Morning Report: Incomes and spending rise

Vital Statistics:

			Last	Change
S&P futures			2609	5
Eurostoxx index			370.62	1.36
Oil (WTI)			64.88	-0.37
10 Year Government Bond Yield				2.77%
30 Year fixed rate mortgage				4.45%

Stocks are higher this morning on end of month / quarter window dressing. Bonds and MBS are up.

Stocks are set to break a 9 quarter winning streak. The market leaders - the FAANG stocks - have been taking a beating as Facebook gets hit on data issues, and Amazon finds itself in the Administration's doghouse. 

The bond market will close early today, at 2:00 pm EST. Get your locks in early, as secondary marketing types will probably build in a margin cushion to protect themselves over the long weekend. 

Personal Income rose 0.4% in February, while personal spending rose 0.2%. The Personal Consumption Expenditure Index rose 0.2% MOM and 1.8% YOY. The core PCE index (the Fed's preferred measure of inflation) was up 0.2% MOM and 1.6% YOY. The core PCE numbers were a touch higher than the Street was looking for, and everything else was in line. The savings rate rose. Bonds are rallying a bit on the report. 

Initial Jobless Claims fell to 215,000 last week, barely missing the late February number of 210,000. We haven't seen these levels since the early Carly Simon's "Your'e So Vain" topped the charts. When you take into account population growth the number is even more dramatic. 

The FHFA announced that Fannie and Freddie will be issuing a new uniform mortgage backed security beginning in June of 2019. "The transition to the new, common security requires planning, investment, and preparation by a wide variety of market participants," said FHFA Director Melvin L. Watt. "We have now set the specific date that the Enterprises will start issuing the UMBS and I urge the industry to get ready now to ensure smooth, successful implementation." This will help bring Fannie and Freddie pricing more in line with each other. 

Is fintech reaching parts of the market that have not been fully served by traditional banks and lenders? The Philly Fed finds some evidence that it does, particularly in areas where there is high lender concentration (i.e. only a few banks) and areas that don't have much in the way of banks. 

Barclay's Bank agreed to pay $2 billion in civil penalties to settle an investigation concerning RMBS issued during the bubble years. “In general, the borrowers whose loans backed these deals were significantly less credit-worthy than Barclays represented,” the Justice Department said in a statement Thursday. Barclay's had committed to keep the settlement under $2 billion in 2016, but the Obama Justice Department balked. 

A Reuters poll of 75 bond strategists suggests that fears of oversupply in the Treasury market are overblown. They are looking for an increase of 40-50 basis points in the 10 year bond yield in 2018. Considering that we are already up 30 basis points this year, we probably aren't looking at major increases from here - maybe we will find a range of 2.8% to 3% and bounce around. 

Morning Report; Fourth quarter GDP revised upward to 2.9%.

Vital Statistics:

			Last	Change
S&P futures			2623.25	8
Eurostoxx index			366.29	-1.28
Oil (WTI)			64.88	-0.37
10 Year Government Bond Yield				2.77%
30 Year fixed rate mortgage				4.45%

Stocks are lower this morning following yesterday's sell-off. Bonds and MBS are up on the risk-off trade. 

The market leaders (in other words the FAANG stocks) are getting taken to the woodshed on Facebook is down about 20% from mid-February. Is it time to rename the index fAANG?

Mortgage applications rose 4.8% last week as purchases rose 3% and refis rose 7%. Despite the jump in refis we are still at lows not seen for a decade. 

Q4 GDP was revised upward by 40 basis points to 2.9% in the third and final revision. The Street was looking for an upward revision of 20 bps. Consumption was bumped up 20 bps to 4%, while the price index was unchanged at 2.3%. Inventory was increased as well. For 2017, GDP increased 2.3% compared to 1.7% in 2016. 

Pending Home Sales rose 3.1% in February, according to NAR. Despite the gain, it is still over 4% lower than a year ago. That said, February 2017 was exceptionally strong. Expect to see a decrease in March, at least in the Northeast, after a series of storms. 

Home Price appreciation continues as the Case-Shiller Home Price Index increased 6.3% YOY in January. Seattle led the group, increasing almost 13%, followed by San Francisco and Las Vegas. All MSAs reported year-over-year gains. The smallest increases were in the Washington DC and some of the Midwest. 

Increasing real estate prices are pushing up home equity, which grew over $15,000 on average in the fourth quarter, according to CoreLogic.  It was biggest in California, where it jumped $40,000. This is the biggest increase in 4 years, and should bump up consumer spending. Since home equity is considered more permanent than stock market equity, it should affect consumer spending more. 

Consumer confidence slipped a little in March, but is still at elevated levels. The tax cuts are helping to offset some of the losses in the stock market. Generally speaking, consumer confidence indices are inverse S&P indices, so expect them to fall if this sell-off continues. 

As the Spring Selling Season takes shape, we are seeing the biggest home price appreciation at the middle and lower tiers of the market, where there is the biggest supply problem. While mortgage rates are rising, so far they aren't making a dent in housing demand. Surprisingly, Moody's thinks the tax new tax law will dampen home price appreciation about 4% over the next few years, due to the changes in the mortgage interest deduction (which will pretty much only affect the high end in certain states) and increased interest rates due to rising deficits. Perhaps. At any rate, I think the supply / demand imbalance is the biggest driver of home prices, and that will probably get worse before it gets better. 

