Morning Report: Existing home sales fall again

Vital Statistics:

			Last	Change
S&P futures			2856	-5.75
Eurostoxx index			383.91	-0.25
Oil (WTI)			67.32	0.89
10 Year Government Bond Yield				2.82%
30 Year fixed rate mortgage				4.58%

Stocks are modestly lower this morning after Paul Manafort was found guilty and Michael Cohen copped a plea. Bonds and MBS are flat.

Paul Manafort was found guilty of fraud and tax charges and there was a mistrial on the other charges. Nothing was found on the Russian front. Ex Trump lawyer Michael Cohen pled guilty to FEC violations, which relates to the Stormy Daniels case. Whether this ends up getting legs remains to be seen. FWIW, the markets are saying it is no big deal. 

We will get the FOMC minutes today at 2:00 pm. Given the lack of liquidity in the markets, we could see some market movement in what should otherwise be a non-event. 

Mortgage applications rose for the first time in 6 weeks as purchases rose 3% and refis rose 6%. Overall they rose 4.2%. Mortgage rates were unchanged, so that is a surprising jump in refi activity. Given that the index is sitting at lows not seen since the turn of the century, it doesn't take much of a bump in activity to move the index. 

Existing home sales fell again for the fourth month in a row. They fell 0.7% on a MOM basis and are down 1.5% on a YOY basis. This is the fifth straight month of YOY declines. It looks like much of the decline was attributable to weakness in the Northeast. The median house price rose 4.5% to 269,600.  Current estimates of median income are around 61,500, so that puts the median house to median income ratio around 4.4x. While other measures of housing affordability remain decent, this one is flashing red for valuations overall. The MP / MI ratio ignores interest rates, which are the biggest determinant of affordability, but over time house prices correlate with incomes, and it wouldn't be a surprise to see home prices begin to take a breather. 

Fed Chairman Jerome Powell assured Senator Tim Scott that the Fed remains independent despite the jawboning from Trump. Powell said in a radio interview: “We do our work in a strictly nonpolitical way, based on detailed analysis, which we put on the record transparently, and we don’t ... take political considerations into account,” Powell told the radio show. “I would add though that no one in the administration has said anything to me that really gives me concern on this front.” Separately, Dallas Fed Chairman Robert Kaplan said that the Fed only needs to hike 3 or 4 more times to get to neutral. 

Morning Report: Donald Trump, the Fed and housing affordability

Vital Statistics:

			Last	Change
S&P futures			2801	-3.75
Eurostoxx index			385.19	-1
Oil (WTI)			69.83	0.37
10 Year Government Bond Yield				2.85%
30 Year fixed rate mortgage				4.50%

Stocks are lower after the Trump Administration threatened more tariffs on Chinese goods. Bonds and MBS are down. 

Donald Trump jawboned the Fed a little yesterday, saying he was "not thrilled" with interest rate hikes.  “I am not happy about it. But at the same time I’m letting them (the Fed) do what they feel is best.” For all the histrionics in the business press, this was pretty mild stuff. As a general rule, presidents respect the independence of the Federal Reserve and don't criticize policy all that much. Obama never criticized the Fed's monetary policy but of course he never had to deal with a tightening, so there wasn't much to complain about. Alan Greenspan was considered "The Maestro" by the business press, so both Clinton and GWB gave him a wide berth. That said, Richard Nixon criticized the Fed, and Jimmy Carter installed a political hack (G William Miller - who was a complete disaster) to run the bank, so it isn't like political meddling is unheard of. FWIW, the correlation between rising bond yields and criticism of the Fed is about 1, so expect more as we move from a secular bull market in bonds to a secular bear market. 

Trump has doubled down by tweeting about the Fed and the dollar this morning: "China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field....The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really? Farmers have been on a downward trend for 15 years. The price of soybeans has fallen 50% since 5 years before the Election. A big reason is bad (terrible) Trade Deals with other countries. They put on massive Tariffs and Barriers. Canada charges 275% on Dairy. Farmers will WIN!"

