Morning Report: The OCC solicits input for CRA modernization

Vital Statistics:

	Last	Change
S&P futures	2897	-4.25
Eurostoxx index	379.06	-3.45
Oil (WTI)	71.13	1.33
10 year government bond yield		2.88%
30 year fixed rate mortgage		4.55%

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

The highlight of the upcoming week will be the jobs report on Friday, although we will get a lot of Fed-speak on Wednesday. Productivity and costs on Thursday will be an important report as well. 

Construction spending rose 0.1% which was lower than the Street 0.4% expectation. Residential construction rose 0.6% MOM and 6.6% YOY. 

Manufacturing expanded in August, according to the ISM PMI Index. The August PMI increased 3.1% to 61.3, driven by increases in production and new orders. Employment rose as well. Many of the participants noted that trade is injecting some uncertainty into their business, especially with respect to price negotiations with suppliers. The reading of 61.3 is unusually strong, and is typically associated with 5.6% GDP growth. 

The OCC is asking for input regarding the CRA and modernization. “As a long-time banker, I have seen firsthand the benefit of CRA investment and how it makes communities vibrant. I applaud the effort of community development practitioners and bankers who work together to make an important difference in our nation’s neighborhoods,” said Comptroller of the Currency Joseph M. Otting. “I have also seen how limitations in the current CRA regulation can fail to provide consideration to a bank that wants to lend and invest in a community with a need for capital, including many low- and moderate-income areas. Unfortunately, the operation of the current CRA regulation can result in restricted resources. It is time for a national discussion on how we can make the CRA work better.”

The ANPR solicits comment on a number of questions regarding improvements to the CRA regulations related to

• increasing lending and services to people and in areas that need it most, including in LMI areas;
• clarifying and expanding the types of activities eligible for CRA consideration;
• revisiting how assessment areas are defined and used;
• establishing metric-based thresholds for CRA ratings;
• making bank CRA performance more transparent;
• improving the timeliness of regulatory decisions related to CRA; and
• reducing the cost and burden related to evaluating performance under the CRA.

Donald Trump was jawboning Canada over trade and threatening China with $200 million in higher tariffs. I think markets are pretty much shrugging off trade threats any more. Note that Trump will need legislation to carry out some of the changes he wants to make with Canada, which isn't going to happen. 

Home prices increased 0.3% MOM and 6.2% YOY in July, according to CoreLogic. They are forecast to rise about 5% over the upcoming year. We are seeing sellers in the hot markets decide to pull properties off the market to see if they can ride the home price appreciation for a bit longer. This is adding to the supply crunch. CoreLogic's model always seems to predict a slowdown in home price appreciation that never seems to materialize. 

An interesting tidbit - the median lot size fell to 8.560 square feet in 2017 (about 1/5 of an acre). Lot sizes had been trending downward, but climbed during the bubble years as more and more building was done in the exurbs. New England has the largest lot sizes at about 0.4 acres, while the left coast has the smallest (.15 acres). Note this study is only looking at single family spec homes. It looks like this is basically a secular trend, and the the bubble years (building in the exurbs) was largely a blip. It also could be a function of building activity being dominated in regions (like the West Coast), where lots are smaller.  

The ultra-high end luxury market has been getting whacked as foreign investors step away. Changes in tax laws might be having an impact, but it could have also been driven by overbuilding at the top end. I suspect it is the latter, since we are seeing softness in states like Florida which benefit from the tax law. 

Morning Report: Where is the private label MBS market?

Vital Statistics:

			Last	Change
S&P futures			2645	-1.75
Eurostoxx index			385.49	0.17
Oil (WTI)			67.92	-0.65
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.56%

Stocks are lower as we begin the FOMC meeting. Bonds and MBS are flat.

Construction spending fell 1.7% MOM but is still up 3.6% YOY. Bad weather in the Northeast and Midwest probably drove the decrease. Residential construction was down 3.5% MOM and up 5.3% YOY.

Manufacturing downshifted in April, but is still reasonably strong according to the ISM Manufacturing Report. Steel tariffs were mentioned several times as an issue. A few comments from the piece:

• "[The] 232 and 301 tariffs are very concerning. Business planning is at a standstill until they are resolved. Significant amount of manpower [on planning and the like] being expended on these issues.” (Miscellaneous Manufacturing)

• “Business is off the charts. This is causing many collateral issues: a tightening supply chain market and longer lead times. Subcontractors are trading capacity up, leading to a bidding war for the marginal capacity. Labor remains tight and getting tighter.” (Transportation Equipment)

The US economic expansion is now the second-longest on record. Low inflation and low interest rates have made that possible. Despite the increase in interest rates, Fed policy is still highly expansionary, so as long as inflation behaves this could go on for a while longer. 

House prices rose 1.4% MOM and 7% YOY, according to CoreLogic. About half of the MSAs are now overvalued according to their model.

