce. About half of those gains have been given back in the Great Recession. I think he is saying that the labor force participation rate should be trending even lower due to demographic factors, and that the stability of the past few years is evidence that the labor market is strong. Perhaps. 

The Fed has always had a simple model of unemployment and inflation called the Phillips Curve. It basically says that unemployment will start driving inflation if it gets low enough. Historically economists have thought that unemployment levels in the low 4s would trigger it. So far we have seen some wage inflation in some skilled areas, but nothing widespread. Most of the inflation we have been seeing has been commodity push inflation driven by food and energy prices. These things often reverse, as higher prices invite new supply. Or in other words, the cure for high prices is high prices. 

You are beginning to see a new theory in academia - that the slow growth in wages is not due to a supply / demand issue, but is evidence of an antitrust problem, or at least a market failure. Hard to see how heavyweights like Wal Mart and McDonalds are colluding for low wage labor, but that;s what they believe, and they think the cure is a higher minimum wage, more unions, and exerting more oversight over the bigger employers. Occam's Razor says that labor-replacing technology is probably the driver, but that's no fun. 

Toll Brothers reported better-than expected earnings this morning, showing that there is still plenty of strength in the luxury sector of the market. Orders rose 19% in units, and ASPs rose 6.8% to $826k.  Margins are falling however, as increasing input and labor costs push against price hikes. 

Surprising stat: 35% of homebuyers bid on a home before seeing it in person. The young buyer is more likely to do this: almost half of Millennial buyers bid before seeing. 

Morning Report: New Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2757.3	8.5
Eurostoxx Index	383.2	2.1
Oil (WTI)	63.3	-0.2
US dollar index	83.5	-0.1
10 Year Govt Bond Yield	2.85%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.4

Stocks are higher this morning on the back of global strength overnight. Bonds and MBS are up. 

The highlight of the week will probably be new Fed Chairman Jerome Powell's testimony in front of Congress. There probably won't be anything market-moving (the questions will probably focus on financial regulation and wage inflation), but just be aware. He testifies on Tuesday and Thursday. The jobs report will be released next Friday, not this one. 

Economic activity moderated slightly in January, according to the Chicago Fed National Activity Index. The 3 month moving average fell as an unusually strong October reading fell off. 

New Home Sales fell in January to 593,000. December was revised upward. The median price rose to 323,000. Inventory stood at just over 300k, which amounts to about 6 month's worth of inventory at the current sales pace. 

Goldman is forecasting a 3.25% 10 year yield by the end of the year, adding that if bond yields hit 4.5% you could see a big sell-off in the stock market (no kidding). Surprisingly, they don't think that sort of yield would trigger a recession. 

Quantitative hedge funds are having their worst month in 17 years, especially the trend-following ones. Some of these funds are down 10% plus this month. If this continues, expect to see redemption notices being filed, which means they will be unwinding positions. One of the biggest positions on the street, aside from being long stocks is being short bonds. This will actually provide some support for bond prices, which means that we could be looking at stable / rising rates in the near term. 

Very surprising stat: Since the bubble peak, the median home price is up about 4.5% and the Case-Shiller Index is up 6.5%. The new home median price is up 27.5%. This demonstrates just how much the homebuilders focused on the luxury market after the bust. I think it also reflects a push towards urban construction as well. 

As the Spring Selling Season begins, inventory is sparse. Most homebuyers have been searching for 3 months or more. The biggest issue? Finding a house they can afford. 

Fannie Mae has almost delivered the 10% return on the preferred stock it sold the government during the financial crisis. Freddie has further to go. Once the GSEs pay their 10%, the preferred stock could be retired, perhaps in exchange for housing reform. 

Morning Report: The Street is short Treasuries

Vital Statistics:

	Last	Change
S&P Futures	2722.3	10.8
Eurostoxx Index	380.9	0.5
Oil (WTI)	62.7	0.0
US dollar index	83.6	0.1
10 Year Govt Bond Yield	2.89%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.4

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

No economic data today, but we do have a lot of Fed-Speak. 

Speculative short positions in US Treasuries are at a record. This means in plain language, that a lot of speculators are making the same bet: that interest rates are going higher. In practice, crowded trades like this often will behave in a perverse manner, especially when you get data points that don't support the prevailing view.  Right now, the Street thinks inflation is rising and they are negative on Treasuries. Any data point that supports that view will probably have a muted effect, while any data point that doesn't support that view will probably have an outsized reaction. To give an example: Say next week's GDP number comes in higher than expected - maybe 3%, with an increase of the GDP deflator (inflation) at 2.8%. Bonds might sell off from something like 2.9% to 2.92%. However, if GDP comes in light (say 2%), and the GDP deflator comes in at 2% as well, we could see bonds rally from 2.9% to 2.85%. These sorts of movements are generally short-lived (lasting a morning or a day), but they do provide opportunities to lock at good prices if you are nimble. Big picture, rates are going higher, however since there are so many speculative bets against Treasuries at the moment, it will provide some opportunities to lock in at good rates if you are quick. 