Morning Report: SOFR gets introduced next week

Vital Statistics:

			Last	Change
S&P futures			2636.75	38.75
Eurostoxx index			368.03	2.21
Oil (WTI)			65.81	-0.07
10 Year Government Bond Yield				2.85%
30 Year fixed rate mortgage				4.46%

Stocks are higher this morning on optimism that a trade war with China can be averted. Bonds and MBS are down.

We will have a short week, with the bond market closed on Friday. On Thursday, we will have an early close. There will be a lot of Fed-speak this week, although not much in the way of market-moving reports.

Economic growth picked up in February according to the Chicago Fed National Activity Index. Production and employment-related indicators drove the increase.

San Francisco Fed Chairman John Williams is the front-runner to replace William Dudley at the New York Fed. Policy-wise he is considered a centrist, although not necessarily a markets guy. He is a long-term macro sort of guy - he doesn't keep a Bloomberg terminal on his desk - which makes him somewhat of an odd pick to run the NY Fed which is all about markets.

Speaking of the NY Fed, it is set to launch its replacement for LIBOR next week - the SOFR (or secured overnight funding rate). Regulators are looking for a replacement for LIBOR after it was found that banks were manipulating it in order to help their own proprietary positions. LIBOR is a reference rate for many adjustable rate mortgages, as well as lines of credit so its replacement will affect the mortgage industry. The big difference between the two is that LIBOR is set based on the forecast of bankers, while SOFR will be based on actual transactions in the money markets. This makes it much less susceptible to manipulation.

Bond market observers will be watching as the Fed auctions off almost $300 billion in paper this week, with the biggest 2 year auction since 2014. Amid weakening demand for US Treasuries, the results could buffet rates a bit. Note China has threatened to stop buying US Treasuries in response to tariffs.

Mortgage banking profits fell in the fourth quarter to $237 a loan from $929 in the third quarter. This was the lowest reading since Q1 when it hit $224. Higher costs and decreasing volumes drove the decrease. Margins also fell as banks cut margins in a more competitive environment. 56% of the firms in the study reported positive pre-tax profit in the quarter, down from 77% in the prior quarter.

California is mulling a new idea to increase the supply of homes on the market, by giving a tax break to people 55 and older who downsize and move to a new county. Many homeowners are reluctant to move because they will get hit with higher property taxes on the new property.

Morning Report: Durable Goods increase smartly

Vital Statistics:

			Last	Change
S&P futures			2648.75	5
Eurostoxx index			365.94	-3.21
Oil (WTI)			64.54	0.24
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.46%

Stocks are higher this morning after yesterday's bloodbath. Bonds and MBS are down small. 

Troubles with Facebook and the potential for a trade war with China caused a 3% decline in the stock market yesterday. This pushed the 10 year bond yield down towards 2.8%. 

New Home Sales came in at 618k, more or less flat on a MOM and YOY basis. 

Durable Goods orders came in much stronger than expected, increasing 3.1% MOM and almost 9% YOY. Ex-transportation, they rose 1.9% MOM and 8.1% YOY. Core Capital Goods orders (a proxy for business investment / capital expenditures) rose 1.8% MOM and 8% YOY. We might see some strategists bump up their Q1 GDP numbers on that reading. 

KB Home reported first quarter earnings that missed on the top line; however the stock was up regardless after hours. Operating Margins improved, driven by an increase in gross margins. Bottom line numbers are not really comparable given the big adjustment to deferred tax assets as a result of the corporate tax cut. It is interesting to see an increase in gross margins, which have been falling pretty much across the industry. Perhaps it is a sign that home price growth is again outstripping cost growth (particularly labor and commodities). 

The Senate passed a $1.3 trillion spending bill that will keep the government open. Donald Trump is mulling a veto over wall funding, but that is probably just noise. 

Historically, house prices and the homeownership rate have correlated rather closely, but that broke down after house prices bottomed in 2012. What is going on? The first question to ask is whether the increase in homeownership that started in the mid-90s was due to increasing home prices or something else. We know that the Clinton Administration began to pull on some policy levers (and jawbone the GSEs) to increase lending to underserved markets and areas. 

The wealth that was being created in the stock market rally probably helped as well. Easy credit during the bubble also pulled some people into the housing market as well. Once the bubble popped, many people lost their homes and became renters. Finally, tight supply in the aftermath of the bubble is preventing many from buying, and professional investors who are buying starter homes to rent them out are exacerbating the problem. 

Prepayments hit a 4 year low, according to Black Knight Financial Service's First Look on February mortgage performance data. Foreclosure starts fell 25% MOM after spiking in January. Hurricane-related delinquencies fell. 

Realtor.com says that this Spring Selling Season is set to become one of the most competitive ever, with lots of buyers who were unable to find anything last year competing with new homebuyers. How are homebuyers reacting to the environment? Increasing down payments, increasing earnest money, and bidding through the asking price. 

Morning Report: The Fed hikes rates

Vital Statistics:

			Last	Change
S&P futures			2699	-19
Eurostoxx index			371.42	-3.54
Oil (WTI)			63.42	1.36
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.46%

Stocks are lower this morning after the Fed hiked rates and the Bank of England decided to stand pat. Bonds and MBS are up. 

