Morning Report: Job cuts fall

Vital Statistics:

			Last	Change
S&P futures			2725	1
Eurostoxx index			386.51	1
Oil (WTI)			67.49	-0.72
10 Year Government Bond Yield				2.86%
30 Year fixed rate mortgage				4.47%

Stocks are flat this morning after personal incomes came in as expected. Bonds and MBS are flat. 

Personal Incomes rose 0.3% in April, in line with expectations. Personal Spending rose 0.6%, higher than the 0.4% estimate and inflation was tame at 2% YOY, with the core rate up 1.8% YOY. The big jump in consumer spending will probably have some strategists taking up their estimates for Q2 GDP. March and February spending numbers were revised upward. Inflation remains in check, which will give the Fed the leeway to hold off on hiking rates if the European situation with Italy escalates. 

Pending Home Sales fell 13% in April, according to NAR. The supply / demand imbalance remains the story: Lawrence Yun, NAR chief economist, says the housing market this spring is hindered because of the severe housing shortages in much of the country. “Pending sales slipped in April and continued to stay within the same narrow range with little signs of breaking out,” he said. “Feedback from Realtors®, as well as the underlying sales data, reveal that the demand for buying a home is very robust. Listings are typically going under contract in under a month1, and instances of multiple offers are increasingly common and pushing prices higher.”

Initial Jobless Claims fell to 221,000 last week. We are still at exceptionally low levels. 

Mortgage rates fell 10 basis points last week, and this is even before the huge bond market rally on Tuesday. 

Deutsche Bank was put on the troubled bank list last year. This was obviously a big impetus behind its decision to reduce its US footprint. The German regulators have been on top of the bank as well. With credit default spreads widening in the Euro banking market, expect to see the European Central Bank tread extremely cautiously with policy normalization, and for the Fed to adopt a wait and see attitude after hiking in June. Separately, if Deutsche Bank decides to exit the US entirely, wouldn't it be wild to see them spin off Bankers Trust? 

Job Cuts fell to 31,517 in May, according to outplacement firm Challenger, Gray, and Christmas. This is the seasonally slow period for job cuts, as most companies concentrate them in Jan-Feb time frame. The cuts are mainly coming in retail, although things are picking up in the financial sector. Regionally, they are concentrated in the Northeast, particularly NY and NJ. 

The Trump Administration is set to push for tariffs on European steel and aluminum. A German magazine said that Trump told French President Emannuel Macron that he wanted to "stick to his trade policy long enough until no Mercedes-Benz cars were cruising through New York." The deadline for negotiations is this Friday.

US regulators are set to sand off some of the harder edges on Dodd-Frank and the Volcker Rule. The biggest change requested from the industry is the rebuttable presumption that any position held for less than 60 days is considered a proprietary trade. Essentially, this is a "innocent until proven guilty" scenario. The Fed also intends to clarify the liquidity management exception, which is meant to distinguish between market-making and proprietary trading. At the end of the day, falling commissions and tightening bid/ask spreads have made market-making an unprofitable business for the most part anyway. I suspect investors and regulators are in for an unpleasant surprise the next time we have a crash and the only bids in the market are retail GTC orders. 

The number of underwater homes fell below 10% in the fourth quarter for the first time since the crisis. Torrid home price appreciation has cut the percentage down to 9.1%, or about 4.4 million homes. "For much of the country the Great Recession is an increasingly distant memory - the American economy is booming once again and markets are now shifting their gaze to future downturn risks," said Zillow senior economist Aaron Terrazas. "But scattered in neighborhoods across the country, the legacy of the mid-2000s housing bubble and bust lingers among the millions of Americans still underwater on their mortgages, trapped in their homes with no easy options to regain equity other than waiting.” The worst areas? Chicago, Virginia Beach, and Baltimore. 

Morning Report: Markets now heavily discounting 4 hikes this year

Vital Statistics:

			Last	Change
S&P futures			2705	4
Eurostoxx index			384.58	0.1
Oil (WTI)			67.12	0.39
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.45%

Stocks are slightly higher this morning as Italian bonds bounce. Bonds and MBS are down. 

US Treasuries touched 2.76% yesterday on the flight to quality trade. The Fed Funds futures are now predicting a 81% chance of a hike in June. The biggest effect of the Italy situation can be seen in the December Fed Funds futures. A couple of weeks ago, we were looking at a coin toss for 4 hikes this year. Now it is closer to 20%. The dot plot consensus is 3, so the markets are aligning a little closer to what the Fed thinks it is going to do.

Why is Italy worrying the markets so much? Italy has a huge amount of debt - 1.9 trillion euros worth. Its debt to GDP ratio is 130%. The fear is that the uncertainty over this issue over the summer will depress Euro growth, while the banking sector (which already has some issues) will take further hits. As of now, this is a political, not an economic issue - Italian yields are around 3%, nowhere near the 8% level they hit in 2012. Note that Spanish yields are beginning to creep up as well. 

Mortgage Applications fell 3% last week as purchases fell 2% and refis fell 5%. This is the 8th consecutive decline. The refi index is down to the lowest level since December 2000. "Rates slipped slightly over the week as concerns over U.S. trade policy and global growth sent some investors back to safer U.S. Treasuries," said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. "Minutes from the most recent Federal Open Market Committee meeting also yielded a more dovish tone, which added to the downward pressure in rates. Our 30-year fixed mortgage rate decreased two basis points over the week to 4.84 percent as a result. Both purchase and refinance activity decreased despite the drop in rates, part of which was due to slowing activity before the Memorial Day holiday."