Acting CFPB Director Mick Mulvaney is looking for ways to save money. Sharing desks and moving to the basement are possibilities. As an aside, this article belongs on the opinion page. 

The private label MBS market used to be a $1 trillion market - last year it was only about $70 billion. What is going on? Regulation may appear to be the culprit, but it really isn't. There are still all sorts of unresolved issues between MBS investors and securitizers. The biggest surround servicing - how do investors get comfort that the loan will be serviced conflict-free, especially if the issuer has a second lien on the property. How do investors get comfort that the issuer won't solicit their borrower for a refinance? A lack of prepay history is also a problem - it makes these bonds hard to model and price. Many investors also remember the crisis years, when liquidity vanished and investors were unable to sell, sometimes at any price. 

Issuers were content for a lot of years to simply feast on easy refi business - rate and term streamlines which were uncomplicated and simple to crank out. Warehouse banks were reticent to fund anything that didn't fit in the agency / government box, so why not concentrate on the low-hanging fruit? Investors were able to pick and choose from all sorts of distressed seasoned non-agency paper trading in the 60s and 70s. Most of that paper ended up being money good. But in that environment, why would anyone be interested in buying new issues over par? If you are a mortgage REIT, why not buy and lever new agency debt with interest rates at nothing and a central bank that is actively supporting the market? 

Now that the easy refi business is gone, will we see a return of this market? Perhaps, but there probably still is a big gulf between what borrowers and investors are willing to accept and the governance issues remain unsolved. 

Morning Report: Manufacturing strong

Vital Statistics:

	Last	Change
S&P Futures	2697.8	3.8
Eurostoxx Index	389.3	0.9
Oil (WTI)	60.8	0.4
US dollar index	85.7	-0.2
10 Year Govt Bond Yield	2.46%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	103.25
30 Year Fixed Rate Mortgage	3.91

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

We will get the FOMC minutes this afternoon at 2:00 pm. We might see some volatility if they contain any surprises, so just be aware if you are locking around then. 

Mortgage applications fell 3% last week as purchases rose 1% and refis fell 7%. 

Manufacturing improved in December, according to the ISM Manufacturing Report. New Orders and Production drove the increase, while employment fell. This was the second highest reading for 2017. Manufacturing firms reported difficulties finding qualified workers, and 44% reported increasing starting pay to attract workers. The 2017 average of 57.6 in the index historically corresponds with a 4.5% increase in GDP. The December reading would be associated with over 5% growth. That said, manufacturing doesn't have the impact on the economy it used to have, but that is still impressive growth. 

Despite Twitter tensions with North Korea (which rattled the chattering classes), North Korea and South Korea improved communications. While the tiff between Kim Jong Un and Trump make for bit of a sideshow, the markets (stocks, bonds, currencies) do not take it as any sort of serious threat or possibility. 

Construction spending increased in November by 0.8% MOM and 2.4% YOY. Private residential construction rose 1.1% MOM and over 7% YOY. 

Framing lumber prices are up 43% YOY, in the CME futures. Traders are looking for prices to eclipse their bubble highs this Spring. This should bump up prices for new construction in 2018. For all of the handwringing over tax reform's effect on house prices, simple supply and demand will keep them supported, at least for 90% of the market. If the growth in the economy ever translates into faster wage growth, expect that supply and demand imbalance to increase even further. 

Economic confidence was positive in 2017, according to Gallup's economic confidence index. Note the index began in 2008, so the only track record we have is of the crisis / post-crisis days. 

Congress is working to come up with some sort of long-term spending solution to keep the lights on. Republicans want increased defense spending, while Democrats want non-defense spending to have the same increases that defense does. Surprisingly, both parties seem to want to increase defense spending. Republicans are going to need Democrats to reach a deal, as some on the right will balk at the higher spending levels. While there has been talk that Democrats might demand some sort of immigration measure in exchange for a vote, so far they haven't drawn that line in the sand. At least as of now, nobody is talking about a government shutdown. Remember the last time government shut down, originators couldn't get tax transcripts out of the IRS which delayed some closings. It is something to stay ahead of. 

Morning Report: ADP payrolls come in light

Vital Statistics:

	Last	Change
S&P Futures	2583.0	10.0
Eurostoxx Index	397.8	2.5
Oil (WTI)	55.0	0.6
US dollar index	87.8	0.1
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.68
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	3.99

Green on the screen this morning as markets rally worldwide. Bonds and MBS are down. 

The Fed decision is due at 2:00 pm EST today. No changes in interest rates are expected, but there is always the risk that something in the statement could move rates. Be careful locking around then. Separately, Donald Trump is scheduled to announce Yellen's replacement tomorrow. 