In a unanimous decision, the FOMC hiked the Fed Funds rate 25 basis points yesterday and released its new dot plot and projections. The projection materials showed a meaningful hike in projected GDP: from 2.5% to 2.7% in 2018 and from 2.1% to 2.4% in 2019. They also took down their estimate for unemployment: from 3.9% to 3.8% in 2018 and from 3.9% to 3.6% in 2019. They also cut their long term estimate of the unemployment rate from 4.6% to 4.5%. The dot plot bumped up their projections for the Fed funds rate across the board, by about a quarter in 2018 and 2019 and by 3/8 in 2020. The Fed funds futures didn't move much. The May futures are predicting no change, the June futures are predicting a 78% chance of another 25 basis point hike, and the Dec futures are predicting a 42% chance of another 25 basis point hike.

Note the dot plot comparison and how the interest rate forecasts inched up: Bill Gross isn't buying the forecast. He thinks a Fed Funds rate above 2% when inflation is only 2% will be too destabilizing in such a highly leveraged world. Of course Bill is probably talking his book a bit too.

Home prices rose 0.8% MOM and 7.3% YOY according to the FHFA House Price Index. The Middle Atlantic and Midwest lagged while the West Coast and Mountain states led. 

Initial Jobless Claims ticked up 3k last week to 229,000. 

The Index of Leading Economic Indicators came in much stronger than expected in February. January was revised upward as well. 

The Trump administration plans to announce $50 billion in tariffs against the Chinese for intellectual property violations. The US accuses China of using foreign investment restrictions to force US companies to share technology.

Fannie and Fred are stepping up their purchases of affordable housing loans under their "duty to serve" mandate. Between them, they will buy roughly 8,400 more loans for manufactured, rural, and affordable housing. The problem with these areas (especially rural areas) is that the low loan balances make the loans themselves less profitable. On the other hand, low balance loans generally have higher servicing values, all things being equal. The GSEs are targeting Appalacia, the lower Mississippi Delta, and Native American areas. 

Loan gestation times fell to 42 days in February, according to the latest Ellie Mae Origination Insights Report. This is a big drop on a year-over-year basis as well, which strips out some of the seasonality issues. Credit scores also fell a touch. 

Morning Report: Existing Home Sales increase

Vital Statistics:

			Last	Change
S&P futures			2719	-3.75
Eurostoxx index			374.05	-1.52
Oil (WTI)			63.42	1.36
10 Year Government Bond Yield				2.90%
30 Year fixed rate mortgage				4.46%

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

The FOMC decision is scheduled to be released at 2:00 pm EST. This will be Jerome Powell's first rate hike and press conference, so the markets will be hanging on his every word. Here are some of the things the Street will be focusing on. The biggest will be the dot plot for the rest of the year. Do the tax cuts and planned infrastructure spend push the Fed to bump up their consensus of 3 hikes this year to 4%? If so, that is bearish for bonds (higher rates). Another will be the long term neutral Fed Funds rate, which currently stands at 2.8%. Do they move it up to 3%? That sort of revision would be taken as hawkish as well and would push rates higher. Finally, the long-term unemployment rate is currently set at 4.6%, which implies the current rate of 4.1% is too low. If they move down the longer-term unemployment rate, that could be interpreted as dovish. 

While most mortgage market participants are rightly focused on the 10 year bond yield, there is another rate that is gathering attention - LIBOR. LIBOR has been rising steadily over the past 18 months, and and 3-month LIBOR is at levels not seen since 2008. LIBOR and the 1 year T-bill rate are the reference index in many adjustable rate loans. What does this mean for the mortgage industry? Funding costs are rising, while volumes are falling. Not a good mix for profitability. Also note that this is yet another reason for borrowers with ARMs to consider a refi into a 30 or 15 year fixed rate mortgage. Long-term rates have been much more stable than LIBOR, and therefore the relative attractiveness is increasing. 

Note that increasing short-term rates are having a spill-over effect onto other asset classes. Long-term bonds have had no competition from money market instruments for a decade. That is changing. 

Mortgage Applications fell 1% last week as purchases rose 1% and refis fell 5%. 

Existing home sales rose 3% in February to a seasonally adjusted pace of 5.54 million. This is up 1.1% YOY. The median home price rose 5.9% to $241k. Total housing inventory stood at 1.59 million, which is 8% lower than a year ago.  The first-time homebuyer accounted for 29% of sales, which is down from 31% a year ago, and well below the historical average of 40%. Days on market fell to 37. The average contract rate for a 30 year mortgage increased 3 basis points to 4.33%. Distressed sales fell to 4%. Overall, it is the same story - tight inventory and rising prices.  

For the first time homebuyer, this is bad news, as most of the inventory is at the high end, not the low end. Starter homes in the Bay Area are over $800k, and engineers in Silicon Valley are struggling to pay the rent. Starter homes account for 22% of the inventory, while luxury accounts for almost 60%. 

Meanwhile, construction job openings are the approaching post-recession highs. Lack of labor remains the biggest issue for construction companies. 

Congress seems close to a deal to keep the government open after funding expires on Friday.  Fiscal conservatives will be unhappy, as the trade seems to be higher military spending for higher non-military spending. For originators, the biggest issue with a government shutdown is the inability to get 4506-T reports out of the IRS. 

Morning Report: FOMC meeting begins today

Vital Statistics:

			Last	Change
S&P futures			2725.25	3
Eurostoxx index			375.23	1.54
Oil (WTI)			62.97	0.91
10 Year Government Bond Yield				2.88%
30 Year fixed rate mortgage				4.43%

Stocks are higher this morning after yesterday's bloodbath in tech. Bonds and MBS are down small. 