The second estimate for GDP came in at 2.2%, right in line with the first estimate. Inflation was revised downward a touch from 2% to 1.9% and consumption was revised downward from 1.2% to 1%. Inventories were revised downward, while business investment was revised up to 9.2% - a big number. 

Whether the increase in business investment was a direct result of the tax cuts remains to be seen, but so far tax cut effects aren't showing up in corporate profits which were more or less flat in the first quarter with last year. 

The economy created 178,000 jobs in May, according to the ADP Employment Report. The Street is looking for 190,000 jobs in Friday's report, although the ADP and BLS reports have been pretty far away the last few times around. The key number will be wage growth, not payroll growth in any case. 

Interesting data points in the ABA survey of the nation's banks. QM has actually caused banks to decrease non-QM lending (which was the opposite of the intended effect). About half retained servicing. Almost nobody lends to FICOs below 620.

The Fed is set to announce proposed changes to the Volcker Rule, which severely limits proprietary trading activities for commercial banks. The current rules are so vague that JP Morgan Jamie Dimon once quipped that traders would need a lawyer and a psychiatrist by their side to determine whether they were in compliance with the law. The Fed will probably tweak the rules only modestly, and will not usher in a return to pre-2008 rules. That would require legislation, which isn't happening. 

Morning Report: Markets cool on a June hike after Italian elections

Vital Statistics:

			Last	Change
S&P futures			2700	-18
Eurostoxx index			384.87	-4.95
Oil (WTI)			66.97	-0.91
10 Year Government Bond Yield				2.87%
30 Year fixed rate mortgage				4.54%

Stocks are lower this morning as Italian sovereign debt is getting slammed on the election results. Bonds and MBS are up on the flight to quality.

Over the weekend, Italy failed to establish a coalition of Eurosceptics and their president rejected a Eurosceptic finance minister. The fact that Italy came so close to electing a government that would consider exiting the EU has bond traders selling Italian sovereigns. Between this and Brexit, many observers are wondering if the whole EU experiment is beginning to unravel. How much of this is merely symbolic remains to be seen, but in the meantime the flight to quality trade is on, and that means lower rates. 

Italian 10 year bonds are trading at 3.16%, which is up 143 basis points over the past several days. Spain is wider as well, while the rest of the Eurozone (Germany, France) is tighter. The canary in the coal mine for rates however will be the Eurozone banks, and cost of credit protection is going up. Unicredit and San Paolo Imi are up almost 100 basis points, Deutsche Bank (which has other non-Italian headaches) is up 40, and most other Euro banks are up modestly. As of now, this is mainly a European bank phenomenon, however Citi is also up small.  

US yields are lower across the board, from the 2 year to the 30 year. Convexity buying will probably give the move legs at least for the near term. The Fed Funds futures are now handicapping a 78% chance for a hike at the upcoming meeting. It was at 95% a week ago. If the Italian debt problem gathers momentum, it will inevitably cause financial stress to rise and that will give the Fed an excuse to sit the next meeting out. As long as inflation is behaving, they can afford this luxury. Falling oil prices are helping as well.

The Italian vote will probably be sometime this fall, so it at least appears as there won't be an immediate resolution. Bottom line for the mortgage originators, like the Brits did in 2016, the Italians just might have saved your year.

Aside from Italy, we have a lot of data this week, with GDP on Wednesday, personal income / spending on Thursday, and the jobs report on Friday. European newsflow will be the dominant force, however any sort of weakness in the numbers will probably have an outsized impact as the Street is really leaning the wrong way here.

Home prices increased 6.5% YOY in March, according to the Case-Shiller Home Price Index. Seattle, San Francisco, and Las Vegas all posted double-digit increases, while Chicago and Washington DC brought up the rear.

Consumer confidence increased in May, according to the Conference Board. The Present Situation component increased more than the Expectations component. This is surprising given that these consumer confidence indices are often an inverse gasoline price index.

6 trends from the MBA Secondary conference last week: The main points are that margins are falling and volumes are shrinking. Many independent originators are not going to make it through the year. JP Morgan may increase it footprint in FHA after the regulators loosened the thumbscrews. Ginnie Mae will issue a report this summer talking about the future of digital mortgages for the industry. The GSEs are looking to implement technology to allow originators to sell off servicing rights easier, and there remains a need for ways to increase the credit box for the first time homebuyer, who is still often shut out of the market.

Speaking of the first time homeuyer, they decreased activity in the first quarter, according to Freddie Mac. Homes purchased by first time homebuyers slipped by 2% to 411,000. 81% of first time homebuyers used low down-payment mortgages.

First time homebuyers are going to struggle to compete with all-cash buyers. Now, a new startup intends to disrupt homebuying by allowing borrowers who need a mortgage to offer cash instead to the seller (essentially the startup bears the risk if the borrower somehow can't get a mortgage). “We’re taking that single value proposition that a lot of these institutions and iBuyers have, which is access to capital, and we’re democratizing that capital for the benefit of consumers instead of using it for corporate profits,” said Ribbon CEO Shaival Shah. “Cash discounts that consumers earn from our program flow directly back to the consumer. Based on our early deal volume, customers are seeing an average of 5 percent savings to the purchase price by using Ribbon.” The startup is backed by Bain Capital and a few others.

Interesting perspective in the "robots are going to take our jobs" scare. Historically, improvements in farming, technology, industry have caused jobs to disappear. Obama Administration economist Austan Goolsbee argues that if robots and AI increase productivity (meaning we get more output from less input) that makes us richer. The question for jobs is inevitably how fast the adjustment process happens. The longer it takes, the easier the transition. The paper reads quite easily for an academic paper and provides some needed perspective.

Again, on a personal note, I am still looking for a senior capital markets / securities analyst position so if anyone has any leads, please let me know. 