Mortgage applications continue to fall (six times in the last seven weeks), according to the MBA. Applications decreased by 2.6% as purchases fell 1% and refis fell 5%. Mortgage rates hit a low for 2017 in September, but have risen about 20 basis points since then. The average contract interest rate was 4.22%, an increase of 4 basis points from last week. 

ADP saw an uptick in payrolls for October, increasing to 235k. September was revised downward to 110k due to the hurricanes. Many were expecting to see a bigger rebound for October, but it hasn't happened, at least according to ADP. The BLS is announcing payrolls on Friday, with the Street looking for 325k. 

Construction spending rose 0.3% in September, according to the Census Bureau. On a YOY basis, it is up 2%. Residential construction was flat on a month-over-month basis but is up 9.6% YOY. 

Manufacturing is still strong, according to the ISM index. It slipped slightly in October to 58.7 from 59.5. Hurricane effects are probably having some effect here. 

House Republicans moved back their tax reform reveal by a day, which shows there is some disagreement in whether this can pass. With uniform opposition from Democrats, it will only take a few Republicans to kill it. The state and local tax deduction will probably prove to be the deal killer, and while many Republicans have big philosophical objections to the estate tax, it probably isn't a hill worth dying on. While people have historically considered senior citizens to be the third rail of politics, in all reality, it is the upper middle class (especially the HENRY's, which stands for high earnings, not rich yet). They are the ones most affected by changes in 401k contributions, state and local tax deductions, and the mortgage interest deduction. The top 20% pays 95% of the income taxes in this country, according to OMB. 

Morning Report: Mediocre Jobs report

Vital Statistics:

	Last	Change
S&P Futures	2475.8	5.8
Eurostoxx Index	375.9	2.0
Oil (WTI)	47.0	-0.3
US dollar index	85.3	-0.4
10 Year Govt Bond Yield	2.11%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.86

Stocks are higher despite a mediocre jobs report. Bonds and MBS are up. 

Jobs report data dump:

• Payrolls up 156,000
• Unemployment rate 4.4%
• Hourly earnings up 0.1% MOM / 2.5% YOY
• Labor force participation rate 62.9%
• 2 month payroll revision down 41,000

Another month where the ADP number was way off of what BLS reported. For the markets, it is a Goldilocks report which is strong enough to keep the recovery going and weak enough to keep the Fed from tightening too aggressively. Construction, professional business services, and manufacturing were the biggest contributors to job growth. Manufacturing job growth was the highest in 5 years, which is encouraging.  2.5% annual wage growth is nothing to write home about, however with inflation around 1.5% or so, it is probably the best we can hope for at the moment. The Fed funds futures moved a touch more towards the Fed standing pat in December and September. 

The strong manufacturing job growth was echoed in the latest ISM Manufacturing Survey, which improved in July. New Orders and Production drove the big increase, although employment was close behind. The reading of 58.8 is usually associated with 4.9% GDP growth. Given that strength, wage growth should be accelerating. 

Construction spending fell in July by 0.6% and is up only 1.8% YOY. Residential construction improved however, which we need to see to alleviate the tight inventory issue. 

Gasoline prices are up 25% in some places after Harvey affected about 10% of the US's refining capacity. Higher gas prices have invariably tilted towards lower growth and a drop in the consumer confidence indices. Expect to see some hand-wringing over the mindset of the consumer going forward. 

Bond strategists are flummoxed to explain the bond market's rally over the past few months. At the beginning of the year, most were thinking the 10 year would yield closer to 3%, however yields have dropped by about 40 basis points instead. With GDP growth around 3%, you should expect to see investors dump Treasuries, but it hasn't happened. IMO the Trump reflation trade was always a bit of a stretch, and pre-election yields were closer to reality than post-election yields. Still, there are a lot of bears that are having a tough year right now. 

Almost half of all homes in the US have regained their bubble peaks, according to Zillow. The leading MSAs are Denver and Dallas, while the ones who still lag the most include Las Vegas and Riverside. 

Morning Report: Irrational exuberance in the bond market?

Vital Statistics:

	Last	Change
S&P Futures	2475.5	7.5
Eurostoxx Index	380.1	2.2
Oil (WTI)	49.9	-0.3
US dollar index	85.9	0.1
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

Stocks are higher this morning on overseas strength. Bonds and MBS are down a touch.

Personal income was flat in June, as a drop in interest / dividend income offset an increase in compensation. Inflation remains nowhere to be found as the PCE price index (the Fed's preferred measure of inflation) was flat MOM and up 1.4% YOY. Ex-food and energy, the numbers ticked up 0.1%.

Home prices rose 1.1% in June and are up 6.7% YOY, according to the CoreLogic Home Price Index. Want to know how tight inventory is? Unsold inventory as a percentage of households stands at 1.9%, which is the lowest in 30 years.

Manufacturing strengthened slightly in June, according to the ISM and PMI manufacturing indices. Construction spending fell 1.3% in June as public construction spending fell. Residential construction was down 0.3% MOM, but is up 9% YOY.