These comments are smacking the dollar this morning, which is pushing up the 10 year yield. The comments have made no changed to the Fed funds futures, which are still predicting an 85% of a 25 basis point hike in September and a 58% chance of another hike in December. 

Note Russia is dumping Treasuries. Most of its position has been liquidated. This was in response to sanctions imposed earlier this year. 

Housing affordability has been falling as rates and prices rise. The most affordable places in the US are the Northeast and the Midwest. The Midwest is the most affordable despite having the highest regional mortgage rates. There is a surprising amount of variation between mortgage rates in different parts of the country - a range of 25 basis points. The Northeast has high prices (but low rates) and the Midwest has low prices (but high rates). Affordability is back to 2009 levels. 

At least one commentator thinks housing has peaked for this cycle. As a general rule, housing construction is an early cycle phenomenon - in other words it generally leads the economy out of a recession. Since this expansion is very long in the tooth, it would follow that housing might have peaked. The problem with that theory is that housing didn't show up in the early recovery - it kept falling well after the recession ended. FWIW, between the shortage we currently have and the fact that building margins are still healthy indicates housing has room to run. 

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."

Morning Report: Trade tensions push down interest rates

Vital Statistics:

	Last	Change
S&P Futures	2681.3	-9.0
Eurostoxx Index	369.2	2.2
Oil (WTI)	61.4	0.1
US dollar index	83.8	0.1
10 Year Govt Bond Yield	2.84%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.4

Stocks are lower this morning the trade cold war between the US and the world escalated. Bonds and MBS are up.

Those hoping that Donald Trump would re-think his position on trade over the weekend were disappointed. He is now threatening EU automakers and demanding a re-negotiation of NAFTA to ease steel and aluminum restrictions with Mexico and Canada. Exiting and / or renegotiating NAFTA will probably not be as easy as he thinks it will be. The US has always had the leadership position globally in encouraging free trade. There is no doubt it that has accepted some protectionism from other countries as a cost of doing business, and in the spirit of moving the ball on free trade in general. In other words, the US has accepted a disadvantaged position, and these "free trade" agreements were in reality a negotiation over how many points the US would spot other countries.

Rates this week will be primarily determined by the fluid state of trade announcements. We will get  some important market-moving data this week with the jobs report on Friday, and productivity on Wednesday. There will also be Fed-Speak all week. 

Big picture, trade tensions are causing a flight to quality, which is pushing down interest rates. This is probably going to be only a temporary phenomenon so I would encourage LOs to push their customers to lock. Despite rising rates, we are not seeing an influx of foreign money into Treasuries, and we are seeing European investors and Japanese investors investing in Bunds and JGBs despite the lower yields. Why would investors accept 62 basis points in Germany or 5 basis points in Japan when they could get 2.8% in the US? Currency hedging costs wipe out the differential. 

Trade battles are generally bad for everyone involved, except for domestic producers in the industries being protected. Note that Secretary of Commerce Wilbur Ross is an ex-steel guy himself and is not an idealistic free-trader. I suspect that is where Trump is getting his advice, although the media claims it was a petulant decision out of the blue as a result of negative headlines. 

Tariffs on steel and aluminum will be bad for the construction industry, especially multi-fam. Don't forget, the housing business is already dealing with a 20% tariff on Canadian soft lumber. Building Material prices are already at record highs. 

The services economy continues to expand, with the ISM Non-Manufacturing index hitting 59.5 in February. This was lower than the exceptionally strong January reading of 59.9. The internals of the report were good, with the New Orders and Employment indices coming in over 60. Some of the comments from business below:

• "Lumber-related costs continue to increase as supply is also starting to become a problem. The market volatility of construction materials and the short supply of construction labor have added difficulty to long-term planning." (Construction)
• "Slight increase in activity; beginning to see some higher cost for goods and services." (Finance & Insurance)

Strong growth and inflation is the takeaway.

Amazon is in talks with JP Morgan to start providing checking account services. Amazon mortgages can't be far behind. Has Bezos ever looked at banking P/E ratios? They aren't triple digit. 