Morning Report: 10 year trades below 3% on slightly dovish FOMC minutes

Vital Statistic:

			Last	Change
S&P futures			2726	-4
Eurostoxx index			392.54	-0.07
Oil (WTI)			71	-0.84
10 Year Government Bond Yield				2.98%
30 Year fixed rate mortgage				4.61%

Stocks are lower after Trump threatened more tariffs on autos. Bonds and MBS are up on the dovish FOMC minutes.

Initial Jobless Claims ticked up to 234,000 last week.

Existing home sales fell 2.5% in April, according to NAR. Sales fell to an annualized pace of 5.46 million, down from 5.6 million in March, which was also the Street estimate. Lawrence Yun, NAR chief economist, says this spring’s staggeringly low inventory levels caused existing sales to slump in April. “The root cause of the underperforming sales activity in much of the country so far this year continues to be the utter lack of available listings on the market to meet the strong demand for buying a home,” he said. “Realtors® say the healthy economy and job market are keeping buyers in the market for now even as they face rising mortgage rates. However, inventory shortages are even worse than in recent years, and home prices keep climbing above what many home shoppers are able to afford.”

Other tidbits from the report: the median home price increased 5.3% to $257,900, inventory of 1.8 million homes represents a 4 month supply, days on market fell to 26 days, and the first time homebuyer was 33% of all transactions.

US house prices rose 1.7% in the first quarter, according to the FHFA House Price Index. On a YOY basis, they were up almost 7%. The West Coast continued to lead the pack with high single-digit growth rates, and the Middle Atlantic showed an acceleration of growth. Over the past 5 years, the Middle Atlantic (NY, NJ, PA) has been the slowest appreciating region, growing just over half the rate of the West Coast.

The FOMC minutes were a bit more dovish than expected - the Fed Funds futures are now handicapping a 37% chance of 4 hikes this year, down from the mid 40% yesterday. The FOMC is worried about a trade war with China depressing economic activity. On inflation, they emphasized the symmetry of the inflation goal. "Most participants viewed the recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis." Overall, nothing was all that new, just a re-affirmation of symmetry, meaning that the 2% target is not a ceiling.

Dallas Fed Head Robert Kaplan thinks the Fed has about 4 more hikes to go before it is at a "neutral" stance. He also discussed his views of inflation above 2%: "I want to run around 2, and if we got a little bit above it and I thought it would be short-term and not long-term, I could tolerate it"

As anyone who attended the Secondary Conference could tell you, mortgage banking is going through a rough stretch right now. Digitalization of mortgage banking has compressed margins and volumes are down. Even people that want to move are finding a dearth of inventory. What could be the catalyst to turn things around? Buy-side firms ringing the register on the REO-to-rental trade. That would bring back enough purchase activity to allow some of the smaller firms to retrench and get their costs under control. Wishing for falling rates is probably a long shot, although if the 10 year finds a level here, we could see rates come in a little, but probably not enough to bring back refis.

Refi activity is going to be concentrated in two areas: cash out to refinance credit card debt, etc, and FHA refis into conforming once the homeowner has enough equity to get under the 80% LTV threshold and avoid having to pay PMI.

While the mortgage business is going through a rough patch, quarterly profits for banks are spiking (tax reform has some effects here). The banking sector largely sat out the M&A boom that has been common throughout other industries. The US market is still about the least concentrated banking market on the planet. Is it time for some M&A? 

Morning Report: Congress eases Dodd-Frank a little

Vital Statistics:

			Last	Change
S&P futures			2709	-17
Eurostoxx index			392.65	-4.29
Oil (WTI)			71.89	-0.29
10 Year Government Bond Yield				3.01%
30 Year fixed rate mortgage				4.66%

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

Mortgage Applications fell 2.6% last week as purchases fell 2% and refis fell 4%. The refi share of mortgage apps fell to 35.7%. Rates increased substantially last week, driving the decline. Refis are at the lowest level since 2000. 

New Home Sales in April were 662,000, lower than March and the Street estimate. The median sales price was $312k and the average price was $407k. There were 300k houses for sale at the end of the month, representing a 5.4 month inventory. 

Separately, the share of new houses built to be rented is steadily increasing, adding to the tight inventory problem.

Congress passed a few tweaks on Dodd-Frank yesterday, which gave banks from $50-$250 in assets a bit of regulatory relief from the more onerous requirements in terms of risk management. This was a bipartisan and incremental bill that does not "gut Dodd-Frank." Banks like Zion's or Huntington simply aren't going to get involved in some of the more esoteric stuff that a JP Morgan will and don't require six compliance officers to ensure they don't blow themselves up in the CDO market. This bill was less ambitious than the Financial CHOICE act that passed the House last year but failed to garner any Democratic support in the Senate. 

The CFPB is planning on easing some of the Obama-era use of disparate impact. Disparate impact means that a lender is guilty of discrimination if its lending numbers don't reflect the demographic makeup of the area in which the bank operates, even if it had no intention of discrimination. It basically strips away the ability of a lender to even defend themselves. This measure stems from a Supreme Court decision in 2015 that upheld the concept of disparate impact, but required a plaintiff to prove the company's policies led to it. HUD is also dialing back some Obama-era policies that required local governments to submit plans to make sure neighborhoods reflect the demographic makeup of the surrounding area by forcing them to change zoning requirements to allow more affordable housing. The requirement stands, however HUD delayed the compliance date. 

Separately, the CFPB is going to back away from auto financing. The original language in Dodd-Frank prevented the CFPB from getting involved in this area, but Richard Cordray claimed that because auto dealers didn't do auto loans - banks did - that they did fall under CFPB's jurisdiction. This change is another example of the CFPB "pushing the envelope" and reflects Mick Mulvaney's philosophy of going as far as the law requires, but no further.  

