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: Markets sell off as 10 year breaches 3% level

Vital Statistics:

			Last	Change
S&P futures			2626.5	-9
Eurostoxx index			379.58	-3.53
Oil (WTI)			67.53	-0.22
10 Year Government Bond Yield				3.02%
30 Year fixed rate mortgage				4.59%

Stocks are lower this morning after yesterday's interest rate-driven sell-off. Bonds and MBS are down.

The 10 year breached the 3% mark yesterday, which served as a catalyst for a substantial stock market sell-off. Of course 3% is just a round number, but it is the highest rate since 2014. Some pros are looking for a global slowdown in the economy, which could make some corporate borrowers vulnerable. We certainly appear to be in the late stages of a credit cycle. Junk-rated bond issuance has been on a tear over the past few years, reaching $3 trillion as yield-starved investors have had to reach into the lower credits to make their return bogeys. That said, corporate bond spreads are still at historical lows, (investment grade spreads are still half of what they were as recently as early 2016. Let's also not forget that much of the bond issuance over the past 8 years went to refinance old debt at higher interest rates - in other words it was a net positive for these companies. 

We are now going to see just how much of the huge rally in financial assets over the last decade was due to the inordinate amount of stimulus coming out of the Fed. As stocks now have to compete with Treasuries, some changes in asset allocations are to be expected and the riskier assets are going to bear the brunt of the selling. Keep things in perspective, however. Interest rate cycles are measured in generations. 

One of the benefits of QE has been to goose asset prices (which was kind of the whole point). Increasing people's net worth would increase spending and therefore increase GDP. It probably worked, however that hasn't been costless. One of the problems with increasing real estate prices is that it shuts people out from places where there is opportunity (California in particular). If you already own property in CA and have been experiencing torrid home price appreciation, you can move since your increased home equity can be used to purchase another expensive property. But if you live in the Midwest were home price appreciation has been less, you might not be able to take that job in San Francisco since you can't afford to live there. That said, negative equity was probably a bigger problem and home price appreciation did mitigate that issue. 

Mortgage Applications fell 0.2% last week as purchases were flat and refis were down 0.3%. Conforming rates increased 6 basis points, while government rates increased 1. ARMs decreased to 6% of total applications. A flattening yield curve makes ARMs less and less attractive relative to 30 year fixed mortgages.  

Acting CFPB Director Mick Mulvaney has made some changes at the Bureau. First, he is ending the pursuit of auto lenders, which Dodd-Frank prohibited. The Cordray CFPB did an end-around by going after the big banks behind some of the auto financing, and that will end. Second, Mulvaney will no longer make public the complaint database against financial services companies, saying that “I don’t see anything in here that I have to run a Yelp for financial services sponsored by the federal government.” Finally, he plans to change the name from the CFPB to the BCFP. All of this is in keeping with Mulvaney's commitment to follow the law and go no further. 

Morning Report: Is the Trump Reflation Trade returning?

Vital Statistics:

	Last	Change
S&P Futures	2693.3	-0.3
Eurostoxx Index	390.5	-0.5
Oil (WTI)	57.5	0.3
US dollar index	86.8	0.0
10 Year Govt Bond Yield	2.49%
Current Coupon Fannie Mae TBA	102.531
Current Coupon Ginnie Mae TBA	103.375
30 Year Fixed Rate Mortgage	3.88

Stocks are higher this morning as tax reform looks set to pass. Bonds and MBS are down. 

The Senate passed tax reform, and it looks like we'll need a second vote in the House because of the name. Stocks like it, and bonds are selling off. That said, bonds are selling off worldwide, so it isn't just the US. 

Hot on the heels of tax reform comes funding the government, as normal funding runs out on Friday.  Mitch McConnell has vowed there will be no government shutdown, and he is probably correct, as the continuing resolution will be larded up with all sorts of unrelated measures to garner the necessary votes. The big threat is if Democrats demand some sort of immigration deal or if conservatives balk at stabilizing Obamacare or re-authorizing CHIP. Politicians talk about "Christmas Tree" bills, where everyone gets an ornament (or a priority satisfied). Given the silence in the media and the absence of leaks, it appears that is exactly what is going on. Just in time for the season, I guess.  

The 10 year broke through support yesterday, which caused a sell-off driven by stop-loss selling on the part of technical traders.  Don't forget, one of the biggest trades on the Street right now is the yield curve flattening trade, where investors are long the 10 year and short the 2 year (or some variation of that). Yesterday, people got carried out on that trade as the losses on the 10 year side of the trade were not offset by gains on the 2 year. My point on this is that the movement in the 10 year over the past couple of days has a lot of noise in it, caused by temporary technical trading. It might just be a blip. 