Morning Report: Tariff Threats cause bond market to rally

Vital Statistics:

	Last	Change
S&P Futures	2658.0	-20.0
Eurostoxx Index	368.8	-6.1
Oil (WTI)	60.8	-0.2
US dollar index	83.8	-0.2
10 Year Govt Bond Yield	2.84%
Current Coupon Fannie Mae TBA	102.313
Current Coupon Ginnie Mae TBA	102.531
30 Year Fixed Rate Mortgage	4.4

Stocks are lower this morning on news of a possible trade war. Bonds and MBS are flattish.

Donald Trump has announced plans to impose 25% tariffs on steel imports and 10% tariffs on aluminum imports. The dollar has weakened in response, and we have seen bond yields fall as well. He characterized trade wars as "good" and "easy to win." As a general rule, nobody wins trade wars - they depress economic growth - but the silver lining is that you are seeing a bit of a flight to quality, which means Treasuries have a bid for once. This is pushing rates down. Don't know how long it will last (he may be bluffing, or someone will probably talk him out of it), but take advantage of it. I could see him re-thinking and abandoning this idea over the weekend, and we could be looking at a 2.9% 10 year on Monday. 

Consumer sentiment was flat in February, according to the University of Michigan Consumer Sentiment Survey. 

Jerome Powell's testimony in front of the Senate wasn't all that dramatic. The main subjects were wage growth (or the lack of it), fair lending, and regulation. Elizabeth Warren spent her time harping on Wells Fargo. These events are mainly for political posturing and not much else. One Senator asked him about climate change, which Powell took in stride. I was hoping he would ask the Senator to lay out the connection between the Fed Funds rate and atmospheric CO2, but alas he played it straight. 

On the subject of the labor market and wage growth, he said that nobody really knows what full employment actually is. The unemployment rate suggests that we are, while wage growth and the labor force participation rate suggest we are not. His view is that if you take all of the data, we are probably at or very close to full employment. He did say that the Fed has been modeling something like a 25 basis point annual decline in the labor force participation rate due to demographics - i.e. the retiring Baby Boomers, and that it has now caught up with that demographic model. 

Acting Director of the CFPB Mick Mulvaney said yesterday that the Bureau will rely more on state AGs when deciding on enforcement actions. He reiterated the plan to spend resources on cases that are on "solid legal ground" and less on "creative claims." Regulation by enforcement is also on the way out, and the CFPB intends to be much more forthcoming in telling the industry what the rules of the road are. 

Elmer Fudd says we are in a bond market bubble. 

Morning Report: First estimate of Q4 GDP disappoints

Vital Statistics:

	Last	Change
S&P Futures	2850.8	9.5
Eurostoxx Index	400.8	2.2
Oil (WTI)	66.5	0.0
US dollar index	83.1	-0.3
10 Year Govt Bond Yield	2.63%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.17

Stocks are higher this morning as Trump speaks in Davos. Bonds and MBS are up small. 

The first estimate for 4th quarter GDP came in at 2.6%, a touch below the 2.9% Street estimate. THis was a drop from the 3.2% growth rate in the third quarter. A larger-than-expected trade deficit, along with some inventory adjustments accounted for the miss. It will be revised twice more in the next month or so. The GDP price deflator (a measure of inflation) was 2.4% and consumer spending was a robust 3.8%. 

Housing increased 6.8% and accounted for about .84% percentage points of the growth. Housing construction will be the engine that will pull the economy going forward. We have tremendous demand for new housing and tight labor markets. Getting back to normalcy (1.5 million units a year) in housing starts will make a big difference. If we get to what is typically observed coming out of a recession (2 MM +) we will be looking the best economy since the 90s.  

The Fed Funds futures didn't really react much to the reading, and are currently handicapping a 71% chance of a 25 basis point hike at the March meeting. Next week's meeting is expected to maintain the current Fed Funds rate. 

Durable Goods orders increased 2.9% last month, which was better than expectations. Ex-transportation they rose 0.6%. Capital Goods orders fell 0.3%. On a YOY basis, all numbers were up smartly: Durable goods up 8.2%, DGXT up 7%, Cap goods up 8.1%. More evidence of a strong economy. 