The FOMC minutes are scheduled to come out at 2:00 pm EST. The Street will be zeroing on any discussion of whether 2% inflation is a symmetric target or a hard ceiling. The Street is now leaning slightly towards 2 versus 3 more hikes this year. It was over 50% last week. 

Fun fact courtesy of Barry Ritholz. On this day in 2002, Netflix went public, raising $300 million. That same year, Blockbuster earned over $800 million in late fees alone. Today, Netflix is up 15,000% while Blockbuster is extinct. Note investors had almost given up on NFLX in the mid 00s. 

Morning Report: Consumer debt to hit $4 trillion this year

Vital Statistics:

			Last	Change
S&P futures			2737	4.75
Eurostoxx index			396.69	0.82
Oil (WTI)			72.55	0.31
10 Year Government Bond Yield				3.07%
30 Year fixed rate mortgage				4.66%

Stocks are higher this morning as the trade rhetoric with China cools. Bonds and MBS are up.

China said overnight it would cut its tariff duties on automobiles from 25% to 15%. 

Things are looking grim for the origination business, according to people at the MBA Secondary Conference in NYC. A combination of declining volumes and skinnier margins are pushing the smaller originators out of the market. Hard to see what changes things, although an increase in homebuilding would help. 

McMansion builder Toll Brothers missed quarterly earnings estimates on higher costs, driven by building materials, land and labor. Gross margins contracted 150 basis points, while revenues increased 17%. The stock is down 7% this morning. 

Economic activity accelerated slightly in April, according to the Chicago Fed National Activity Index. Production-related indices accounted for the majority of the index gain, followed by employment indices. The CFNAI is a meta-index of 85 different economic indicators. 

Oil continues its strong run on the back of OPEC cuts and supply disruptions out of Venezuela and Iran. Oil is the highest it has been in almost 4 years. The ability to turn on incremental supply quickly and cheaply will help keep a lid on prices, although higher gas prices for the summer driving season are going to dampen sentiment. 

JP Morgan might get bigger in FHA loans, according to statements made at the MBS Secondary Conference. Regulatory risk caused the bank to publicly state it was pulling back from that market. Regulatory reform is helping, but the bank says that further fixes will be needed. Chase does do FHA lending, but it is tiny. 

The level of consumer debt in the economy has a lot of people talking. Consumer debt is probably going to hit $4 trillion by the end of 2018. Certainly the chart of consumer debt looks worrisome:

Increased student loan debt is a big driver of the increase. That said, does that mean consumers are in over their heads? Can they service that debt? Well, if you look at this chart, it doesn't appear to be a problem:

In other words, consumer debt is high, but the amount people are actually paying to service that debt is very low. Higher interest rates will move that debt service ratio up, but it is hard to make an argument that consumers are over-extended, at least by looking at that chart. 

Freddie Mac is launching its Borrower of the Future Campaign to take a look at how the industry will have to address the younger homebuyer. “The increase in self-employed and the rise of the sharing economy and digitally-driven lifestyles are having a tremendous impact and leading to shifts in behavioral, economic and societal factors,” said Chris Boyle, Chief Client Officer at Freddie Mac. “Collectively, the industry must now take into account these dynamics as we think about how to effectively help the next generation find the home of their dreams. We’re excited to serve in this important role to help the industry better understand the Borrower of the Future, and then drive the conversation on how to apply these insights to make the mortgage process more efficient and affordable.”

Neel Kashkari discusses how the Fed has beaten the Phillips Curve. The Phillips Curve dates back to the 1950s, and plots a relationship between unemployment and inflation. Kashkari cites the 2009 interventions, which should have caused deflation, but didn't. We have unemployment below 4% and still no signs of real inflation. 

Morning Report: The era of low mortgage rate is over

Vital Statistics:

			Last	Change
S&P futures			2713	-5.75
Eurostoxx index			394.37	-1.42
Oil (WTI)			71.39	-0.08
10 Year Government Bond Yield				3.09%
30 Year fixed rate mortgage				4.69%

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

Slow news day. with no economic data. 

The Wall Street Journal has declared the era of low mortgage rates is over. What does this mean for the industry? For the industry overall, it means a tougher fight to keep purchase business, but it also could depress home sales as a combination of higher home prices and higher rates make moving up too unaffordable. NAR estimates that the effect of a 100 basis point increase in mortgage rates can reduce sales by 8%. Mortgage rates have been on a tear this year, increasing 62 basis points since the end of 2017. The 10 year yield has increased by the same amount, and usually mortgage rates don't move up in a 1:1 ratio with Treasuries. I wouldn't be surprised to see mortgage rates fall if Treasury yields stall out here. 

I suspect that "convexity selling" has been driving the moves in rates. Mortgages have a quirky characteristic called negative convexity. Negative convexity explains why a GN mortgage with an expected duration of 7 years will pay a higher yield than a Treasury with a duration of 7 years. Neither one has credit risk, but they have different interest rate risk. MBS investors (say mortgage REITs or hedge funds) will buy mortgages and hedge interest rate risk by selling Treasuries. As interest rates rise, they can get balanced by either selling MBS (which pushes mortgage rates up) or by buying Treasuries (which pushes interest rates up). Whenever you see big moves in rates during a short period of time, you are often seeing convexity hedging exacerbating the move, which is why you will see a retracement in rates after the re-hedging activity finishes. We saw a big move this week as Treasuries broke the 3.1% level. Mortgage rates have shot up as well. 