Does the passage of tax reform bring the Trump Reflation Trade back into play? The Trump Reflation Trade refers to the rally in stocks and the sell-off in bonds that we saw a year ago based on policy expectations in Washington. The markets were expecting a tax cut and an infrastructure spending plan which would goose the economy and drive investors out of safe assets like Treasuries into riskier assets like stocks and corporate bonds. That trade petered out, at least on the bond side of the ledger as getting anything passed in Washington looked almost impossible. We had a nice rally in bonds in Spring and have been stuck in a narrow range since. With tax reform now done, and talks of infrastructure spending next year, we could see a repeat, where bonds test the early 2017 levels around 2.6%. That said, I would be extremely surprised to see a deal on infrastructure, as 2018 will be all about midterm elections and posturing ahead of them. 

The tax bill made some changes that are positive for housing and the mortgage industry. The biggest one for many smaller independent originators concerns mortgage servicing rights and the recognition of income for tax purposes. The original bill would have required originators to pay the tax up front for the MSR portion of the gain on sale. Since MSRs are not cash, it would have hurt the cash flows of many smaller originators and perhaps driven them out of servicing. The tax treatment for MSRs remains unchanged. Second, affordable housing advocates were worried about two provisions that would have possibly discouraged affordable housing construction - the removal of the Low Income Housing Tax Credit and Private Activity Bonds. Those provisions remain unchanged. 

Mortgage Applications fell 4.9% last week as purchases fell 6% and refis fell 3% despite a drop in rates. 

Existing Home Sales rose 5.6% to a seasonally adjusted annualized value of 5.81 million, which is the highest since 2006. The median home price rose 5.8% to $248,000. There are 1.67 million homes for sale, which represents about 3.4 month's worth. The first time homebuyer was 29% of sales, and we saw cash-only sales (think investors) increase to 22%. The new tax bill will make it somewhat more attractive to be a landlord, so we could see some effect here, especially at the lower price points. 

Morning Report: Vastly different forecasts for the 10-year

Vital Statistics:

	Last	Change
S&P Futures	2164.0	-3.0
Eurostoxx Index	339.4	2.0
Oil (WTI)	44.4	-0.2
US dollar index	88.0	0.2
10 Year Govt Bond Yield	1.57%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.52

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

Mortgage Applications fell 1.3% last week as purchases fell 2% and refis fell 1%. Considering that the 10 year bond yield picked up 17 basis points last week, those are surprisingly good numbers, however there could be comparison issues with the 4th of July week. 

Brexit has created some winners and losers in the real estate business. Winners: those in the mortgage origination business and borrowers who benefit from lower mortgage rates. Losers: high-end developers who rely on foreign money and the private label securitization market, which needs higher yields to attract interest in non-guaranteed paper. 

Strategist Komal Sri-Kumar, who has been right as rain about the rally in Treasuries this year (when everyone else was predicting higher yields) has an eye-popping forecast for the 10 year: 90 basis points. He sees global growth slowing and believes inflation will be nowhere to be found. 

On the other side of the trade, SocGen believes fair value in the 10 year is 1.95%, and sees a 1% chance of the 10 year hitting 1.1% this year. Their original model was looking for high 2%. In fact, most strategists were looking for 2.75% of so on the 10 year by the end of the year. No one can make heads or tails of the bond market right now. 

We obviously have a bubble in sovereign debt, and the world is assuming inflation and growth are never, ever coming back. In other words, it is just another "its different this time" argument. IDTT are the 4 deadliest words in investing. Will it end with a cataclysmic top like we had in stocks in 2000 and residential real estate in 2006? Who knows? The last time we had interest rates this low was the 1930s under the gold standard. Today, we have negative rates under the PhD standard. This is uncharted territory and isn't in the economics textbooks. 

What will be the catalyst to get growth and inflation growing again? It should be housing. Household formation was depressed during the Great Recession and has been coming back. Housing starts are still lagging, however. Throw in obsolescence and you have a housing shortage, which is driving up prices. That pent-up demand is going to get released as the Millennials age, and that is going to push housing starts up to where they should be, around 2 million units a year. Compare housing starts to household formation over the past few years. 

Tim Duy, a very smart Fed-watcher suggests the Fed doesn't have the room to raise rates given that the yield curve is flattening. A flat yield curve (where long-term rates are close to short term rates) is generally bad for the economy, especially the banking system.  He suggests that the process of normalization start with shrinking the Fed's balance sheet. Since the Fed cut rates to zero first, and then instituted quantitative easing, the Fed should undo quantitative easing first and then raise rates. In fact they are doing the opposite. The first step would be to stop re-investing maturing proceeds and let the debt run off. Ideally, the Fed should be hitting bids in the Treasury market, selling overpriced paper, but they have to figure out how to offset the contractionary effect it will have on the money supply. 