Current funding for the government is set to expire on Friday, and Congress is still working on a plan to keep the lights on. Sticking points include funding for the military, the border wall, and the NY-NJ Hudson River Tunnel. Votes are looking likely for Thursday and Friday, so there isn't a lot of margin for error. Making matters worse is a major snowstorm which is set to hit the East Coast tomorrow. Washington is set to get 4-8 inches which could shut down government for the day. New York is set to get a foot. 

We could see some movements in interest rates over the next couple of days with the FOMC decision tomorrow and the Bank of England decision on Thursday. A 25 basis point hike is more or less assured, but the markets will be focused on the projection materials, particularly the dot plot. This will be Jerome Powell's first rate hike, so every word in the statement and everything he says in the press conference will be parsed even more closely that usual. 

The government is mulling a change in the bankruptcy laws that would allow more students to reduce or eliminate student loan debt in bankruptcy. High levels of student loan debt are one reason why the first time homebuyer has been missing in action in this housing recovery. As of now, tax debt and student loan debt are more or less permanent - bankruptcy doesn't eliminate them. Student loan servicers are required by Department of Education regulations to oppose bankruptcies, even if they know there is little chance of recovery. The servicers realize this is often throwing good money after bad. 

Freddie Mac crunched the numbers on how rising interest rates affect the housing market and the mortgage industry. Since 1990, increases in interest rates have dropped home sales by 5%, cut housing starts by 11% and cut mortgage origination by 30%. Of course the rate hikes since 1990 were in the context of a secular bull market in bonds that started around 1981 and ended around 2016 or so. In other words, these rate hikes were short-lived. This time around, that probably isn't happening. That said, starts are so depressed relative to demand to begin with that we probably won't see an 11% drop. Unless inflation picks up massively, the Fed will continue to go slow and will be loath to knock the economy back into a recession. 

As I mentioned yesterday, I have left iServe and am seeking a new opportunity. I will be contacting many of you over the next few days / weeks. 

Morning Report: February housing starts give back January's gains

Vital Statistics:

			Last	Change
S&P futures			2742.5	-13
Eurostoxx index			375.67	-2
Oil (WTI)			62.18	-0.17
10 Year Government Bond Yield				2.87%
30 Year fixed rate mortgage				4.43%

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

The FOMC will meet on Tuesday and Wednesday with the announcement scheduled for 2:00 pm Wednesday. The consensus is that the Fed will raise the Fed Funds rate a quarter of a percent. Aside from the Fed meeting, there shouldn't be much in the way of market moving data. 

Housing starts for February came in lower than expected at 1.24 million. Building Permits were 1.3 million. This was about a 90k drop month-over-month, which was driven by a decline in multi-family construction. Building Permits exhibited similar activity, where the decline was driven by multi-family. Multi-family construction is much more volatile than single family construction, so it is hard to read too much into this number. We are seeing evidence of oversupply in some luxury markets like NYC and landlords are cutting rents slightly. That said, there is still a complete dearth of supply at the lower price points, and affordable housing advocates are pulling out their hair trying to figure out what is wrong and what policy lever can be pulled to do something about it. 

Freddie Mac has a piece discussing the demographic issues driving the low starts. Interesting stat: There are about 4 million more people aged 25-34 than there are aged 35-44. Yet the headship rate (that is the rate of young adults forming households) is 3.6% less than what it was in the year 2000. If today's young adults aged 25-34 were forming households at the same rate of the year 2000, we would have seen an extra 1.6 million household formations in 2016. What would that have meant in terms of housing starts? 2 million perhaps? The trend in America has been for people to hit milestones (moving out of the house, getting married, having kids) later in life, and maybe we are close to an inflection point. But as of now, they remain a source of pent-up demand, but not a source of real demand. 

Industrial Production rose 1.1% in February and manufacturing production rose 1.2%. Capacity Utilization increased to 78.1%. The capacity utilization number shows there is still some slack in the system (historical average is closer to 82%-83%). Inflationary pressures are going to be relatively muted until that slack gets taken up. 

Job Openings hit a record in January hitting 6.3 million, according to the JOLTS report. This is an increase of almost 600k jobs, however previous months were revised downward. The biggest increases in job openings were in the professional and business services category, and the trade, transportation and utilities category. The quits rate however, remained largely unchanged at 2.2%, where it has been for a long time. The quits rate is the biggest predictor of future wage growth and is something the Fed watches closely - it is invariably mentioned in the FOMC assessment of the economic situation. 

The University of Michigan preliminary reading for March consumer sentiment jumped to 102. Interesting internal: the "current conditions" component of the index increased pretty strongly for the lower income groups, and actually fell for the higher income groups. I don't know if that is the beginning of a trend (it could simply be a reflection of the stock market sell-off), but for almost all of the post-crisis period, those numbers have been reversed. 

While sentiment may be ebullient for consumers, that isn't the case for mortgage bankers. The latest Fannie Mae Lender Sentiment Survey shows that lenders are expecting a net negative profit margin for the 6th straight quarter, and matched the low of Q1 2016. "Lenders have faced an increasingly difficult market environment, as they report the most sluggish refinance demand expectations in more than a year, the most anemic purchase demand outlook on record for any first quarter, and the worst profit margin outlook in the survey’s history," said Doug Duncan, senior vice president and chief economist at Fannie Mae. The lack of purchase demand is disturbing, and shows that we have had a slow start to the Spring Selling Season. Lack of inventory remains an issue, and the double whammy of increasing interest rates and rising prices are affecting affordability. Lenders are not increasing the credit box to gain a competitive advantage - standards actually tightened during the quarter. 