Do credit cycles drive the business cycle or is it the other way around? Historically, business cycles have driven credit cycles. In other words, business dries up, making debt harder to service, which causes banks to retrench and raise cash. The last two cycles however, the credit cycle drove the business cycle. Credit tightened up first, and then the economy rolled over. Is this a new trend? My guess is that it probably isn't, as the last two economic booms were driven by bubbles in stocks (late 90s) and residential real estate (mid 00s). This time around, asset prices are high, but we don't have anything comparable to the stock market or real estate bubbles this time around. Your major macro credit risk is that the Fed overdoes it, not that a bunch of debt backed by garbage assets implodes. 

Everyone loves ETFs these days. They have low fees, provide instant diversification, and are liquid. In the fixed income market however, the liquidity is probably a bit of an illusion. Corporate bond issuance has soared since the bottom of the cycle in 2012, yet the amount of market-making capacity has been shrunk by 80-90%. The issue for ETF investors is that they expect to have liquidity in these instruments, but in a crisis the underlying assets of these bond funds will experience a tremendous shock. Why? Because Dodd-Frank's Volcker Rule has essentially ended market-making as a business for banks. Market-making activity means that when everyone wants to sell, the banks who issued these bonds would usually step in and act as the buyer of last resort. This time around, that won't happen and ETFs will trade at huge discounts to their supposed net asset value. There is no such thing as a financial free lunch, and investors are going to discover the downside of low fees, tight spreads and marginal cost commissions the next time the credit cycle turns.

Morning Report: The REO-to-Rental trade earned 9% a year

Vital Statistics:

			Last	Change
S&P futures			2718.5	-4.5
Eurostoxx index			394.21	1
Oil (WTI)			72.15	0.66
10 Year Government Bond Yield				3.10%
30 Year fixed rate mortgage				4.65%

Stocks are lower this morning on bad earnings from Cisco. Bonds and MBS are down small. 

The US and China will enter trade talks over the next couple of days. Both sides have signaled willing to make some compromises, so this could potentially be good for interest rates.

Initial Jobless Claims came in at 222k last week, while the Philly Fed improved to 34.4 which is a strong reading. The Index of Leading Economic Indicators rose a respectable 0.4%. 

One of the reasons why starter homes have been so tough to find has been the REO-to-rental trade, where professional investors scooped up REO properties early in the crisis and rented them out. CoreLogic crunched the numbers and it turns out the trade made about 9% per year for the past 5 years. Impressive return in an environment of financial repression. Most of the return came from home price appreciation however, so if prices begin to level out, some of these professional investors will turn sellers. This is especially true if they had these properties in funds with a life. As short term interest rates rise, the low single-digit rental return will have more competition. 

While longer-term bonds can be used as a proxy to estimate future inflation, Treasury Inflation Protected Securities represent a direct measure of inflationary expectations. The Fed invariably mentions TIPS in their meeting minutes. The breakeven rate of inflation has hit a 4 year high in this market at 2.2%. This means that an investor would need 2.2% in the consumer price index to be indifferent between buying Treasuries and TIPS, which pay a return equal to the interest imputed in the bond plus the consumer price index. 

2/3 of the mortgage originated in April were purchase loans, according to Ellie Mae's Origination Insight Report. Fewer loans in the pipeline is speeding up processing times, as the average time to close fell to 41 days. The average FICO score ticked up to 723.

CSFB thinks 3.5% on the 10 year will be the level to trigger a stock market exodus, although rates could stall out somewhere south of that for a while.

The hits just keep coming for Wells. The WSJ reports they added or changed information for some business customers during an anti-money laundering audit. Wells states that it was an internal matter only: “This matter involves documents used for internal purposes. No customers were negatively impacted, no data left the company, and no products or services were sold as a result.” This is only going to increase the voices in DC calling for the bank to be broken up. It already is not allowed to increase its balance sheet. At some point, it might make sense for Wells to spin off Wachovia and its securities unit. 

GoBankingRates calculated what you can get for $300k in every state. The best value? West Virginia, where $300k will get you 3,347 square feet. Worst? Washington DC, which gets you 581 square feet.

The CFPB recently issued new rules to fix the TRID "black hole" issue. 

CFPB Interim Chairman Mick Mulvaney reiterated his commitment to tame the CFPB by ending regulation by enforcement at NAR's Legislative Trade Meeting and Expo. Student loan debt was also discussed, and while the CFPB doesn't have a magic wand to make the debt go away they will continue to ensure that students understand the risks they are taking and also will go after predatory student loan collection practices. 

Morning Report: Housing starts disappoint again

Vital Statistics:

			Last	Change
S&P futures			2705	-3.5
Eurostoxx index			393.19	0.82
Oil (WTI)			70.93	-0.38
10 Year Government Bond Yield				3.06%
30 Year fixed rate mortgage				4.65%

Stocks are lower this morning after North Korea pushed back on the proposal to end their nuke program. Bonds and MBS are higher after the the 10 year decisively pushed through the 3% level yesterday. 

The 10 year hit 3.10% yesterday on no real news. If the inflation numbers aren't all that bad, why are rates increasing? Supply. The government will need to issue about $650 billion in Treasuries this year compared to $420 billion last year. Note that one of the downsides of protectionism will be seen here - when the US buys imports from China, they usually take Treasuries in return. Less trade means less demand for paper. 

Rising rates may present problems for active money managers. The average tenure is 8 years, so this is the first tightening cycle they have ever seen. For the past decade, cash and short term debt have not been any sort of competition for stocks and long term bonds. Note that the 1 year Treasury finally passed the dividend yield on the S&P 500. Stocks and bonds are going to see money managers allocate more to short term debt. 