Lenders are loosening requirements to get a mortgage, particularly for first time homebuyers. We are seeing a modest drop in overall credit scores, and a slight increase in LTV and DTI ratios. This indicates a move towards low down payment loans. As rates increase, the credit box will almost invariably increase as lenders fight for fewer and fewer loans. Some lenders are also changing the way they treat student loan debt, even excluding it altogether if a parent is making the payments. 

Who is the biggest mortgage lender out there? If you said Wells Fargo, you would be correct for all of 2017. However the biggest lender in the 4th quarter was Quicken. 

HUD is providing foreclosure relief for victims of the 2017 hurricanes in Texas and Florida. Homeowners affected by these disasters (and some others) may be able to get a loan that covers their mortgage payments for a year, payable upon sale of the property or a refinance. 

How much do you have to make to be in the top 1% these days? Just shy of half a million. To be in the top 10%? Just under 150k. 

This weekend is Buffetapalooza, or the annual shareholders meeting for Berkshire Hathaway in Omaha. It has been called a Woodstock of Capitalism, where shareholders dance with the Froot of the Loom guys, eat See's candy and have dinner at Warren's favorite steakhouse. The climax will be his letter to shareholders, which is usually chock full of folksy advice for investors, along with observations on the economy and the state of affairs politically. Warren is the second-biggest corporate holder of short term Treasuries and is probably itching for a deal. That said, I think the last big deal he did was several years ago when he bought Precision Castparts. 

There is a rumor going around that the Fed will begin holding press conferences after all FOMC meetings, not just the Mar, Jun, Sep and Dec meetings. That could be a setup to begin making interest rate changes at these meetings as well. As of now, the markets expect them not to. Don't forget, press releases after a FOMC meeting is relatively new. Historically the Fed wanted to be opaque, as they believe that their policy is more effective if it is a surprise to the markets. Greenspan was known for changing interest rates between meetings. 

Morning Report: FOMC minutes mildly bearish for bonds

Vital Statistics:

	Last	Change
S&P Futures	2704.0	5.3
Eurostoxx Index	378.5	-2.6
Oil (WTI)	61.8	0.1
US dollar index	83.8	-0.1
10 Year Govt Bond Yield	2.92%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.4

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

The FOMC minutes were surprisingly upbeat on the economy, which pushed up bond yields yesterday afternoon. The part that got everyone's attention:

"A number of participants indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the United States and abroad, continued accommodative financial conditions, and information suggesting that the effects of recently enacted tax changes—while still uncertain—might be somewhat larger in the near term than previously thought. Several others suggested that the upside risks to the near-term outlook for economic activity may have increased. A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate." (emphasis mine)

Separately, Bullard and Quarles cited the strength in the economy and the need to continue to raise interest rates. 

This language caused some strategists to increase their forecast to 4 hikes this year from 3. Surprisingly, the Fed Funds futures reacted in an opposite manner on the minutes, but reversed course later to become unchanged on the day. The 10 year treasury sold off throughout the day, and hit 2.94% in the late afternoon. 

Part of the movement in bonds is being driven by Europe. European governments have been increasing their bond issuance at the same time the European Central Bank is decreasing its demand for paper. The market for government bonds is a global market, and if there is excess supply, it will hit interest rates across the board. This is why you will sometimes see bonds move lower without any particular catalyst. The catalyst may exist, however it is something overseas that the US business press is either ignoring or covering lightly. 

Initial Jobless Claims fell to 222,000 last week. We remain at lows not seen since the Vietnam War and the days of the military draft. Still have yet to see widespread wage inflation however. Until that happens, the Fed will go slowly. 

The Index of Leading Economic Indicators improved in January, increasing 1%. It will be interesting to see if February's number is affected by the recent stock market volatility. 

Interesting map from GeoFred which shows the economic growth in different parts of the country. The thing that jumps out at me is how bad the NY-NJ-CT area is. I guess the fact that that area is somewhat levered to the financial industry is an issue, although I wonder how much of it is due to people who have been fleeing high taxes, though if that was the case you would expect to see it in CA as well and you don't. 