Finally, on a personal note, I have left iServe and am seeking new opportunities. I will probably be reaching out to many of you over the next few days / weeks. 

Morning Report: Home prices increase by fastest pace in 4 years

Vital Statistics:

	Last	Change
S&P Futures	2758.3	4.3
Eurostoxx Index	375.2	0.2
Oil (WTI)	61.3	0.4
US dollar index	83.6	0.1
10 Year Govt Bond Yield	2.81%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	102.75
30 Year Fixed Rate Mortgage	4.43

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

Initial Jobless Claims fell to 226k last week. We are at levels not seen since the 1960s. 

Import prices rose 0.4% MOM and are up 3.5% YOY. Declining oil prices actually pushed the index lower. A weaker dollar is helping bolster exports, however it also makes imports more expensive. It probably won't make a difference to the Fed, which tends to focus on the Personal Consumption Expenditure metric when formulating monetary policy. 

Manufacturing continues to exhibit strength, according to the Empire State Manufacturing Survey and the Philly Fed. We will see if Larry "King Dollar" Kudlow is able to put a floor under the US dollar, which has been weakening to the benefit of exporters. He is already telling the Fed to "let it rip" regarding the economy. 

The NAHB Homebuilder Sentiment Index fell to 70 in March. 

Homeowner's equity increased 12% (or just about $900 billion) according to CoreLogic. Negative Equity fell by 21% to 2.5 million homes or about 5% of all homes with a mortgage. For LOs, this represents an opportunity: Anyone who did a FHA loan with 3.5% down a few years ago might have built up enough equity to qualify for a conforming mortgage without MI. With higher rates driving down the refi index, there aren't many opportunities out there, so review your past production. 

Home prices increased 8.8% YOY according to Redfin. This is the fastest pace in 4 years. The median home price is $285,700. Home prices are again ahead of incomes, with the median house to median income ratio back at 4.8x, which is about where it peaked during the bubble years. Low inventory is driving this, and homes are moving quickly. The average time on market fell by a week to 53 days. In Seattle, the average home goes to contract in 8 days. 

The House is introducing a bill to rename the CFPB and to have it run by a 5-person board. The new name will be the Financial Product Safety Commission. The bill is bipartisan. Separately, the Senate passed a bill yesterday which eases regulatory requirements for smaller banks. 

In the developing world, a lack of affordable housing is a huge problem. One company's solution: 3D printed houses, which will cost about $4,000 to build. The company will introduce its first community of 3D printed homes next year in El Salvador. 

Morning Report: Wholesale inflation still under control

Vital Statistics:

	Last	Change
S&P Futures	2779.5	6.8
Eurostoxx Index	376.9	1.4
Oil (WTI)	61.1	0.4
US dollar index	83.4	-0.1
10 Year Govt Bond Yield	2.84%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	102.75
30 Year Fixed Rate Mortgage	4.43

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

Inflation at the wholesale level rose 0.2% MOM / 2.8% YOY. Ex-food and energy, they rose 0.2% MOM / 2.7% YOY. The core index (ex food, energy and trade services) rose 0.4% MOM / 2.7% YOY. Overall, the report came in a touch hotter than expectations, but nothing major. In terms of services, hotel demand drove the increase, while goods were impacted by lower energy prices. This report shouldn't have any effect on the Fed's decision next week. 

Retail Sales came in weaker than expected, and this is providing some support for bonds. The headline number was down 0.1%, while the control group was up 0.1%. Census has made some technical changes to the way it measures and calculates the index, so these numbers are going to contain a bit of noise. That said, people who were hoping that tax cuts would propel spending are disappointed this morning, however it might take a month or two to show up in the data. 

Not much of a reaction in the Fed Funds futures, with March futures handicapping a 89% chance of a 25 basis point hike, and the December futures coalescing around a total of 75 basis points this year. 

Mortgage Applications increased 0.9% last week as purchases rose 3% and refis fell 2%. The average contract rate rose 4 basis points to 4.69%, the highest level since January 2014. Refis comprised 40% of all mortgages, the lowest level in almost 10 years. The government share of mortgages increased. 

The leading candidate to replace Gary Cohn is Larry Kudlow, a free-trade, supply-side economist. A veteran of Wall Street and Washington, he recognizes that some saber rattling in trade issues can be a useful negotiating tactic. He also is a regular on TV, which is crucial for selling the Administration's policies to the public. Finally, he is well-liked in Washington, and while Democrats might not agree with him on policy, he doesn't strike a nerve with them. This will be helpful in navigating budgetary decisions. 

10 years ago, Bear Stearns collapsed, pretty much setting the stage for the financial crisis. The public didn't pay attention until Lehman went under. At the end of the day, Bear and Lehman were symptoms, not the disease. The disease was a burst residential real estate bubble. Keep that in mind as the business press will undoubtedly publish a bunch of "Are we at risk for another financial crisis?" articles this week. Residential real estate bubbles are the Hurricane Katrinas of banking, and when they burst, they take down the system with it. We do not have one at the present, and while there is evidence of excessive risk taking in some corners of the market (subprime auto, etc) it simply isn't big enough to dent the economy in a material way. 

Hard to believe, but true. Last night not a single Japanese government bond traded. Between the central bank vacuuming up the supply as a part of QE and Japanese pension funds buying and holding, there is almost no liquidity in the market. Makes the yield curve pretty easy to manipulate, though. Japan has always had a different attitude about markets - it thinks interest rates and stock prices are too important to be determined by a mere market - but it will be interesting to see how the economy gets out from under such determined government support. Ultimately, accurate, unmanipulated interest rates and asset prices are a necessary part of the plumbing for a functioning economy.