Remember "irrational exhuberance?" That was Alan Greenspan's warning to investors that there was a stock market bubble. Unfortunately for him, he issued the warning on 12/5/96, about 39 months before the stock market actually peaked. Well, he is back, warning of a bond market bubble. He is warning of an abrupt pop in the bond market, and a return to 1970s stagflation. Color me somewhat skeptical of the abrupt pop in the bond market argument. Below is a chart of interest rates going back to World War 1. As you can see, interest rate cycles are long. Aside from the disastrous Fed hike after the crash of 1929, rates stayed below 4% from 1924 to 1959.

FWIW, the 1970s stagflation was largely due to the oil shocks combined with the guns and butter policies of the Johnson administration coming home to roost. The 1970s came after decades of economic strength, while today we are coming out of a decade of economic weakness. Housing starts averaged 1.75 million units per year for the entire 1970s. Since 2010, we have averaged about half that. During the 1970s, capacity utilization was running close to 83%. Since 2010, it has been 76%. Wage growth is stuck stubbornly at 2.5% growth, and there is still slack in the labor market. I just don't see the conditions in place for a return to 1970s stagflation.

Financial regulators are working on a rewrite of the Volcker rule, which prohibits FDIC insured banks from proprietary trading. No one is sure what is actually being proposed - it may turn out that the re-write will merely provide some bright lines to separate prop trading from market-making. Between a drop in commissions and cloudy guidance over prop trading, market making has dried up, and liquidity is suffering in many markets as a result. Any changes will have to pass muster with a panoply of regulatory agencies, so this is going to take some time.

Morning Report: FOMC minutes today

Vital Statistics:

	Last	Change
S&P Futures	2421.5	1.5
Eurostoxx Index	379.4	-1.3
Oil (WTI)	46.3	1.4
US dollar index	87.7	0.1
10 Year Govt Bond Yield	2.30%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4

Stocks are up small after the long weekend. Bonds and MBS are down.

At 2:00 pm we will get the minutes from the June FOMC meeting. There is the always the possibility of market movement from these things, so just be aware. Here are the things the markets will be looking for. 

Construction spending was flat MOM in May and up 4.5% YOY. Private residential construction was up 11% YOY. 

Manufacturing continues to accelerate, according the ISM PMI report, which hit a 3 year high. The index level would historically correspond with a 4.6% increase in GDP. The average for the first half of the year would correspond to a 4.1% increase in GDP. Of course manufacturing doesn't have the share of GDP it used to, but it is a good indication that things are getting better. 

Bond yields have been backing up, largely on overseas events. Bonds in Europe are selling off and dragging US yields higher on the relative value trade. The current projections for the upcoming FOMC meetings have become slightly more in favor of rate hikes, but we are still looking at no change at the July meeting, and only a 18% chance of a hike in September. The markets are also looking to the September meeting for more clarity regarding balance sheet reduction. 

Home Price appreciation continues to accelerate, as the CoreLogic home price index rose 1.2% MOM and is up 6.6% YOY. Rental inflation rose 3.1%, so the increase in home prices is a bit of a double-edged sword. Those who already own homes are getting the benefit of home price appreciation while the first time homebuyer is squeezed. 

Upcoming changes that will affect mortgage credit. Tax liens and civil judgements will be expunged from credit reports, which could amount to a 20 point increase in FICOs for some people. Second, Fannie Mae is increasing the DTI ratio from 45 to 50 in order to take into account high levels of student loan debt. 

HUD is recommending that Fannie Mae tweak upward its affordable housing goals for 2018-2020. Most goals are unchanged, but a couple were pushed up slightly. 

Morning Report: Jobs report misses, and rates fall

Vital Statistics:

	Last	Change
S&P Futures	2434.3	4.8
Eurostoxx Index	394.3	2.6
Oil (WTI)	47.4	-1.0
US dollar index	88.5
10 Year Govt Bond Yield	2.16%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.25
30 Year Fixed Rate Mortgage	3.94

Stocks are up this morning despite a miss on the jobs report. Bonds and MBS are up.

Jobs report data dump:

• Nonfarm payrolls up 138k
• Unemployment rate 4.3%
• Employment to population ratio 60%
• Labor force participation rate 62.7%
• Average hourly earnings up 2.5% YOY
• Average workweek 34.4 hours

The payroll number was a big miss from the 185k expectation, and differs wildly from the ADP payroll number yesterday of 253k. Yet another instance where the ADP number and the official BLS number aren't even close to each other. Yes, the ADP number is meant to track the final revised BLS number, so it is possible that the BLS payroll number gets revised upward in the next two months. The labor force participation rate fell to 62.7% from 62.9% which was a disappointment as well. The unemployment rate fell to 4.3%, which is a 16 year low. The labor force shrunk by 430k people, while the number of people employed fell by 233k. The overall population increased by 180k. The two numbers the Fed pays the most attention to (employment / population ratio and hourly earnings) are certainly not pointing to any sort of inflation acceleration. 