Morning Report: Existing home sales fall

Vital Statistics:

	Last	Change
S&P Futures	2715.3	1.3
Eurostoxx Index	379.1	-1.4
Oil (WTI)	61.8	0.1
US dollar index	83.8	0.2
10 Year Govt Bond Yield	2.88%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.4

Stocks are flattish this morning on no real news. Bonds are lower after a tough auction yesterday. 

Mortgage Applications fell 6.6% last week as purchases fell 6% and refis fell 7%. Higher mortgage rates are beginning to bite. 

Existing Home Sales fell 3.2% in January, according to the National Association of Realtors. Lawrence Yun, NAR's Chief Economist said: “The utter lack of sufficient housing supply and its influence on higher home prices muted overall sales activity in much of the U.S. last month. While the good news is that Realtors® in most areas are saying buyer traffic is even stronger than the beginning of last year, sales failed to follow course and far lagged last January’s pace. It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.” The median home price rose 5.8% to $240,500. Inventory rose, however it still remains extremely tight at 3.4 month's worth of supply. The rise in prices and scant inventory may be scaring away the first time homebuyer which dropped to 29% of sales. Historically, that number has been closer to 40%.

The FOMC minutes from the January meeting are scheduled to be released at 2:00 pm EST today. Investors noted a slight change in the January FOMC statement, where the need for "gradual adjustments" in interest rates was changed to "further gradual adjustments" in interest rates. They hope to get more clarity on what message the Fed intends to send with that change of language, however we probably will have to wait until the March meeting when the Fed releases their new dot plot of expected interest rate movements. As of now, the consensus seems to be a total of 3 hikes this year, at least according to the Fed Funds futures. New York Fed Chairman William Dudley said in an interview that the statement was meant to reflect further strength in the economy. 

Homeowners will be able to deduct mortgage insurance premiums on their 2017 returns thanks to a last-minute change in the budget. Borrowers must have adjusted gross income below $100k and the insurance must apply to their principal residence. No word on whether this will continue, and it will probably be a moot point anyway as taxpayers with AGIs under 100k will probably be better off taking the standard deduction most of the time. The tax liability on principal forgiveness also was extended for another year. This would apply to homeowners who get principal forgiven in loan modifications, short sales, and foreclosures. The tax code treats forgiven debt as ordinary income, and the people who go through mods or foreclosures are usually in such financial trouble to begin with that the last thing they need is an additional tax bill. 

The Supreme Court yesterday declined to hear a lawsuit brought by Fannie Mae shareholders which challenges the government's sweep of all of Fannie's profits into the Treasury. This isn't the end of the road for the investors however - they have one more claim pending in the U.S Court of Federal Claims in DC. Fannie Mae stock is down about 5% pre-open. 

Merger mania in the mortgage banking space continues. Mr. Cooper has been bought by WMIH in a cash and stock transaction worth $3.8 billion in cash, stock and assumed debt. Mr. Cooper and WMIH are the new monikers for old stalwarts Nationstar (or IndyMac) and Washington Mutual. Separately, Flagstar has bought the mortgage warehousing operations of Santander Bank. 

Morning Report: Robust housing starts

Vital Statistics:

	Last	Change
S&P Futures	2736.0	2.0
Eurostoxx Index	379.5	3.0
Oil (WTI)	61.4	0.1
US dollar index	82.9	0.2
10 Year Govt Bond Yield	2.88%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.44

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

Housing starts came in at 1.326MM annualized, better than expectations. Building permits hit 1.4 million - a 10 year high. Both numbers beat estimates by about 100k, a sizeable amount. The jump was largely in the volatile multi-family segment however. Single family starts were up about 4% YOY. That said, we are still well under the historical averages for starts, which was about 1.5 million units a year during from the 60s through the 90s and early 00s. 

NAR welcomed the housing starts number: "Terrific news on housing starts in January with a solid 10% gain. This rise in single-family housing construction will help tame home price growth, and the increase in multifamily units should continue to help slow rent growth. The large gain in housing starts in the West (10.7%) is especially welcomed, as that region has been facing acute housing shortages. Ultimately, there is still large room for improvement given the fact overall housing inventory is currently near historic lows." This is from Lawrence Yun, Chief Economist.

Import prices rose 1% MOM and are up 3.6% YOY. Energy prices were a big driver of the increase, however if you pull out energy, import prices were up just under 2% YOY. The dollar has been selling off for about a year now, and that is adding pressure to import prices which will flow through to inflation. 