Morning Report: Bonds rise on tame consumer price growth

Vital Statistics:

	Last	Change
S&P Futures	2803.0	14.0
Eurostoxx Index	378.4	-0.8
Oil (WTI)	61.0	-0.4
US dollar index	83.7	0.0
10 Year Govt Bond Yield	2.84%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	102.714
30 Year Fixed Rate Mortgage	4.46

Stocks are higher this morning after the CPI came in lower than expected. Bonds and MBS are up. 

Consumer prices rose 0.2% MOM and 2.2% YOY, however the core rate, which excludes food and energy rose 0.2% MOM and 1.8% YOY. Communications (cell phones, data) costs were a drag on the index, while apparel prices pushed it higher. Owner-equivalent rent moderated as well, which is a proxy for house prices. 

The NFIB Small Business Optimism Index just missed the record high set in 1983, rising 0.7 points to 107.6. Lack of qualified workers was the #1 problem again, and reports of compensation increases were the highest since 2000. Reports of CAPEX spend were the highest since 2004 as well. For all of the talk about how things are going on Wall Street, Main Street has switched into a higher gear. Probably the biggest constraint to higher growth right now is a lack of qualified workers. Of course, if the labor markets were truly tight, we would see widespread wage inflation. There are pockets of strength as noted below, but some parts of the labor market are still relatively stagnant. 

Separately, the Conference Board's Employment Trends Index rose in February, and is up 5.6% YOY. The six month growth rate is the highest in 4 years, when the labor market was still in recovery mode. 

One of the strange things in this labor market has been wage growth at the lower end of the wage scale, but not in the upper half. Between minimum wage laws and voluntary raises provided by companies like WalMart in the aftermath of tax reform have boosted wages at the lower end of the scale. This is squeezing the middle to upper middle class, as things like child care and entertainment, become more expensive, while their own disposable income remains relatively unchanged. This might just be a delayed reaction, and we will see more widespread wage growth. However, it might also crimp demand for housing as people feel like they don't have the disposable income for homeownership. More issues for the first time homebuyer. 

Rex Tillerson is out as Secretary of State. CIA Director Mike Pompeo has been appointed to the role. Meanwhile, Larry Kudlow is seen as the favorite to replace Gary Cohn, who is leaving the Admin as well. 

While most people in the mortgage markets are focused primarily on long rates, rising short term rates are having a large impact as well. Short rates (LIBOR / 1 year T-bill) are the highest in 10 years. This affects ARMs and their relative attractiveness to the 30 year fixed rate mortgage. As the yield curve steepens (in other words, the difference between the 30 year bond yield and LIBOR increases) the more attractive ARMS become. As that spread falls, the 30 year fixed becomes more attractive. While ARMS provide a borrower with a lower monthly payment out of the box, paying the extra yield may be a better bet this time around. ARMs perform best in secular bond bull markets, like we experienced from 1981 to a couple of years ago. In a rising rate environment, they won't be as attractive.

The rise in short term rates is also going to have knock-on effects in the stock and bond markets. For the past 10 years, short term bonds have paid next to nothing, so stocks and longer duration bonds have had no competition. That is changing, and we will see an effect on stocks as funding costs for companies increase. 

Morning Report: Demand for Treasuries is falling

Vital Statistics:

	Last	Change
S&P Futures	2794.5	6.0
Eurostoxx Index	379.2	0.9
Oil (WTI)	61.5	-0.6
US dollar index	83.8	0.0
10 Year Govt Bond Yield	2.89%
Current Coupon Fannie Mae TBA	102.25
Current Coupon Ginnie Mae TBA	102.5
30 Year Fixed Rate Mortgage	4.4

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

This week will have some important economic data with housing starts on Friday and inflation data on Wednesday and Thursday. No Fed-speak as we are in the quiet period ahead of next week's FOMC meeting. 

As part of Dodd-Frank reform, Congress is looking at broadening the credit box for a qualified mortgage. Rural buyers, who typically use a smaller community bank, tend to have the biggest issues in getting a mortgage. Banks with $10 billion or less in assets could still get QM protection provided they meet some of the requirements and also hold the loan on their balance sheet. This change has bipartisan support - most everyone agrees that Dodd-Frank was too onerous for smaller banks. 

Investors are beginning to have less of an appetite at Treasury auctions. Treasury auctions are generally non-newsworthy events that happen every Monday. While there is no real risk of a failed auction, we are starting to see less demand for Treasuries, which is to be expected in a rising interest rate environment. That said, you might start to see interest rates move on auction results. Bid / Cover ratios are not yet part of the business press vernacular, but we could be heading there. Something to keep in mind if rates suddenly move on a Monday afternoon. 

Demand for Treasuries will drop if we see an honest-to-goodness trade war. Politicians make a big deal out of trade deficits, which sound worse than they really are. I run a massive trade deficit with my local deli: I buy lunch from them every day, and they never so much as buy a cup of coffee from me. China has chosen to accept Treasuries instead of our goods and services. If we buy less from them as the result of a trade war, they will buy less Treasuries, which would imply higher interest rates at the margin. 