Despite the payroll number, the Fed Funds futures increased their probability of a June hike to 93%. The 10 year continues to rally, and we are at the lowest yields since early November. The Trump reflation trade continues to deflate, at least as far as bonds are concerned. 

Construction spending continued its zigzag pattern, falling 1.4% MOM but increasing 6.7% YOY. Residential construction fell on a MOM basis but is up 16% YOY. Public residential construction fell. 

The ISM Manufacturing Index ticked up last month, led by increases in new orders, production, and employment. The prices index fell by a lot, however which again shows the lack of inflationary pressures in the supply chain. The current levels so far in the PMI index correlates with a historical GDP growth rate of around 4%. While manufacturing isn't the driver of the economy it used to be, it still matters. 

Announced job cuts at Ford pushed up the Challenger job cuts number, but otherwise job cuts are largely small. 

Donald Trump announced he will pull the US out of the Paris Accord yesterday. This will take years, so in the meantime expect no effects on oil prices or the economy. 

Investment bank Moelis, along with Blackstone and Paulson fund management have reportedly put out a detailed blueprint to bring the GSEs out from under government control. Treasury Secretary Mnuchin as well as the MBA are cool to the idea, because existing stockholders will benefit, when in reality they would have been wiped out back when the GSEs went under conservatorship. 

Home sizes are shrinking for the first time since 2009. This is mainly due to a change in the hombuilder mix. Post-crisis, the only segment of the homebuilding market that was working was the luxury end. Now, starter homes are becoming the focus, which is dragging average sizes lower. Home sizes are still larger than the bubble peaks were. 

Small business lending fell in April. 

Morning Report: Why aren't we seeing wage growth?

Vital Statistics:

	Last	Change
S&P Futures	2382.3	0.8
Eurostoxx Index	391.4	-0.1
Oil (WTI)	51.0	0.6
US dollar index	88.6	-0.1
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	103.27
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.94

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

Economic activity picked up in April, according to the Chicago Fed National Activity Index. It rose to .49 (better than expectations) and the 3 month moving average rose to .23. Production and employment led the rise, while personal consumption and housing were negative. 

We have some Fed-speak at 10:00 EST today along with a bunch after the close. The biggest events this week should be the FOMC minutes on Wednesday and the second revision to Q1 GDP on Friday. We will also get a lot of housing data this week. 

One of the biggest issues for the Fed is wage inflation (or the lack thereof). The last time unemployment was this low, we were experiencing 4% wage growth. Why aren't we now? Here are a few explanations. They revolve around a few different theories. The first is that there has been a structural change in labor economics, and that the tradeoff between unemployment and inflation is over due to globalization, lack of union representation, etc. The second explanation is that wage negotiation dynamics have been colored by the economy since 2008: employers are training people internally instead of hiring outside at a higher price, employees don't feel comfortable asking for more, productivity is lousy, and the huge reservoir of the long-term unemployed means the market is not as tight as it may appear. The final one is a measurement problem: that the BLS numbers aren't accurately reflecting the reality of the marketplace. Take construction: Builders constantly complain that they can't find skilled labor, that they are offering signing bonuses, etc yet when you look at the actual BLS numbers, construction wages are only growing 2.1%. We are seeing in the mortgage business with ops folks as well. So maybe we are starting to see pockets of wage growth, however it isn't showing up quite yet in the rest of the economy or the numbers. 

The drop in construction spending hasn't only been in housing - it has also been in schools. State and local governments are spending about 1/3 less on school construction than they did before the crisis, yet enrollment is up 4%. This is just another problem for the first time homebuyer - finding affordable homes with good schools. 

NAR is predicting 5.6 million home sales in 2017, up 200k from last year, and new home sales of 620k, up from 560k last year. GDP will grow at 2.2% and inflation will remain tame. Sales would be higher if there was more inventory, and the group hopes that regulatory changes, especially with Dodd-Frank will ease up credit for smaller banks, who fund local homebuilders. 

Now that the REO-to-rental trade is largely played out, Wall Street is now building houses for rentals. Some are planned communities, where renters get the benefit of living in a single family detached homes, plus they get some of the advantages of apartment living, with gyms and common spaces. They also don't have to deal with maintenance.  Interestingly, many people intend to rent for only a short time period, but end up staying. For one landlord, 1/3 of the tenants have been on month-to-month arrangements for 7 years. The REITs behind this trade also get discounts from builders, lower maintenance costs, and about a 5% - 8% pickup in rental income for a new house. 