Despite rising rates, financial conditions continue to ease. The Chicago Fed National Financial Conditions Index is back to pre-crisis levels. Note that doesn't necessarily mean we are set up for another Great Recession - the index can stay at these levels for a long time, and we don't have a residential real estate bubble. That said, this index can be one of those canaries in a coal mine for investors - at least selling when it goes from negative to positive. 

Mortgage Applications fell 2.7% last week as purchases fell 2% and refis fell 4%. The refi index is at the lowest level in almost 10 years, and the refi share of mortgage origination is at 36%. The typical conforming rate fell a basis point to 4.76%. 

April Housing starts came in at 1.29 million, down 4% MOM but up 11% YOY. The Street was looking for 1.32 million. Building Permits 1.35 million which was right in line with estimates. Multi-family was the weak spot. Note that March's numbers were unusually strong (relative to recent history), so April was a bit of a give-back. 

Industrial production rose 0.7% last month while manufacturing production rose 0.5%. Capacity Utilization rose to 78%. 

New York State is suing HUD to force them to continue to use the Obama-era standard of enforcing AFFH. HUD delayed the rule after numerous local governments were unable to implement policies in time.  Andrew Cuomo's statement: “As a former HUD Secretary, it is unconscionable to me that the agency entrusted to protect against housing discrimination is abdicating its responsibility, and New York will not stand by and allow the federal government to undo decades of progress in housing rights,” Cuomo said in a statement. “The right to rent or buy housing free from discrimination is fundamental under the law, and we must do everything in our power to protect those rights and fight segregation in our communities.”  Of course overt housing discrimination hasn't existed for half a century, but that isn't what this is about.  The issue is zoning ordinances and multi-fam construction. Expect to see more of this sort of thing in blue states as the housing shortage gets worse. 

Morning Report: Market now predicting a 50% chance of 4 hikes this year

Vital Statistics:

			Last	Change
S&P futures			2724	-6.25
Eurostoxx index			393.28	1.09
Oil (WTI)			71.74	0.78
10 Year Government Bond Yield				3.04%
30 Year fixed rate mortgage				4.57%

Stocks are lower this morning on earnings and retail sales. Bonds and MBS are down on hawkish comments out of Europe.

Retail Sales rose 0.3% in April, according to Census. The control group rose 0.4%. Both numbers were in line with consensus estimates. There is a push-pull effect in the numbers as tax cuts will encourage spending, while higher gas prices will depress it. 

Speaking of retail sales, comps at the Home Despot came in lower than expected, although some of that was weather-related. The company noted that traffic in May has been strong. As home affordability gets worse, home improvement projects generally increase as people renovate instead of moving to a nicer home. The builders (and mortgage originators) have noted that the Spring Selling Season has been a dud this year. 

The Empire State Manufacturing Survey came in at 20, higher than expected, while homebuilder sentiment improved to 70. Strong pricing is being offset by weak traffic, particularly among the first time homebuyer. Separately, inventories were flat in March, which will probably cause some houses to take down their estimate for first quarter GDP growth. 

What would happen if you listed your home at $1? Would the subsequent bidding war get you to the correct price? It certainly would create a huge buzz around your home and that will probably help. That said, there are problems associated with that tactic. First, you will get all sorts of low-ballers who will only clog up the process. More importantly, the sites like Realtor.com, Zillow etc generally have searches with price ranges. In other words, if you expect your house to be worth $500,000 and you list it for $1, it won't show up if the buyer sets a $400,000 - $600,000 search range. 

HUD is seeking comment on the Supreme Court's Disparate Impact ruling and whether HUD's current policy is consistent with the ruling. Disparate Impact means that you can get slammed for discrimination even if you didn't intend to discriminate, but your numbers are not consistent with the population. 

The Fed Funds futures now are handicapping a 50% chance of 4 rate hikes this year. 

A combination of higher budget deficits and low unemployment has Goldman predicting a 3.6% 10 year yield by the end of 2019. This is the first time since WWII when we have had a combination of increasing deficits and falling unemployment. ""The sizeable demand boost provided by the recent deficit-increasing tax cuts and spending cap increases at a time when the economy is already somewhat beyond full employment is a striking departure from historical norms that is likely to contribute to further overheating this year and next and tighter monetary policy in response." Of course the labor force participation rate is quite low, as is the employment-population ratio, two numbers that are not captured by the unemployment rate. Until you start to see wage inflation, the Fed will be content to go slow. 

Morning Report: The push-pull of monetary policy

Vital Statistics:

			Last	Change
S&P futures			2732	3.75
Eurostoxx index			391.38	-1
Oil (WTI)			70.81	0.11
10 Year Government Bond Yield				2.98%
30 Year fixed rate mortgage				4.55%

Stocks are higher this morning as trade tensions with China eased somewhat over the weekend. Bonds and MBS are down small.

The Trump Administration is pushing Congress to get a long-term funding deal done by the August recess. 

There won't be much in the way of market-moving data this week - housing starts and retail sales will be the only possibilities. We will have Fed-speak every day however. 

As the yield curve flattens, it is attracting more and more attention. Chris Whalen argues that Fed manipulation of the curve is the driving force behind the flattening. By paying interest on excess reserves, the Fed has pushed up short term rates far further than demand for credit would imply - in fact he argues that if the Fed stopped paying interest on excess reserves, the Fed Funds rate would get cut in half. On the other side of the coin, fears of taking losses on its QE portfolio has caused the Fed to hold down long-term rates. Finally, he argues that the reason for the growth in nonbank lending has been due to unwritten guidance from the government to the big banks: don't go lower than 680 on FICO scores. There is a conflict between macroprudential regulation and monetary policy, which is inhibiting credit growth despite the FOMC's attempts to stimulate it. Whalen argues that credit growth is not high enough to really stimulate a recovery and that is due to hard caps the regulators have imposed on commercial and industrial lending, construction finance, and multifamily lending. I wonder if credit is behind the lack of housing construction despite such high demand. 