Consumer sentiment improved in early February despite the stock market sell-off. Sentiment came in at about December levels and is at post-recession highs. 

Changes may be coming to TRID disclosure. The House passed a measure requiring more detail in how insurance fees are disclosed. The bill would amend language in the Real Estate Settlement Procedures Act (RESPA) to require the itemization of “all actual charges” and not just the itemization of “all charges.” The bill also would amend RESPA to require that ‘‘Charges for any title insurance premium disclosed on [the TRID rule] forms shall be equal to the amount charged for each individual title insurance policy, subject to any discounts as required by State regulation or the title company rate filings.’’. Thus, the bill would not permit the current approach to the disclosure of title insurance premiums under the TRID rule, and would require that the amounts disclosed for title insurance reflect the actual premium charges, including any discounts.

Thinking of relocating? Here is how much you need to make to be able to qualify for a mortgage on the median house in that MSA. The highest? San Jose, where the median home price is 1.3 million and you need to make just under a quarter of a million. 

Morning Report: Goldman forecasting 3.5% on the 10 year this summer

Vital Statistics:

	Last	Change
S&P Futures	2707.0	10.3
Eurostoxx Index	377.0	2.5
Oil (WTI)	60.4	-0.2
US dollar index	82.9	-0.2
10 Year Govt Bond Yield	2.90%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.44

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

Inflation at the wholesale level came in higher than expected as the Producer Price Index rose 0.4% MOM and 2.7% YOY. Ex-food and energy, the index was up 0.4% / 2.2% and the core rate was up 0.4% / 2.5%. The US dollar is weaker on the data, which adds to inflationary pressures. I suspect at some point dollar weakness will feed higher rates, but we aren't there yet. Treasuries look like they want to test the 3% level we reached after the taper tantrum. The 10 year yield hit 2.94% overnight, so we aren't all that far away. Goldman is forecasting 3.5% on the 10 year within the next 6 months on monetary tightening. Other strategists are raising their forecast for Fed tightenings as well, based on the additional stimulus of the budget deal and tax cuts. 

FWIW, after the inflation data, the Fed Funds futures are now predicting a 83% chance of a hike at the March meeting, and sentiment is coalescing for a total of 3 hikes this year, to take the Fed Funds rate to 2.0% - 2.25%. 

In other economic data, Initial Jobless Claims rose to 230k last week, while the Philly Fed rebounded to 25.8. The Empire State Manufacturing survey slipped. Industrial Production fell a tenth of a percent while Manufacturing Production was flat. Capacity Utilization fell 20 basis points to 77.5%. So, between the higher than expected inflation data and weaker manufacturing data, bonds are pretty much flattish. 

Donald Trumps proposed 2019 budget contemplated an 18% cut in HUD's budget, with the cuts largely coming from the end of the Community Development Block Grant program. At the end of the day, this budget is a messaging document and has 0% chance of becoming law as-is. 

Builder Sentiment was flat in February according to the NAHB. 

Morning Report: Bonds sell off on a higher than expected CPI

Vital Statistics:

	Last	Change
S&P Futures	2672.8	11.0
Eurostoxx Index	373.4	2.9
Oil (WTI)	58.6	-0.6
US dollar index	83.6	-0.1
10 Year Govt Bond Yield	2.87%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.39

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

Consumer prices rose 0.5% MOM and are up 2.1% YOY, according to the Consumer Price Index. Apparel drove the increase. Ex-food and energy the index was up 0.3% and 1.8%. These numbers are a little higher than what the Street was looking for, and bonds sold off about 5 basis points on the report. Between the CPI and the higher-than-expected wage inflation in the jobs report, Treasury investors are getting nervous about inflation. 

The Fed Funds futures are predicting a 78% chance of a 25 basis point hike next month. For the year, there is about a 1/3 chance of two hikes and a 1/3 chance of 3 hikes. with the final 1/3 split between 1 and 4. 

Goldman's inflation forecast is for a 1.8% increase in the core PCE. Despite upward creeping inflation, this is still below the Fed's target rate. 

Mortgage Applications fell 4% last week as purchases declined 6% and refis declined 2%. On the back of the jobs report, Treasury yields rose and mortgage rates hit the highest level in 4 years. The typical 30 year mortgage rate rose to 4.57% from 4.5%. 

Retail Sales were down 0.3% in January and were flat YOY. Weak auto sales were behind the change. The control group was flat. 