Donald Trump spoke at Davos. He stressed that America is open for business and that he is willing to negotiate multilateral trade agreements (think TPP). He mentioned tax reform and that America is open for business. 

A non-profit in New Mexico has come up with a concept to help get homeowners in their first home without much of a downpayment and without MI. They issue 2 mortgages, one for 80% of the loan, which is sold on the secondary market without MI, and then a second loan for 18%, which they hold. Supposedly the performance metrics for these loans are better than the control group. 

Morning Report: Awaiting the FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2545.8	-2.8
Eurostoxx Index	389.4	-0.8
Oil (WTI)	50.9	-0.1
US dollar index	86.5	-0.1
10 Year Govt Bond Yield	2.35%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.9

Stocks are lower this morning as we await the FOMC minutes. Bonds and MBS are flat.

There were 6.1 million job openings at the end of August, little changed from the prior month. The quits rate (which is a number the Fed watches closely) was unchanged at 2.1%. The quits rate is a leading indicator for wage growth. 

Chicago Fed President Charles Evans said yesterday that a December hike is not a sure thing, and that he hoped for an "honest discussion" on whether it was time to hike rates again. He said the Fed should not treat the 2% inflation target as a ceiling, and should be comfortable with higher than 2% inflation given that it has undershot the target for so long. He was also bullish on the economy in general: “Global growth has really solidified,” which has helped the U.S. economy, he said. “I suspect the wage story is improving.”

The FOMC minutes will be released at 2:00 PM EST today. They probably won't be market-moving, although we could see some adjustment in the December rate hike probabilities, which currently stands at a 93% chance of a rate hike. 

Mortgage applications fell 2.1% last week as purchases fell .1% and refis fell 4%. Mortgage rates increased 4 basis points to 4.16%. 

Donald Trump plans to adjust his tax reform plan over the next few weeks. With Democrats uniformly in opposition, Republicans have a narrow path to get this across the line. The issue with the tax plan is that it could raise taxes for people in the $50k-$150k range who live in high tax states. There are enough Blue State Republicans in the House to kill it. In the Senate, Trump has a strained relationship with Bob Corker and John McCain, which means he has no margin for error. Rand Paul has also said that any tax hikes on middle and upper middle class incomes is unacceptable. Tax reform is looking like a long shot, especially since 2018 will be all about posturing for midterms. 

Blackrock's Larry Fink said that his biggest fear is an over-aggressive Fed. He considers this to be a low-probability event, however. His fear is that we could see an inversion of the yield curve, which happens when longer-term interest rates are lower than shorter term interest rates. Historically, that has been a recessionary signal. It is more than a theoretical possibility: the yield curve almost always flattens during a tightening cycle, and the technical mechanics of unwinding QE also would encourage the curve to flatten. What does that mean for mortgage rates? Probably nothing, but at the margin it would favor 30 year fixed rate mortgages over ARMs. 

CoreLogic estimates that 172,000 homes could be at risk from the wildfires in Napa and Santa Rosa. Mother Nature has made life miserable for servicers this fall, however the effects probably won't begin to be felt until the end of the year.

Canada is trying to figure out what to do with their housing bubble. The median house price in Vancouver is currently at 1.6 million (or about 20x income). To put that number into perspective, the US bubble peaked at 4.8x. Vancouver's market is probably tied most closely to China's and will burst once that one does. 

Morning Report: Tax reform to be unveiled today

Vital Statistics:

	Last	Change
S&P Futures	2500.8	5.3
Eurostoxx Index	385.4	1.4
Oil (WTI)	51.9	0.0
US dollar index	86.5	0.4
10 Year Govt Bond Yield	2.29%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.87

Stocks are up this morning as Washington pivots to tax reform. Bonds and MBS are down. 

Janet Yellen spoke yesterday and said that it would be "imprudent" to wait until inflation hits 2% to start hiking rates. Those comments were taken as support for a December hike and the Fed Funds futures took up the odds of a rate hike in December to 81%.  