Morning Report: Risk on feeling after speech

Vital Statistics:

	Last	Change
S&P Futures	2379.5	16.8
Eurostoxx Index	374.6	4.4
Oil (WTI)	54.1	0.1
US dollar index	91.7
10 Year Govt Bond Yield	2.46%
Current Coupon Fannie Mae TBA	101.91
Current Coupon Ginnie Mae TBA	103.41
30 Year Fixed Rate Mortgage	4.09

We have green on the screen this morning as markets liked Donald Trump's speech to Congress last night. Bonds and MBS are down.

Donald Trump addressed Congress last night (it wasn't a full-on State of the Union address), and laid out broad brush strokes about his priorities going forward, including tax reform and healthcare. Generally speaking, the speech was well-received, although those looking for policy depth were disappointed. Here is a transcript. Regardless, equity markets liked what they heard and we are off to the races this morning. 

On the bond side of things, yields continue to increase, particularly on shorter-term paper as markets handicap a March hike. The 2 year bond now yields 1.31%, which is a post-crisis record. 

Mortgage Applications rose 5.8% last week as purchases rose 7% and refis rose 5%. Refis accounted for just over 45% of all applications last week, the lowest since 2008. 

Personal incomes rose 0.4% in January, a little better than expected, while personal spending rose 0.2%, which was a little lower than expected. The Personal Consumption Expenditure index, which the Fed prefers to use, rose 1.9% YOY. The core PCE index which excludes food and energy rose 1.7% YOY. Note that the PCE index is generally about 30 basis points behind the Consumer Price Index, simply because of the difference in weightings. Note that the second revision of GDP from yesterday had PCE inflation at 2.2% at the end of December, so we are seeing a deceleration in January.

Manufacturing improved in February, according to the ISM Manufacturing Survey. New Orders rose, while employment fell. The reading for February of 57.7 would typically correspond to a GDP growth rate of 4.5%. While manufacturing isn't the driver of the economy that it used to be, this is still good news for growth going forward, especially after a pretty weak 2016. 

Construction spending fell 1% in January and is up 3.1% on a YOY basis. Residential construction rose 0.3% and is up 5.5% YOY. Donald Trump plans to add $1 trillion in construction spending, although he does not say over what period. As we learned from the Obama stimulus of 2009, infrastructure spending has a long lead time. That said, take a look at the chart below, which is of public construction spending. We have averaged about $300 billion a year in public construction spending over the past 10 years or so, which means an additional trillion over something like 4 years amounts to almost doubling public construction spending. This would mean public construction spending as a percent of GDP would be at a 50 year high. 

Delinquency rates continue to fall according to Freddie Mac. The seriously delinquent rate fell below 1% in January, which is down from 1.33% a year ago. The rate peaked in 2010 at 4.2%. Pre-bubble, seriously delinquent rates were in the 60-80 basis point range. 

Morning Report: Blowout ADP number

Vital Statistics:

	Last	Change
S&P Futures	2281.5	7.0
Eurostoxx Index	364.3	4.0
Oil (WTI)	53.3	0.5
US dollar index	90.7	0.2
10 Year Govt Bond Yield	2.49%
Current Coupon Fannie Mae TBA	102.1
Current Coupon Ginnie Mae TBA	103.2
30 Year Fixed Rate Mortgage	4.16

Stocks are higher this morning after a good ADP number. Bonds and MBS are down.

The private sector added 246,000 jobs in January, according to the ADP Employment Survey. This is the highest number since June 2016. We saw strong growth in construction jobs and manufacturing, while finance was flat and IT fell. The Street is looking for a 175k nonfarm payrolls in Friday's report. The ADP number hasn't been a great predictor of the BLS number for a while, so don't read too much into it. While strong, this number will probably not change anything with respect to this afternoon's Fed decision, which comes out at 2:00 pm EST. 

Mortgage Applications fell 3.2% last week as purchases fell 6% and refis fell 1%, according to the MBA. The average rate for a 30 year fixed rate mortgage rose 4 basis points. Refis fell below 50% for the first time since 2015. 

More evidence that the manufacturing sector is turning around: The ISM Manufacturing index hit a 2 year high in December. Input costs rose to a 5.5 year high, which is spooking the bond market a little this morning. 

Construction spending fell 0.2% in December, missing expectations. It is up 4.2% YOY. Residential construction rose 0.4% and is up 3,6% YOY. 

Donald Trump nominated Colorado federal appeals court judge Neil Gorsuch to the Supreme Court yesterday to replace Anonin Scalia who died last year. Democrats are vowing to filibuster in retaliation for the treatment of Obama's nominee Merrick Garland. 

Distressed sales fell in October, according to CoreLogic and are now at the lowest levels since 2007. Cash sales came in at 32%, which is still elevated compared to pre-crisis levels. Normalcy is around 25% or so. 

The REO-to-Rental trade worked out for Blackstone, culminating in the IPO of Invitation Homes, which raised $1.54 billion in an IPO yesterday. The deal was priced at $20 a share, within the $18-$21 range. The stock begins trading today under the symbol INVH.