Fannie Mae reported earnings of $2.5 billion for 2017, after taking a $9.9 billion hit on deferred taxes based on the tax law. Adding back the $9.9 billion noncash charge gives the company net income of about $12.4 billion, about the same as 2016. The stock has a market cap of $10.7 billion, meaning it is trading at a P/E below 1. Arguably, the stock shouldn't exist in the first place, and it only trades due to the vagaries of government accounting. 

About 130 mortgage bankers sent an open letter to Congress stressing the need for GSE reform. The letter laid out their preference for a guarantor-based system over an issuer-based system. Essentially the difference would be that the guarantor-based system would be most similar to the current one, where someone like Fannie and Freddie do not originate mortgages, but guarantee than and issue securities. The issuer-based system would rely on a few large aggregators to secure the government guarantee and issue securities. The smaller bankers would probably be at some sort of competitive disadvantage under an issuer-based system and would be better off under a guarantor-based system. 

Federal Reserve Chairman Jerome Powell's prepared remarks at his swearing-in ceremony. "While the challenges we face are always evolving, the Fed's approach will remain the same. Today, the global economy is recovering strongly for the first time in a decade. We are in the process of gradually normalizing both interest rate policy and our balance sheet with a view to extending the recovery and sustaining the pursuit of our objectives. We will also preserve the essential gains in financial regulation while seeking to ensure that our policies are as efficient as possible. We will remain alert to any developing risks to financial stability."

Morning Report: CFPB will stop "pushing the envelope."

Vital Statistics:

	Last	Change
S&P Futures	2643.5	-11.8
Eurostoxx Index	372.7	-0.2
Oil (WTI)	58.8	-0.5
US dollar index	83.8	-0.3
10 Year Govt Bond Yield	2.54%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.37

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

Small Business Optimism rebounded in January as expansion plans hit a record high. The net percentage of businesses saying "now is a good time to expand" was the highest since 1973, when the survey began. A more benign regulatory and tax environment is helping drive sentiment. In fact, "finding quality workers" is a bigger concern now than "taxes and regulations." Small businesses added .23 workers last month on average. 

The CFPB released its strategic plan for the next 5 years, and it marks a departure from the Cordray CFPB. CFPB Acting Director lays out his strategic vision in the opening statement: "This Strategic Plan presents an opportunity to explain to the public how the Bureau intends to fulfill its statutory duties consistent with the strategic vision of its new leadership. In reviewing the draft Strategic Plan released by the Bureau in October 2017, it became clear to me that the Bureau needed a more coherent strategic direction. If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes. I have resolved that this will not happen at the Bureau. The rest of the document reiterates the role of the CFPB and Mulvaney's commitment to those duties. 

Donald Trump laid out his priorities in a budget document yesterday. These sorts of things are never intended to become law (Obama had one that garnered exactly zero votes), but are more to lay out philosophies and priorities. The document did contemplate an increase in the guaranty fee that Fannie Mae charges borrowers by 10 basis points. At the margin, this would make Fannie loans somewhat less attractive relative to FHA / VA however it probably won't matter all that much. The amount of money involved ($26 billion over 10 years) is not major. Separately, shareholders of Fannie Mae and Freddie Mac stock had hoped the document would discuss the GSEs retaining their profits. That didn't happen. 

Hurricane-related delinquencies rose in November, but fell everywhere else, according to CoreLogic. 30 year DQs fell overall from 5.2% a year ago to 5.1%. The foreclosure rate fell from 0.8% to 0.6%. 

Morning Report: Bond Vigilantes returning?

Vital Statistics:

	Last	Change
S&P Futures	2648.5	29.8
Eurostoxx Index	373.8	5.1
Oil (WTI)	60.3	1.1
US dollar index	84.2	0.0
10 Year Govt Bond Yield	2.87%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.37

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

No economic news today. The only market moving data this week should be the Consumer Price Index on Wednesday and the Producer Price Index on Thursday. We will get some housing data, with starts and the FHFA House Price Index, although those should not matter to the markets. Bonds are probably going to be an inverse stock ETF for a while - meaning that when stocks are down, they will be up and vice versa. 