That said, China (and to a less extent Canada) have real estate bubbles on their hands, and residential real estate bubble generally lead to banking crises. What happens when you have banking crises? Demand for risk-free assets rise. In China especially, we should see the trade deficit balloon if that happens, as they will try and export their way out of the recession, and their own workers will have less disposable income to buy US goods and services. A burst China bubble could recreate the economy of the 1990s, where the US gets a free lunch with non-inflationary low interest rates. In the 90s, Japan and China were "exporting deflation" to the US, which is part of the reason why the 90s felt so good. Of course instead of price inflation, we got asset bubbles instead which caused their own headaches. This time around, we won't have the same problem. People know that stocks and real estate aren't special assets that can only increase in price. 

Morning Report: Goldilocks Jobs Report

Vital Statistics:

	Last	Change
S&P Futures	2762.3	17.0
Eurostoxx Index	376.8	0.2
Oil (WTI)	60.6	0.4
US dollar index	83.9	0.0
10 Year Govt Bond Yield	2.9%
Current Coupon Fannie Mae TBA	102.25
Current Coupon Ginnie Mae TBA	102.5
30 Year Fixed Rate Mortgage	4.4

Stocks are higher after the strong jobs report. Bonds and MBS are down. 

Jobs report data dump:

• Nonfarm payrolls up 313,000 vs expectations of 205,000
• Unemployment rate 4.1% vs expectations of 4.0%
• Labor Force Participation rate 63% vs expectations of 62.7%
• Average Hourly Earnings up .1% / 2.6% vs expectations of .2% / 2.9%

Overall a great report for the stock market. Strong growth in payrolls, without a massive increase in wage growth. The civilian employment to population ratio increased from 60.1% to 60.4%, which matched the post-crisis record set in September. The labor force increased by 800k, while the population increased by 150k. The civilian employment to population ratio peaked in 2000 at 64.7% and bottomed in 2009 at 58.3%, and we are much closer to the low than we are to the high. Some of that is demographics, however there is undoubtedly still slack in the labor market that number bears it out. Which is why we still have the wage inflation typically associated with 6% unemployment and not 4% unemployment. 

The Fed funds futures didn't do much on the report - as we approach the March meeting, the probabilities of a hike continue to increase and are sitting at 89%, and the December futures are still coalescing around a prediction of 3 hikes this year. Chicago Fed President Charles Evans says he would argue against a March hike. 

Home Depot is donating $50 million to train 20,000 construction workers over the next decade. "It's important that we support the trades," Home Depot CEO Craig Menear said in an interview. "Not only do we sell product to professionals like plumbers and electricians," but the company also partners with service providers that install kitchen flooring, hot water heaters and other equipment in consumers' homes. There are still 158,000 job openings in the construction sector that need to be filled. 

Donald Trump announced tariffs of 25% on steel and 10% on aluminum yesterday, with temporary relief for Canada and Mexico while we renegotiate NAFTA. Senator Jeff Flake introduced legislation to overturn these tariffs. I would bet there are enough votes in both chambers to pass the bill, and there might be enough to override a veto. 

File under "Only Nixon could go to China:" Donald Trump will meet North Korean President Kim Jong Un in May, to discuss the country abandoning its nuclear weapons program. 

Mortgage credit decreased in February, according to the MBA's Mortgage Credit Availability Index. Apparently the decrease was due to a single large investor in the conventional space. While we are close to post-crisis levels in the index, we are a long way from the go-go days of the bubble. 

Soaring stock and real estate prices have sent net worth as a percent of disposable income to record levels.  I wouldn't be surprised to see this number fall as the Fed pulls back support for the asset markets and we finally start seeing wage inflation. 

Morning Report: Fed Beige Book points to strong labor market

Vital Statistics:

	Last	Change
S&P Futures	2729.3	6.0
Eurostoxx Index	374.0	1.3
Oil (WTI)	61.2	0.0
US dollar index	83.6	0.1
10 Year Govt Bond Yield	2.87%
Current Coupon Fannie Mae TBA	102.25
Current Coupon Ginnie Mae TBA	102.5
30 Year Fixed Rate Mortgage	4.4

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

Donald Trump is set to impose tariffs on steel and aluminum, however there is talk of exempting Canada and Mexico from them (which is where we get most of our foreign steel to begin with). That exemption will be used as leverage to renegotiate NAFTA. So far, the trade war is largely symbolic - Trump tweeted that he wanted to see a $1 billion decrease in our trade deficit with China, which is about $375 billion. In other words, it is a drop in the bucket, and all for show. That might have been an error however, some reports are saying he meant $100 billion, which probably makes more sense. That said, stocks are taking the trade war in stride, and bonds seem to have found a level here. 

Initial Jobless Claims rose to 231k last week from 220k. Job outplacement firm Challenger, Gray and Christmas reported that companies announced 35,369 job cuts in February. 

The overall economy grew at a modest to a moderate pace in January and February, according to the Fed's Beige Book survey. With regard to employment, it said: "On balance, employment grew at a moderate pace since the previous report. Across the country, contacts observed persistent labor market tightness and brisk demand for qualified workers, as well as increased activity at staffing placement services. Several Districts reported continued worker shortages across most sectors, with contacts often mentioning shortages in the construction, information technology, and manufacturing sectors. In many Districts, wage growth picked up to a moderate pace. Most Districts saw employers raise wages and expand benefit packages in response to tight labor market conditions. Contacts in a few Districts conveyed reports of modest increases in compensation following passage of the Tax Cuts and Jobs Act." The increases in wage inflation are a good sign for the economy overall, but not so much for interest rates. The Street is looking for a strong reading in wage growth in tomorrow's Employment Situation Report: an increase of 2.9% YOY. 