Should homebuyers wait until spring to purchase a home? It turns out the best months to purchase are January and February. Less competition means bigger discounts to the asking price. 

Morning Report: Treasury Secretary nominee Steve Mnuchin discusses regulation and the GSEs

Vital Statistics:

	Last	Change
S&P Futures	2201.2	3.0
Eurostoxx Index	341.0	-1.0
Oil (WTI)	50.6	1.2
US dollar index	91.7	-0.3
10 Year Govt Bond Yield	2.41%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.14

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

OPEC agreed to production cuts yesterday, which has sent the price of WTI over $50 a barrel. 

Further evidence of strength in the labor market: announced job cuts fell to 27,000 last month, which is the lowest in a year. This is a 13% drop YOY. The retail sector had the biggest number of job cuts, largely due to the bankruptcy of American Apparel. Job cuts in the financial sector continue, however cuts in the energy sector are tapering off. 

Initial Jobless Claims ticked up to 268k from 253k last week. 

Manufacturing improved in November, as the ISM Manufacturing PMI increased from 52.3 to 53.2. Separately, the Markit PMI Manufacturing index ticked up to 54.1 from 53.9. 

Construction Spending rose 0.5% last month and is up 3.2% YOY. Residential Construction was up 1.8% and is up 4.6% YOY. 

Treasury Secretary nominee Steve Mnuchin said that Fannie Mae and Freddie Mac should exit government control, which puts him at odds with several Republicans like Jeb Hensarling who want to see the GSEs wound down. “We will make sure that when they are restructured, they are absolutely safe and don’t get taken over again. But we’ve got to get them out of government control,” Mnuchin said on an interview with Fox News. What "exit government control" actually means is an open question, however he believes that Fannie Mae is crowding out private lending. Getting private lending back into the mortgage market has been a priority since the financial crisis since 96% of all new origination still goes Fannie, Freddie, or Ginnie. I would also wager that the biggest ultimate lender to the mortgage market is the Fed, via their QE holdings of MBS. So the US mortgage market is for all intents and purposes nationalized at this point. Fannie Mae stock was up 46% on the statements. One big issue for privatizing Fannie and Fred: At the moment, all of their profits go to the government. By 2018, they will probably have no equity left, which isn't good news for common stockholders. 

Donald Trump also tapped a Quicken executive to the HUD transition team. He also named Jimmy Kemp, son of former HUD Secretary Jack Kemp, to the team as well. In many ways, these nominations signal a detente between the government and the financial sector, which should help tremendously with the goal of bringing private capital back into the mortgage market. 

Separately, Mnuchin and Commerce Secretary Wilbur Ross were interviewed on CNBC, where they laid out more of their regulatory philosophy. Mnuchin said that Dodd-Frank was too complicated and the goal of financial regulation is to get banks to lend again. He cited regulatory uncertainty as a major impediment to lending. Wilbur Ross quipped that small banks have more compliance people than lending officers. Both said that lending is the engine of growth for the economy. 

Morning Report: Construction spending falls

Vital Statistics:

	Last	Change
S&P Futures	2102.0	-2.0
Eurostoxx Index	333.6	-2.0
Oil (WTI)	46.0	-0.6
US dollar index	88.6	0.0
10 Year Govt Bond Yield	1.82%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.62

Stocks are mixed ahead of the FOMC decision today. Bonds and MBS are up.

At 2:00 pm we will get the FOMC rate decision. Given the sensitivity around the election, I would imagine the Fed wants to be as far in the background as possible. I would be looking for a statement that is pretty much identical to the Sep statement. 

Mortgage Applications fell 1.2% last week as purchases fell 0.4% and refis fell 2%. The 30 year fixed rate mortgage increased 4 basis points. 

The ADP jobs report is forecasting a lousy jobs report on Friday. Payrolls increased 147k versus the 170k expectation. The Street is looking for 178k jobs to be reported on Friday. 

The Atlanta Fed has lowered its forecast for Q4 GDP to 2.3%. They were previously looking for 2.7%. They are looking for softer consumer spending and business investment. 

Construction spending fell 0.4% MOM and 0.2% YOY in September. Total construction spending was $1.15 trillion. Private construction fell 0.2% while public construction fell 0.9%. Residential construction was the bright spot however, as it increased 0.4%. Construction spending as a percent of GDP is still rather depressed compared to historical numbers. Yet another example of how housing continues to punch below its weight. 