Morning Report: capping off a terrible week for bonds

Vital Statistics:

	Last	Change
S&P Futures	2160.0	3.0
Eurostoxx Index	337.5	-1.0
Oil (WTI)	46.1	0.4
US dollar index	87.0	0.1
10 Year Govt Bond Yield	1.57%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.49

Markets are higher this morning in spite of a massive terrorist attack in France. Bonds and MBS are down.

Lots of stronger-than-expected economic data this morning

The Consumer Price index rose 0.2% versus expectations of 0.3%. On an annualized basis, it rose 1%. Ex food and energy, it is up 2.3% YOY. Note the Fed prefers the Personal Consumption Expenditure index and not the CPI. 

Retail sales came in stronger than expected - up 0.6% versus expectations of 0.1%. Retail sales had a sluggish start to the year, which partly drove the lousy 1.1% Q1 GDP growth rate. I wouldn't be surprised to see some strategists and the Fed take up Q2 GDP estimates on this number. 

Industrial Production rose 0.6% last month and manufacturing production rose 0.4%. Both numbers beat estimates. Capacity Utilization rose to 75.4%, again better than expectations.

It is hard to believe, but the 10 year bond has picked up 20 basis points in yield since Monday morning. This is the biggest weekly loss in a year.  Whether that was "the top" remains to be seen: markets can have ferocious sell-offs in the context of a bull market. At the end of the day, the US is going to be driven by foreign bond trading. The German Bund went from -18 basis points on Monday to nearly 0% this morning.

Larry Fink of Blackrock says that a .75% 10-year yield wouldn't surprise him. 

Wells Fargo reported a 4% YOY increase in net income for the second quarter. Mortgage origination was up 2% YOY. Citi beat numbers. 

Morning Report: The 10 year bond yield approaches 2013 levels

Vital Statistics:

	Last	Change	Percent
S&P Futures	2037.6	-19.9	-0.98%
Eurostoxx Index	2920.0	-85.0	-2.83%
Oil (WTI)	37.05	-1.3	-3.36%
LIBOR	0.625	-0.006	-0.91%
US Dollar Index (DXY)	94.63	0.048	0.05%
10 Year Govt Bond Yield	1.71%	-0.05%
Current Coupon Ginnie Mae TBA	105.6
Current Coupon Fannie Mae TBA	104.9
BankRate 30 Year Fixed Rate Mortgage	3.62

Markets are lower for the second day in a row on global growth concerns. Bonds and MBS are up.

With the latest bond market rally, the 10 year bond yield is a stone's throw away from the 2013 "taper tantrum" when the Fed began its withdrawal of QE. Part of the reason for the bond rally is the flight to safety in Europe. The German Bund now yields under 10 basis points. Talk about a all-risk/no reward trade. Falling global bond yields are pulling US Treasury yields lower as investors sell European and Japanese bonds to buy US Treasuries. For the mortgage industry, it should mean more refi volume. Since the Fed hiked rates in December, the 10 year yield has fallen 58 basis points. Who'd a thunk?

The ISM non-manufacturing index improved in March, after decelerating for most of last year and this year. Employment continues to be neutral. 

Job openings fell in February to 5.445 million from 5.6 million the month before. These are still boom-time levels, which begs the question as to why the labor market continues to have such a low labor force participation rate. Many would argue it is a skills gap - the labor people need isn't what is out there there right now. 

Good article on how hard it can be for Millennials to get a mortgage these days if you have bad credit, given the regulatory shelling that has been going on for the past 8 years. There is definitely a cognitive dissonance in DC over the competing goals of increasing access to credit and slugging "unregulated" financial system even harder.

Ever wonder why a government guaranteed mortgage backed security trades for a much higher yield than the corresponding Treasury? The credit risk is the same - i.e. zero - so what is the reason for the difference. I discuss the reason in Rob Chrisman's blog. Note there is some bond geek math going on in the explanation.

Former Fed Head Narayana Kochlerakota discusses the way we use the financial system for social engineering, and suggests if the government thinks college and housing needs to be subsidized, the answer is to subsidize it directly instead of subsidizing borrowing. FWIW, I have always thought the issue with college tuition inflation is that college is a good with inelastic demand. Colleges don't compete on price and parents will pretty much pay whatever is asked. When the government subsidizes an inelastic good, the subsidies accrue to the producer, not the consumer. Which means the net effect is that the more the government subsidizes college education, the more colleges raise tuition.