Buyer sentiment fell last month, according to the Fannie Mae Home Purchase Sentiment Index. “Volatility in consumer housing sentiment continued into February, with the new tax law beginning to impact respondents’ take-home pay and the stock market creating negative headlines due to early-month turbulence,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Additionally, consumers’ expectations for higher mortgage rates suggest that consumers expect the Fed to hike rates a few more times in 2018. We will continue to track how consumer housing attitudes trend in the coming months as these various market forces play out.”

Morning Report: Gary Cohn resigns

Vital Statistics:

	Last	Change
S&P Futures	2703.3	-21.0
Eurostoxx Index	371.3	-2.4
Oil (WTI)	62.1	0.5
US dollar index	83.5	-0.3
10 Year Govt Bond Yield	2.86%
Current Coupon Fannie Mae TBA	102.25
Current Coupon Ginnie Mae TBA	102.5
30 Year Fixed Rate Mortgage	4.4

Stocks are lower this morning on the prospect of a trade war. Bonds and MBS are up.

White House Economic Adviser Gary Cohn has resigned after losing the argument on tariffs. Cohn, a Democrat, was one of the more moderate voices in the Trump Administration, and his resignation cements the idea that the Administration is turning away from globalization, which has marked Washington establishment for decades.  

So far the potential trade war hasn't had much of an effect on the Fed Funds futures, which are handicapping a 86% chance of a hike in May and have centered on 3 hikes for the full year. The impact of a trade war will be an interesting question for the Fed. On one hand, they raise prices, which should translate into higher inflation. On the other, they depress economic activity which should translate into slower growth and higher unemployment. The first effect is more near term, while the second order effect is longer-term. 

Bolstering the Administration's case for tariffs is the fact that the trade deficit rose to a 9 year high last month. 

Atlanta Fed President Raphael Bostic says that the Fed should take a "wait and see" approach to a trade war. While the Trump Administration may be pushing back from globalization, Congress has not, and the courts provide another speed bump to tariffs. Note as well, that the US "ask" in trade negotiations usually centers on intellectual property protection, and that means Hollywood and Big Tech. Their partisanship will probably come back to haunt them. Think Trump is going to care about the Chinese pirating the latest Michael Moore flick? Or the latest left-wing Netflix "documentary?"

The economy added 235,000 jobs in February, according to the ADP Employment survey. The Street is looking for 205,000 jobs in Friday's jobs report. The ADP report has been coming in higher than the BLS reports lately, so this should have a muted effect. Secondly, the focus on the jobs report (at least from the Street's perspective) has shifted from payroll growth to wage inflation. 

Mortgage Applications rose 0.3% last week as purchases fell 1% and refis rose 2%. The average 30 year mortgage rate rose 1 basis point to 4.65%, the highest since early 2014. 

Nonfarm productivity for the fourth quarter was revised upward to flat, while unit labor costs were revised upward to 2.5% from 2.0%. Compensation costs drove the increase. So far, companies have been unable to pass on higher costs in the form of higher prices, which should mean profit margins will come in, making stocks vulnerable.  This should translate into lower interest rates at the margin.

A real estate startup called Knock is looking to disrupt the real estate industry by acting as a market maker for homes. They will buy a seller's home, move them into a new one, and then sell the old home. The benefit for the home seller is that they will now be able to compete in bidding wars without having any sort of home sale contingencies. That said, this is clearly a bull market phenomenon, and in this market the tough part is not selling your current house - it is getting (and winning) your new one. Still an interesting idea. 

Morning Report: Fears of a trade war easing

Vital Statistics:

	Last	Change
S&P Futures	2727.3	9.0
Eurostoxx Index	373.3	2.4
Oil (WTI)	63.1	0.5
US dollar index	83.5	-0.3
10 Year Govt Bond Yield	2.89%
Current Coupon Fannie Mae TBA	102.25
Current Coupon Ginnie Mae TBA	102.5
30 Year Fixed Rate Mortgage	4.4

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

The EU proposed tariffs on some US goods if Trump follows through on his plan to institute higher tariffs on steel and aluminum imports. White House Gary Cohn is working with business leaders in an attempt to change the President's mind. Think about that. An economic advisor is reaching out to administration outsiders to try and get the President to change his mind. Imagine Austan Goolsbee soliciting the input of the financial industry in 2009 in an effort to derail Dodd-Frank. Supposedly Cohn plans to resign if Trump doesn't relent on a trade war. House Speaker Paul Ryan has also come out against tariffs. Despite Trump's warning that he "won't back down" on tariffs, the markets are starting to bet that a trade war isn't going to happen, which is probably why futures are up. 

Don't forget that we already have tariffs on Canadian softwood lumber. Prices are at record levels. This is yet one more reason why we have such an affordability problem - not enough (cheap) new construction. 

House prices rose 0.4% MOM from December to January, according to CoreLogic. Prices are up 6.6% YOY. They are forecasting prices to rise 5% this year. The fastest appreciation is at the lower price points, where prices are increasing 9% for homes at the 75% of the area's median home price, while appreciating only 5% for homes at 125% of the area's median home price. This demonstrates the struggle that the first time homebuyer is facing: rising rates and higher home price appreciation. Below is a chart of where home prices are overvalued and undervalued

Factory orders fell 1.4% in January reversing a string of gains. This is interesting simply because most of the regional Fed reports and the ISM data are showing strength in new orders, which was the weakness in this report.