Bonds were also under pressure due to the possibility of some sort of tax deal. Here is a preview of the tax plan. Trump plans on releasing the details today. Apparently the big pieces involve cutting the corporate tax rate falls to 20%, while the top individual income tax bracket falls to 35%. There is an option for Congress to institute a higher bracket. Deductions will be limited while the standard deduction increases. The most contentious deduction will be the state and local tax deduction, which will hit taxpayers in high tax states like NY and CT the most. CT is already reeling from an exodus of high income earners and businesses, and this will only exacerbate that. This won't be good for real estate prices there. While this is largely going to hit blue states, there are enough Republican House members in blue states to deep-six it unless Trump can get some Democrats on board. No word on eliminating or lowering the cap on the mortgage interest deduction. 

Pending Home Sales fell by 2.6% in August, according to NAR. 

Mortgage applications fell half a percent last week as purchases rose 3% and refis fell 4%. The hurricanes did depress activity in Florida and Texas, however increasing rates and a lack of home inventory were the biggest drivers. 

Durable goods orders rose 1.7% in August, which beat consensus estimates. Ex-aircraft, they were up 0.2%. Capital Goods orders rose 0.9%, which is an indication that business expects to see further activity and is increasing their capacity. The bump in capital goods orders is being driven by the rebound in oil prices and drilling activity in the energy sector. Capacity Utilization rates are still low compared to historical standards.

The bond market has been in a tight range for this entire year. In fact, the 62 basis point range has been the tightest in over 50 years. Historically, that range has been closer to 175 basis points. The article is somewhat misleading, as the range is going to fall naturally when rates fall from 10% to 2%. Using volatility measured in sigma is better. That said, it isn't just the US bond market: volatility in general is down. The VIX (the volatility measure for the stock market) has been in the single digits. Historically that has been a warning sign (When VIX is high, time to buy. When VIX is low, time to go). 

Morning Report: Beware of Hurricane deductibles

Vital Statistics:

	Last	Change
S&P Futures	2458.8	-6.0
Eurostoxx Index	374.7	-0.3
Oil (WTI)	49.0	-0.1
US dollar index	84.3	-0.4
10 Year Govt Bond Yield	2.05%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.74

Stocks are lower as markets fret over the possible damage due to Hurricane Irma. Bonds and MBS are flat. 

Donald Trump cut a deal with Democrats to fund the government until December and increase aid for Harvey and Irma. Republicans were caught off guard here, however the optics of making a stand on a completely symbolic hill like the debt ceiling during a couple of major hurricanes would have been awful. Trump and Schumer are reportedly planning a bill to repeal the debt ceiling altogether. 

Credit reporting agency Equifax suffered a cyberattack which potentially gave social security numbers, addresses and drivers license numbers for 143 million people. The company has set up a website https://www.equifaxsecurity2017.com/  where people can see if their data was stolen. Banks generally eat the charges for fraud, so something of this size could potentially hit bank earnings if the fraud is big enough. The stock is down 16% on the open this morning. 

Initial Jobless Claims jumped to 298k last week due to the effects of Hurricane Harvey. This number is probably understated as many areas in Texas were unable to report. 

Productivity rose by 1.5%, which beat the 1.3% estimate. The employment cost index came in at 0.2%, below the 0.3% estimate. As long as inflation stays low, wage growth will be low as well. 

Trump has some vacancies to fill at the Fed. Janet Yellen's term expires in February, while the Deputy Fed Chairman Stanley Fischer recently resigned as well for personal reasons. Frontrunner Gary Cohn is supposedly losing favor, partially because the sense is a Goldman banker would have difficulty attracting Democrat votes. Chances are looking better that Trump renominates Yellen for another term. Former Fed Governor Kevin Warsh is also a good possibility. Warsh is slightly more hawkish than Yellen, which means he would pursue higher rates at a faster pace than Yellen, at least at the margin. 

The latest Fed funds futures prediction has a 63% of no move in December now. They are predicting no move in September as well. 