As rates rise, we are seeing more and more money flow into passively-managed bond funds. One of the interesting dynamics of passively managed indices is the self-reinforcing mechanism of the investing itself. For example, look at the FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google). Their weight in the S&P 500 is based on their market caps. So, as these companies outperform the S&P 500, their weighting in the index increases, which causes passive investors to buy more in order to maintain their weighting. It becomes a self-fulfilling prophecy. Here is where it gets strange in bond-land. Companies with the most debt end up dominating the index. So in theory, as a company gets more risky (by issuing more debt), passive investors demand more of their debt. So unlike passive equity investment, which builds on strength, passive bond investing builds on weakness. This means that there should be much more room for index outperformance with actively managed bond funds than with passively managed bond funds. 

Interesting chart from David Stockman:

If the ratio of net worth to income is going to revert to the mean, that means either asset prices are going to crash, or incomes are going to rise. I think the latter is what will occur. 

Morning Report: James Bullard thinks no more hikes are warranted

Vital Statistics:

			Last	Change
S&P futures			2722	3.75
Eurostoxx index			392.17	0.2
Oil (WTI)			71.3	-0.06
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.56%

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

Import prices rose 0.3% MOM and 3.3% YOY, driven by oil. Ex-energy import prices were flat. 

St. Louis Federal Reserve Head James Bullard said that interest rates may already be at the level where they are no longer stimulating the economy. There are “reasons for caution in raising the policy rate further given current macroeconomic conditions” he said in his prepared remarks. Bullard has generally been considered a dove, so this is not much of a surprise. He is also a non-voter. He believes that there is little in the inflationary pressures being signaled in the market. 

With respect to inflation signalling, he has a point. The spread between the 30 year bond and the 5 year bond is now the narrowest since 2007. Note that the yield curve generally flattens during tightening phases and is probably not signifying the type of deflationary period that 2007 did. Given all of the QE over the past decade, the signals from the bond markets are heavily distorted and should be taken with a grain of salt. Note short Treasuries is one of the biggest hedge fund trades on the Street. 

Are the homebuilders set to outperform going forward? They have suffered more than the market during the recent declines, but the environment should be favorable for the sector going forward. With a shortage of housing, high demand and rising prices, the sector should be in good shape. The problem for investors? The sector is highly cyclical, and the stock behavior reflects that. In other words, earnings will rise and fall, and the multiple will expand and contract, dampening the effect. So, if the average multiple is typically mid-teens, don't be surprised if P/E ratios fall to the high single digits during boom times. 

Q2 GDP is currently tracking at 3.7%. 

Sen Pat Toomey says that the Trump Administration doesn't have the authority to pull out of NAFTA, since it was passed by Congress. On the other hand, the Admin does have the authority to pull out of the Iran Deal, as well as the Paris Accords because they were only deals with the Obama Administration and not the US - never ratified by Congress. 

Morning Report: Inflation remains in control

Vital Statistics:

			Last	Change
S&P futures			2705	8.75
Eurostoxx index			391.2	-1.24
Oil (WTI)			71.51	0.37
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.62%

Stocks are breathing a sigh of relief after the Consumer Price Index comes in lower than expectations. Bonds and MBS are up as well. 

The headline Consumer Price Index rose 0.2% MOM / 2.5% YOY. Ex-food and energy it rose 0.1% / 2.1%. Higher gasoline prices pushed the index up, while falling healthcare and communications price increases pulled it lower. While the Fed focuses on PCE, and not CPI it is a welcome development for bonds and shows that the 3% level has held again on the 10-year. 

Initial Jobless Claims were flat last week at 211,000. For those keeping score at home, this is pretty much a 48 year low. 

Royal Bank of Scotland will finally put the mortgage crisis behind it as it settles with the US government with a $4.9 billion fine. The fine was lower than expected and the stock is up 6% this morning in UK trading.

Want to get the absolute best price for your home? List it on Tuesday at 5:00 pm local time. No, really.

California is close to mandating that all new homes come with solar panels. The mandate will probably raise the cost of a new home by about $10,000 although the money will eventually get recouped with lower energy bills - the CA Energy Commission estimates that the typical homeowner will save $80 a month, which would more than offset the $40 additional mortgage cost. CA's average electric bill is only $90 a month to begin with, so that $80 number seems suspect. 

The White House is looking to keep Interim BCFP Director Mick Mulvaney in for a longer period, at least through the end of the year. The WH is rumored to want NCUA Chairman Mark McWatters as the permanent head of the CFPB. McWatters is viewed as a pragmatist and has a reputation for working with people on both sides of the aisle. 

Morning Report: Job Openings equal the number of unemployed

Vital Statistics:

			Last	Change
S&P futures			2680	9.75
Eurostoxx index			390.81	0.81
Oil (WTI)			70.9	1.84
10 Year Government Bond Yield				3.00%
30 Year fixed rate mortgage				4.63%

Stocks are higher this morning after the US pulled out of the Iran deal. Bonds and MBS are down, with the 10 year trading over 3% again. 

The Iran deal was never ratified by the Senate, so it never reached the level of "treaty." It was basically a deal with the Obama Admin and Iran. 

Oil had a volatile day yesterday and is rallying again. China is the biggest customer of Iranian oil, so in theory it shouldn't affect the US all that much, but WTI will follow Brent on the relative value trade. Note that a sustained oil price over $70 is estimated to be about a 0.7% drag on GDP growth. 