One thing that has been a partisan bone of contention has been public construction. The Obama administration has been pounding the table that we need to spend money on public construction in order to "rebuild our crumbling infrastructure" and put people to work in order to stimulate the economy. Let's set aside the argument over whether there is a multiplier effect for government stimulus plans (there isn't). Have we been spending on public construction (infrastructure)? Ultimately, it looks like there is merit to the argument that we have let things slide. Aside from the early Obama administration stimulus bump, it is sliding to new lows as a percentage of GDP. Note that both Hillary and Trump are in favor of a big push for public works spending. Note however that private construction is over 3x the amount of public construction. So if you want the economy to really grow, the juice is in private construction, not public construction. Unfortunately, the lack of private construction is simply not on the radar in Washington. Politicians and regulators should be asking themselves whether they are an impediment to private construction spending. The answer to that question will undoubtedly fall along partisan lines. 

Banks are no longer the biggest mortgage lenders in the US. Nonbanks like PennyMac and Quicken are making the loans that banks no longer want to make. We have seen the banks back away from FHA loans after being slugged too many times by the regulators. “It’s becoming the perfect storm—when you punish banks, [they] don’t lend out money,” said Paul Miller, an analyst at FBR Capital Markets. “Banks are becoming utilities that are unable or unwilling to play with risk.” Of course that is exactly the vision of the Elizabeth Warrens of the world: to turn banks into public utilities that earn a nominal rate of return and are effectively controlled by the government. The biggest worry is that if times get tough, nonbanks have less access to capital than banks which could severely restrict credit. 

Morning Report: Construction spending falls

Vital Statistics:

	Last	Change
S&P Futures	2155.5	-5.0
Eurostoxx Index	343.2	0.2
Oil (WTI)	48.6	0.4
US dollar index	86.6	0.4
10 Year Govt Bond Yield	1.60%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.46

Markets are down this morning on no real news. Bonds and MBS are down as well. 

The big event this week will be the jobs report on Friday. We will also have a lot of Fed-speak as well. 

The PMI Manufacturing Index slipped in September, while the ISM manufacturing index rose. 

Construction spending fell 0.7% in August.  It is also down 0.3% on a year-over-year basis. Residential construction spending fell 0.2% and is up 1.3% for the year. Public construction was down 2.2% and is down 8.8% on a year-over-year basis. Note both Hillary Clinton and Donald Trump support a big infrastructure spending program. 

Delinquencies are down in August according to the Black Knight Mortgage Monitor. The pre-sale foreclosure inventory is now down around 1%, although the inventory is still concentrated in the Northeast, Florida, and Chicago areas. Cash-out refinances increased to 42% of all refis. 

After Friday's weak consumer spending data, the Atlanta Fed took down their estimate of Q3 GDP to 2.4% from 2.8%. 

Portfolio Managers are forecasting the bond bull market will continue into the 4th quarter as global growth is simply too weak to push up inflation. Of course they are talking their books, but they are probably correct. Separately, Henderson of the UK bought Janus Capital this morning. 

Over the weekend, the New York Times got ahold of Donald Trump's taxes from 1995, where he showed a $916 million loss, which he has used to write off taxes owed going forward. Of course, using business losses to offset business income is as legal as eating a hot dog at the ballpark, so there probably isn't a lot of political "there" there. Separately, Julian Assange claims he has emails which will finish Hillary Clinton, though WikiLeaks is delaying the release.

China continues to grapple with its housing bubble in hopes of engineering a soft landing. Watch the video at the end of the story, where investors storm an entrance in order to buy property. 

Morning Report: The refinanceable population grows

Vital Statistics:

	Last	Change
S&P Futures	2160.8	-4.0
Eurostoxx Index	337.1	-3.0
Oil (WTI)	40.5	0.5
US dollar index	86.3	-0.5
10 Year Govt Bond Yield	1.56%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.51

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

Construction spending fell 0.6% last month as both private and public spending fell. Homebuilding was down 0.1% MOM and is up 2.4% YOY. The prior 3 months were revised downward as well. This at least partially explains why the Q2 GDP print was so low. 

Personal Incomes rose 0.2% in June while personal spending rose 0.4%. Just more evidence that the consumer is holding this economy together. The core PCE rate (the inflation measure preferred by the Fed) rose 1.6% YOY. 

The Fed Funds futures have been slowly taking down the probability of a September rate hike - it is now below 20%. Between the weak GDP numbers, the weakness in manufacturing, etc it is hard to make a case that the Fed needs to move in September. 

Governments worldwide are looking at policies intended to inflict capital punishment on investor portfolios. Whether the result is protectionism, Keynsian spending, or expropriation, look to own real assets (like real estate) versus financial assets. In terms of relative value, real assets are at their lowest ever. The world's central banks are on a mission to create inflation, and eventually they will succeed. Note that policies that attack corporate profitability are also inflationary - in fact that is the end the line for socialist economies like Venezuela: everyone has money in their pockets, but there is nothing to buy. 

Brexit has created a massive opportunity for lenders. According to Black Knight Financial Services, the refinanceable population is the highest since 2012. Below are charts of the number of candidates that are refinanceable, and the other is a histogram of mortgage rates.