Homeowners in Florida and Texas should read the fine print on their policies. These storms could trigger "hurricane deductibles" that allow insurers to push more of the damage costs to homeowners. These became widespread after Hurricane Katrina in 2005, but haven't been used. These allow insurers to increase the size of the deductible in certain coastal states if a hurricane occurs. These deductibles are usually a percentage of the policy, as opposed to a flat dollar amount. They generally run in the 1% to 2% range. Sandy did not trigger these due to the fact it was a tropical storm when it hit the East Coast. Bottom line, someone who was expecting a deductible of $1,000 might find themselves with a $5,000 or $10,000 deductible. 

Fannie Mae is offering forbearance up to 12 months in some situations. Borrowers affected by Harvey or Irma are encouraged to contact their servicer to see if they are eligible for some relief. Details are here: http://www.fanniemae.com/portal/about-fm/hurricane-relief.html

Morning Report: Are we heading into a recession?

Vital Statistics:

	Last	Change
S&P Futures	2443.0	-9.8
Eurostoxx Index	374.4	-1.5
Oil (WTI)	47.7	0.3
US dollar index	86.1	0.3
10 Year Govt Bond Yield	2.20%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.89

Stocks are lower this morning after Donald Trump threatened to shut down the government over a wall. Bonds and MBS are up small. 

Mortgage Applications dipped half a percent last week as purchases fell 2% and refis rose 0.3%. The average rate on a 30 year fixed was unchanged, while jumbos dropped 5 basis points. Mortgage rates are back at the lows of November 2016.

New Home Sales slipped to 571,000 in July, which was lower than expectations. 

For all the talk about Millennials wanting to stay in cities, many are beginning to move to the suburbs. I guess it was only a matter of time. That age cohort is now the biggest group in the housing market. They are starting later than previous generations, however and the median age for a first time homebuyer is 33, which has been inching upward for decades. So, for all the handwringing articles about this generation being reluctant to buy houses, it turns out that they are pretty much like every generation before them: preferring to live in urban areas until they get married and have kids. That said, they are largely renters for the moment, as a combination of a dearth of starter homes and high student loan debt keeps them from buying. Eventually builders will realize there is an opportunity in starter homes, but as of now they are remaining lean and are stymied by regulation and a lack of skilled labor. 

Several investment banks are warning that we are approaching the tail end of the expansion and are heading for another recession. They note that global correlations (in other words markets all moving together) has broken down and is back at levels we saw back in 2005. They also cite the fact that companies that beat earnings estimates are not seeing the sort of pop we are used to seeing. We also could be seeing a downturn in profits just as equity valuations reach stretched levels. FWIW, the fact that we are not seeing inflation provides some comfort. Most recessions in the past were driven by an overheating economy (low unemployment, high resource utilization) which caused inflation and tightening from the Fed. We aren't seeing that at all today - in fact the fear is that inflation is too low. The Fed has been increasing rates not to slow the economy, but to eliminate some of the distortions caused by rates sitting at the zero bound. While you can't rule out some sort of black swan event (some sort of shock that comes out of left field) the imbalances that usually precede Fed-driven recessions simply aren't there at the moment, aside from a low unemployment number. 

Morning Report: Odds of a June hike fading

Vital Statistics:

	Last	Change
S&P Futures	2350.5	-7.0
Eurostoxx Index	387.6	-3.5
Oil (WTI)	48.5	-0.5
US dollar index	89.0	0.1
10 Year Govt Bond Yield	2.19%
Current Coupon Fannie Mae TBA	103.27
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	4.03

Stocks are following through on yesterday's sell-off. Bonds and MBS are up again. 

Initial Jobless Claims came in at 232k last week which shows that firms are hanging onto their employees. Claims are at a 28 year low. Meanwhile, the Philly Fed Manufacturing Index put in another strong showing. 

The index of leading economic indicators increased 0.3% in April after a 0.3% increase in March.  “First quarter’s weak GDP growth is likely a temporary hiccup as the economy returns to its long-term trend of about 2 percent. While the majority of leading indicators have been contributing positively in recent months, housing permits followed by average workweek in manufacturing have been the sources of weakness among the U.S. LEI components.”

The DOJ named ex-FBI Director Robert Meuller to conduct the Russia / DJT investigation. This should (in theory) quiet things down for a while, as it satisfies a key demand from Democrats that someone independent of the White House conduct the investigation. The key question: Is this Watergate or Whitewater?