Old timers may remember the term "bond vigilantes" from the early days of the Clinton Administration. Early on in Bill's term he wanted to do a fiscal stimulus package which would have increased government spending. As he talked about increasing spending to goose the economy, the bond market would sell off in response, raising interest rates. In other words, the government's plan to increase economic growth via government spending was being offset by the market (increasing rates are generally bad for the economy). At one point, Bill Clinton was so exasperated, he exclaimed: "You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of f****** bond traders?" James Carville, Bill's strategist once said "“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Fast forward to today. With the spending deal in place, along with a possible infrastructure plan, the economy will be getting plenty of stimulus and government spending. The bond market has been artificially supported by the Fed and global central banks, and that is unwinding. The bond vigilantes may be coming back, which is ironic since probably 3/4 of the bond traders on the street are experiencing their first tightening cycle. But, the trader in me sees the path of least resistance in the bond market as down, which means that rates are generally heading up. In practical terms, this means floating is a lot riskier than it used to be. During the last 30 years, rates generally moved down over time, so if you floated you often did well on that trade - you weren't paying for a lock, and your rate at closing was probably better than it was when you opened the file. Given the change in market direction, the risk of floating is that the rate will increase over time, and in that circumstance it might make better sense to lock. Note that this isn't a forecast of the bond market over the next 45 or 60 days, but an observation that the market "feels" like it wants to go down. It is something to keep in the back of your mind when discussing a lock with a borrower. 

The House tweaked some of the "points and fees" language in Reg Z last week. Democrats have been universally opposed to the Financial CHOICE act, which makes some changes to Dodd-Frank. This may have a chance in the Senate, or at least a better chance than CHOICE would. 

Best headline from last week: Low volatility ETN dies of irony. This was in reference to the XIV inverse VIX ETN which blew up early last week. 

Morning Report: Fannie will now allow AirB&B income on refi applications

Vital Statistics:

	Last	Change
S&P Futures	2593.0	0.0
Eurostoxx Index	368.2	-5.9
Oil (WTI)	60.4	-0.8
US dollar index	84.2	0.0
10 Year Govt Bond Yield	2.83%
Current Coupon Fannie Mae TBA	102.688
Current Coupon Ginnie Mae TBA	102.938
30 Year Fixed Rate Mortgage	4.33

Stock index futures are flat this morning after yesterday's closing sell-off. Bonds and MBS are up. 

There wasn't any real catalyst for yesterday's sell-off, aside from the natural phenomenon of volatility begets volatility. At the margin, stock market volatility is good for interest rates, but it does have negative consequences on your blood pressure. 

So far the sell-off has yet to be reflected much in credit spreads. The biggest high yield ETF has dropped a few points over the past week, but nothing major. It did hit a low of 66 during the financial crisis and also a low in the 70s during early 2016. When high yield debt begins to seriously drop, you tend to see big drops in interest rates overall. Treat this ETF like the proverbial canary in the coal mine. High yield spreads overall are still below the 5 year average, which means investors are not even close to panicking. 

You might not have been aware, but the government shut down for a few hours last night. Democrats in the House (and a few Republicans) balked at the Senate bipartisan plan that adds about $300 billion in spending over the next two years and kicks the debt ceiling can down the road until 2019. This takes continuing resolutions / debt ceiling grandstanding off the table for the 2018 midterms. 

Homeowners will soon be allowed to include Air B&B income on their applications for refinancings. This is a new Fannie Mae program that will initially only be offered by a few lenders. 

Fannie Mae's Home Purchase Sentiment Index hit an all-time high last month on the back of a strong economy and rising house prices. The index increase was driven by expectations of increased home price appreciation. Personal economic expectations (things like concern over losing a job / household incomes) have been in a tight range over the past year. 

Morning Report: Ginnie Mae sends letters to lenders of IRRRL abuses

Vital Statistics:

	Last	Change
S&P Futures	2681.3	13.3
Eurostoxx Index	380.1	7.3
Oil (WTI)	61.3	-0.6
US dollar index	84.2	0.0
10 Year Govt Bond Yield	2.86%
Current Coupon Fannie Mae TBA	102.688
Current Coupon Ginnie Mae TBA	102.938
30 Year Fixed Rate Mortgage	4.33

Stocks are higher as Monday's sell-off gets smaller in the rear view mirror. Bonds and MBS are down. 

The Senate reached a 2 year budget deal to fund the government which bumps up spending by $300 billion. It suspends the debt ceiling for a year, bumps up defense and social spending and provides additional relief to Puerto Rico. We'll see if this can get through the House: the left is mad there is no immigration deal, while the right objects to the increase in spending. 

Initial Jobless Claims hit a 45 year low last week, falling to 221,000. 

The government is cracking down on VA IRRRL abuses and has told 9 lenders that they will remove them from the VA program if they don't find a way to curtail refinance abuses. “We are targeting our actions at outliers, not at lenders who are genuinely helping to support responsible lending,” Ginnie Mae Chief Operating Officer Michael Bright wrote in a statement through a spokesman. These abuses are bad for the affected veterans who borrow the funding fee, but they also affect others, particularly other borrowers in FHA / VA loans. Part of the reason why it has been so difficult to get any fee pickup as you move up in rate has been due to serial refinancings. Investors are reticent to purchase high coupon TBAs. 