Inflation at the wholesale level moderated last month, with the producer price index rising 0.1% MOM and 2.6% YOY. Ex-food and energy, the index rose 0.1% / 2.3% and the core rate rose 0.1% / 2.5%. 

Job openings hit 6.6 million last month, which is a new record for the index, which goes back to early 2000. The quits rate increased to 2.3%. The quits rate has been stuck in a 2.2% - 2.3% range for what seems like forever. Fun fact: The number of job openings has hit the number of unemployed for the first time. 

The labor shortage is particularly acute in construction, which is part of the reason why housing starts have been short of demand. This shortage has extended to home remodeling as well. 

While everyone seems to focus on the CPI / PPI / PCE inflation measures and imagines that a single point estimate accurately reflects the cost of living, it doesn't. First the relative weights of different goods and services differ. For example, PCE and CPI will weight healthcare differently, as well as owner-equivalent rent. The St. Louis Fed notes that the differences in inflation between regions of the US can be substantial as well. 

Mortgage Applications fell 0.4% last week as purchases fell 0.2% and refis fell 1%. Tough times for the smaller originators. 

Despite the slim pickings out there, mortgage credit has contracted a bit this year. Overall, it was a mixed bag, as government credit contracted on less streamlines while conventional increased as jumbos rose. Government credit has been tightening since early 2017, when the government began to crack down on serial VA IRRRL shops. 

How have things changed at the CFPB or the (BCFP) under Mick Mulvaney? Despite the ululating in the press, not that much. One of the panelists warned industry lawyers not to advise their clients that the CFPB is relaxing its enforcement activities. So far, the biggest change we have seen is that the name has been changed back to the Bureau of Consumer Financial Protection, which was the way it was written into Dodd-Frank. 

Fair Housing groups are suing HUD over Ben Carson's delay of the Obama-era re-interpretation of AFFH - affirmatively furthering fair housing. Their complaint is that HUD didn't provide advance notice before suspending the rule,. which would have required communities to "examine and address barriers to racial integration and to draft plans to desegregate their communities." HUD delayed the compliance deadline until 2024. In practice, this means that HUD wants communities to change or eliminate their zoning ordinances to include more multi-family housing in wealthier neighborhoods. 

Morning Report: Jerome Powell agrees with markets on interest rates

Vital Statistic:

			Last	Change
S&P futures			2667	-3
Eurostoxx index			388.93	-0.56
Oil (WTI)			70.09	-0.62
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.55%

Stocks are lower as we await the Trump Administration's decision on the Iran deal. Bonds and MBS are down small. 

The Administration is set to announce later today whether they intend to stay in the Iranian deal or abandon it. Oil has been rallying on expectations Trump will leave. 

Jerome Powell said that market expectations (i.e. the Fed Funds futures) are more or less in alignment with the Fed's expectations for the future path of interest rates. The December Fed funds futures are predicting about a 10% chance of one more hike this year, a 44% chance of 2 more and a 39% chance of 3 more. Over the past month, the central tendency has become more hawkish. 

Small Business Optimism remains strong, according to the NFIB. More businesses are planning on increasing capital expenditures, while hiring remains strong and we are seeing evidence of increased compensation. Profitability increased as well, which indicates that productivity is increasing, and that some of this CAPEX is going towards labor-saving technology. Finding qualified workers continues to be the biggest issue surrounding small business. “There is no question that small business is booming,” said NFIB Chief Economist Bill Dunkelberg. “Consumer spending, the new tax law, and lower regulatory barriers are all supporting the surge in optimism across all small business industry sectors.”

Despite the hurricane-related spike in delinquences, overall DQ rates have been falling, according to CoreLogic. Home price appreciation, in addition to more stringent underwriting standards are the driving force behind it. The foreclosure rate is down from 0.8% to 0.5%, and the 30 day DQ rate is down to 4.8% from 5.0%. As you would expect, TX and FL are experiencing rising DQ rates, but the rest of the nation is down. 

Tesla stock has more or less recovered from its conference call induces swoon from last week. The bonds are at the lows however, trading at 88. Note there is a divergence also in NFLX, which has bonds in the low 90s, while the stock is a highflyer. 

NYS AG Eric Schneiderman resigned from office after reports came out that he abused 4 women. Schneiderman was an AG cut in the same cloth as Eliot Spitzer, and hated the financial industry about as much as he did (FWIW the feeling was mutual). When Spitzer announced his resignation, cheers went up on the floor of the NYSE. 

Freddie Mac is getting into the business of providing lines of credit against MSR portfolios. Nonbank servicers face liquidity issues when loans they are servicing go delinquent. They are required to make the mortgage payment to the ultimate investor of the mortgage until the loan is brought current or foreclosed. Banks generally have no problems with this, but nonbank issuers generally don't have the balance sheet to withstand heavy advances activity. Fannie Mae only requires 6 months of advances, but Ginnie Mae has no similar relief. Policymakers are concerned about the ability of nonbank servicers to withstand a period of prolonged stress if delinquencies spike. 

Homebuyer sentiment hit an all-time high according to the Fannie Mae Home Purchase Sentiment Index. "The latest HPSI reading edged up to a new survey high, showing that consumer attitudes remain resilient going into the spring/summer home buying season," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "High home prices and good economic conditions helped push the share of Americans who think it’s a good time to sell to a fresh record high. However, the upward trend in the good-time-to-sell share seen since last spring has done little to release more for-sale inventory. The tightest supply in decades, combined with rising mortgage rates from historically low levels, will likely remain a hurdle for mobility and a persistent headwind for home sales."