Morning Report: Inflation is back at the Fed's target

Vital Statistics:

	Last	Change
S&P Futures	2267.0	5.0
Eurostoxx Index	362.1	-0.3
Oil (WTI)	61.7	-0.8
US dollar index	94.5	0.5
10 Year Govt Bond Yield	2.38%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.08

Stocks are higher this morning as bank earnings roll in. Bonds and MBS are down ahead of the European Central Bank's first meeting, which is tomorrow. 

Mortgage applications rose 0.8% last week as purchases fell 5% and refis increased 7%. The change in MIP spurred refinance applications and the FHA's share of applications jumped. 

Homebuilder sentiment slipped in December, however it is still elevated. A tight housing market is buoying the sector, while labor shortages and regulations continue to be headwinds. 

The consumer price index increased 0.3% last month and is up 2.1% YOY. Ex-food and energy it was up 0.2% MOM and is up 2.2% YOY. While the CPI is not the preferred inflation index for the Fed (the Personal Consumption Expenditure Index is) it does show that inflation is back at the Fed's target range. Gasoline and shelter drove the increase. 

Note that rental inflation is beginning to moderate, especially at the top end. The overall rental index increased 3.4% this year, which was a deceleration from the 4% growth we saw the year before. That said, the lower price points are still exhibiting strong growth. There is still a wide geographic variation - from still torrid growth in the Northwest to negative in the South. Yet another data point to sell the first time homebuyer - on a 30 year fixed rate mortgage, your P&I payment isn't going to increase.

It looks like home price appreciation is moderating in Southern California, after a long run. 

Industrial Production increased 0.8% last month while manufacturing production increased 0.2%. Capacity Utilization ticked up to 75.5%.

We have a lot of Fed-speak today, and the World Economic Forum continues in Davos. There probably shouldn't be any market moving news, but be aware. Janet Yellen speaks at 3:00 pm EST. Lael Brainard said today that if Trump's fiscal policy ends up goosing the economy too much in the short term and doesn't do enough to help foster long-term growth, the Fed will probably react by raising interest rates sooner, and more. 

Trump Commerce Secretary pick Wilbur Ross heads to Capitol Hill for his confirmation hearing. 

World leaders at the Davos Forum are scratching their heads wondering what happened with the Brexit vote and Donald Trump. The consensus is unsurprisingly that income inequality is the problem and the answer is more wealth redistribution. The problem is that there is no appetite for tax increases when people's incomes are already squeezed. Meanwhile, here are the biggest risks for 2017, according to a survey of economists meeting there. 

Has technology changed the seasonality aspect to the real estate industry? At least in New York City, it may have. Note the Spring Selling Season more or less unofficially starts right around Super Bowl Sunday. 

JP Morgan is accused of racial bias in lending, however in this case it is at the wholesale level and their crime is allowing brokers to change their compensation, which allegedly ended up in minority borrowers paying higher rates and fees. Separately, Deutsche Bank settled for $7.2 billion for various and sundry mortgage violations. 

Here is a good list of common-sense items to tell your borrower about getting a mortgage. No, don't quit your job or buy a new car. Also, think twice about contesting the appraisal. 

Morning Report: Davos looks at populism

Vital Statistics:

	Last	Change
S&P Futures	2265.0	-7.0
Eurostoxx Index	363.1	0.1
Oil (WTI)	53.2	0.8
US dollar index	91.1	-1.0
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.08

Stocks are lower this morning on Theresa May comments about Brexit. Bonds and MBS are up.

The World Economic Forum in Davos is going on this week. There may be a slight chance of market-moving data, but it is unlikely. The big subject is undoubtedly the wave of populism and anti-corporate / anti-government / anti-globalization sentiment going on throughout the world. 

Corporate America seems to have read the tea leaves as well. GM just put out a headline saying they will invest $1 billion in US manufacturing operations and create 7,000 jobs. Walmart is getting into the action too. Even foreign companies are getting into the act. Of course some companies may be publicizing old plans to get the benefit of some good PR, the fact remains that big job cutting announcements are going to be out of style for a while. Don't forget, the job market IS getting tighter, and (hopefully) the mindset of Corporate America is shifting from cost control to revenue growth. 

Manufacturing in New York State slipped slightly last month according to the Empire State Manufacturing Survey. Growth is modest, however employment is still depressed. 

James Bullard believes that the Fed can begin to think about shrinking its balance sheet since rates are higher now than where they were. This would probably happen by not re-investing maturing assets. At the margin, this will translate into higher mortgage rates since TBAs will lose a natural buyer. 

Strategist Komal-Sri Kumar is skeptical of the Fed's forecast for interest rate hikes. His point is that the Fed cannot really raise rates in a vacuum, when all of the other central banks are going in the opposite direction. His call is for one hike this year. I am skeptical of a big fiscal stimulus out of Washington this year because Democrats will be united in opposition, and Republicans aren't going to stick their necks out politically for a President they never wanted and don't trust. The minutes from the Fed said explicitly that the forecast is based on expected fiscal stimulus. Note that many Fed officials are beginning to sour on the idea of additional fiscal stimulus. 

In addition, if Trump manages to impose some additional tariffs (which IMO is a political non-starter) that will weaken the economy, and probably put the Fed on hold. Separately, Donald Trump just turned decades of US policy towards the dollar on its head, saying that the US currency is too strong. At the end of the day, presidents don't really have all that much control over the economy. 

Despite all the uncertainty about the government and the Fed, economic optimism remains just off a nine-year high. 

The baby boomers drove housing construction through the 1970s and 1980s, yet their offspring (an even bigger generation) are not buying homes the way their parents did. What gives? Millennials earn 20% less (inflation adjusted) than their parents did at the same age. Not only that, but the consumer price inflation index deemphasizes /ignores things like college education which has going up multiples of the CPI. When you look at wealth, the numbers are even worse. That said, in 1989, mortgage rates were 10% and the principal and interest payment for a loan on the median house was 27% of median income versus around 21% today.