I'll try and explain what is going on, but first a little background on how government loans are priced. Suppose a borrower wants to get a lender credit and is willing to pay a higher rate to do it. The TBA rate stock is used to determine the rate / fee that goes to the borrower. If a borrower wants a note rate between 4.25% and 4.625%, their loan will be sold into a 4% TBA, which is trading at 102.8125. The difference between par and 102.8125 +/- any lender credits is what pays LO comp, covers the cost of doing the loan, overhead, etc. The higher up you go in the rate stack, the more profit margin you have to play with, and therefore the bigger credit you can offer. If the borrower is willing to take a note rate of 4.75% to 5.125%, the baseline TBA price is 104.125 and that differential between the TBAs represents the increased lender credit the borrower can receive. Here is the problem: What happens if a borrower wants to go even higher and get a bigger credit? If there is no demand for the next TBA coupon (say 5%), then the increase might not be a point - it might only be half a point.  Note today that all the TBAs are down for the day except for the 5% note rates. That means those prices are stale and probably not real. 

Why would investors not be interested in buying the 5% Ginnie note rates? It has to do with prepayment speeds. If you are an investor, you are paying well over par (in this case, maybe 4 or 5 points over par) in order to get something that will give you par back at some point. In other words, you are paying 104 and once the loan pays off you are getting 100, which is a loss of 4 points. You are betting that you will get back that 4 points over time because the note rate is higher than what you could typically get for an instrument with similar credit risk. So, if you buy a bond over par it might take a few years to recoup that premium you paid. If the borrower refis in 6 months, you lose. Ginnie Mae investors have been burned over the past several years paying 105 - 106 for a security that pays them par in a few months when the borrower gets a VA IRRRL. Investors have become gun-shy at buying the higher coupon TBAs, and that affects everybody, not just the veteran who rolled a 1.5% funding fee into a new mortgage for a smaller monthly payment of a couple bucks and the right to skip a payment or two.

The Elizabeth Warrens of the world will focus on the veteran who is paying a big fee for a refi that will take several years to break even, but Ginnie will be focused on some of the unintended consequences of this, and it really becomes evident when you look at how it affects the more marginal borrower. Ginnie Mae was created to finance the tougher credits - the first time homebuyer, the cash-strapped buyer, manufactured homes, lower income / credit buyers. These homebuyers usually have risk factors that will translate into bigger loan level pricing adjustments, and will often require a higher note rate to make the math work. If those higher note rates are not available, then it becomes tough to finance those people, and Ginnie Mae's mission is to help get these people loans. Which is why Ginnie is very sensitive to the actual investors of Ginnie Mae MBS as well as the veteran. The behavior of a few rogue lenders really does impact the whole market and pretty much everyone who takes out a government loans.

Morning Report: More on volatility

Vital Statistics:

	Last	Change
S&P Futures	2700	5.0
Eurostoxx Index	376.7	-8.8
Oil (WTI)	63.2	-0.8
US dollar index	83.9	0.0
10 Year Govt Bond Yield	2.78%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.33

Stocks are flat this morning after recovering about half of Monday's losses. Bonds and MBS are up. 

Mortgage applications were up 0.7% last week as purchases were flat and refis rose 1%. This is despite an increase in rates. Spring Selling season is more or less upon us. Inventory will continue to be an issue, especially if wage growth continues.

Here is a Bloomberg story discussing the volatility we saw on Monday. Much of it traces back to an ETF - the inverse VIX or XIV. This was the easiest way for retail investors to play the volatility in the market. The XIV had been rising all through last year and the beginning of this one as volatility compressed in the equity markets. This shows the possible unintended consequences of some of these products. The XIV is basically a proxy of a proxy of a proxy. In other words, it is an easily-tradeable proxy for the VIX, which is a proxy for how index options are trading. Hedging activity ultimately drove the volatility of the underlying index and arbitrage activity caused the movement in the underlying stocks. Bottom line, the catalyst for the sell-off is probably over. 

Note the price action in the XIV. Some investment activities are like picking up nickels in front of a steamroller. It works until it doesn't, and when it no longer works, it can wipe you out. $145 to $7 - worse than Bitcoin.  Note Goldman thinks most cryptocurrencies are doughnuts. 

Remember when the story was that Millennials wanted to be urban dwellers? Well, now they want the suburbs. The article includes some of the most desirable suburbs based on income growth, affordability, etc. 

