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.