Dallas Fed Chairman Robert Kaplan said yesterday that he doesn't think the nascent upward wage pressure is going to translate into higher inflation. He believes that businesses simply don't have the market power to increase prices (in other words, the environment is too competitive). Interesting theory, and certainly supports the prevailing view of the Fed that there is no inflation problem on the horizon. The lack of pricing power is more or less borne out in the various business sentiment surveys. This in turn will cause central banks worldwide to continue to "feed the beast" according to Yale economist Stephen Roach. 

Morning Report: Sell-off is "technical fear" not "real fear"

Vital Statistics:

	Last	Change
S&P Futures	2593.8	-14.0
Eurostoxx Index	373.2	-8.8
Oil (WTI)	63.4	-0.8
US dollar index	84.0	0.0
10 Year Govt Bond Yield	2.74%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.33

Stocks are lower after yesterday's bloodbath. Bonds and MBS are down.

There was no real catalyst for yesterday's sell-off. The economic data has been great, earnings have been good, and nothing has really changed fundamentally. The canary in the coal mine economically is credit spread behavior, and we have not seen any major movement there. To put things in perspective: We are 8.5% off the record highs set last week. That doesn't even meet the threshold for a correction, which is defined as a 10% drop. Don't forget that a lot of money has been hiding in the stock market because bonds have paid nothing for so long. As the Fed hikes rates, short-term money instruments begin to come back on the radar screen for many investors. Investors have been spoiled over the past few years. Low volatility made people a lot of money in some trades, and it also made investors complacent. 

In fact, THE trade of 2017 was short volatility, and it blew up yesterday. Retail investors can trade volatility via VIX futures, and there are exchange traded funds that mimic movements in the volatility indices. VIX is a "fear index" and it is generally associated with major downward moves in stocks. The "short vol" trade made something like 100% last year, and the mechanics of exiting it can cause all sorts of technical trading issues that can affect stocks. If all the speculators are short volatility, then their exit from the market can add to the destabilization. It is tough to explain, but think of a marble in a bowl. That is "normalcy." If the marble is off-center, it is attracted to the center. That is what typical buy low / sell-high stock market behavior is like. Too many sellers come in, and the buyers emerge which stabilizes things. But, when the crowd is generally short volatility, it is like the bowl is flipped over and the marble is on top. So when the marble is off-center, it is more likely to move away from equilibrium, and the further away it gets, the more the momentum builds. That is what a short squeeze in volatility feels like, and that is what happened yesterday. I am hearing that the mechanical covering in the exchange traded notes is largely done. However, the real money resides in the over-the-counter market and there is simply no visibility there. 

You can see the correlation between high VIX and market-moving events below. There is an old market saw: "VIX is high, time to buy. VIX is low, time to go." You can see the volatility spikes which generally correspond with major events, like the end of the dot-com bubble or the financial crisis. There is no catalyst to speak of here, so I have to imagine this will be short. Yesterday was technically-driven "fear" not "real fear."

By the way, whenever you hear the term "convexity-related buying or selling" that describes sort of the same phenomenon in bonds, although the magnitude is much less than it is with stocks and VIX. Convexity buying and selling generally refers to the behavior of mortgage backed securities and interest rate hedging. We did not see much activity in credit spreads yesterday, and that is a good sign. If credit spreads are increasing, that means investors are becoming worried about the economy going forward. While spreads moved a little, it wasn't much. 

Bonds rallied hard on the flight-to-quality trade, which gives LOs a chance to retrieve some loans that may have gotten away from them last week. Take advantage of the drop in rates to review your pipelines and see if any borrowers might want to lock and / or consider a refi. Given the massive home price appreciation we have seen lately, the switch out of a FHA into a conforming loan with no MI still makes a lot of sense. You might only have a short window here. 

As an aside, Jerome Powell took over as Fed Chairman yesterday as Janet Yellen heads to Brookings. Welcome to the party, Jerome!

Interestingly, the move in markets yesterday caused the Fed Funds futures to take down their estimate of a March hike from 78% to 69%. While it is a low-probability event, the Fed could ease up on rate hikes if the sell-off continues, provided that inflation remains below target. If inflation passes the target and hits the upper 2% range, then they will probably stick to script regardless of what happens in the markets, barring a crash of some sort. 

Home prices rose 0.5% MOM and 6.6% YOY in December, according to CoreLogic. 

As an aside, I will be on a panel at IMN's MSR conference in NYC March 26 and 27. Should be a good event.