The DJT turmoil has affected the market's handicapping of the next FOMC meeting. The odds of a June hike have slipped from 80% to 60%. 

Meanwhile, The Bernank finds it strange that markets ignore political risk until the last moment. He also thinks DJT should re-nominate Janet Yellen and downplayed the market risk from the Fed tapering its reinvestment policy. 

Household debt has surpassed its 2008 peak, according to the Fed. It came in at $12.7 trillion as mortgage debt and student loan debt increased. Of course the difference between 2008 and today is that home equity is much higher, so it isn't necessarily a huge cause for alarm. 

Morning Report: More Trump trouble

Vital Statistics:

	Last	Change
S&P Futures	2386.3	-10.8
Eurostoxx Index	394.6	-1.4
Oil (WTI)	49.0	0.3
US dollar index	89.2	-0.3
10 Year Govt Bond Yield	2.29%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	4.04

Stocks are lower as the White House gets embroiled in yet another scandal. Bonds and MBS are up. 

Donald Trump has been hit with two damaging press reports over the past two days. The first one claims that he shared classified information with Russian diplomats. The second one is that he urged then FBI director James Comey to drop the investigation of Michael Flynn. The first story (if true) is probably not a crime, however the second one (again, if true) strays close to obstruction of justice. Note that both stories rely on hearsay from anonymous sources - basically some guy heard something from some other guy that Trump said this or that - and WaPo / NYT reported it. Suffice it to say, if this was about anyone else, these stories probably wouldn't have seen the light of day with such flimsy evidence. Doesn't mean the stories are not true, but the story's credibility is falling predictably along partisan lines. That probably won't change until we have some names to go with the story. 

What does this mean for the markets? As I said yesterday, the Trump reflation trade is dead. Nothing is going to get done legislatively in this Congress, unless it can get pushed through on party lines, and GOP moderates are no sure thing. So far the GOP establishment has not sided with Democrats and the press against Trump (they can't stand either), but their support is getting thinner and thinner. I suspect the next shoe to drop will be a high profile resignation, like Rex Tillerson, or Wilbur Ross, neither of whom needs this amateur hour headache. And that could be the "all-clear" signal for wavering Republicans to jump ship and turn their backs on the White House. 

The dollar is beginning to take notice, and is down again today. The bond market continues to rally, and I suspect one of the most crowded trades on the Street (short bonds) is going to get painful. Remember the pre-election bond yield was 1.81%. The stock indices are being supported by a few mega-cap stocks which makes it vulnerable to a sell-off. Remember the old saw "Sell in May and go away?" Might be good advice this year. 

Here is a chart of the Dow Jones Industrial Average for 1974, the year of Watergate:

Of course take that chart with a grain of salt. In 1974, the US economy was still reeling from the 1973 oil crisis, so markets were vulnerable to begin with. Second, if you sold the market during the Clinton impeachment kerfuffle you would have been killed (at least for a year or so), but then would have been correct. Note the Clinton impeachment didn't make a bit of difference to the Fed, which kept hiking rates. That could be a difference this time around, especially if the economic data starts turning down. 

Mortgage Applications fell 4.1% last week as purchases fell 3% and refis fell 6%. The refi share of mortgage apps hit a 9 year low at 41.1%. You can see below a chart of the MBA refinance index, which has been crushed since Brexit last June. 

Morning Report: Housing starts disappoint again

Vital Statistics:

	Last	Change
S&P Futures	2399.0	0.5
Eurostoxx Index	395.5	-0.5
Oil (WTI)	49.0	0.1
US dollar index	89.9	-0.1
10 Year Govt Bond Yield	2.34%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	4.09

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

Housing starts for April disappointed, rising 0.7% YOY to an annualized rate of 1.17 million. The Street was looking for 1.26 million. This was the lowest reading in a year. Building Permits rose to 1.26 million on an annualized basis, up 5.7% YOY. It is strange to see disappointing starts alongside the strong builder sentiment number reported yesterday, but builders seem content to build fewer homes and to grow the business by raising prices. 

Industrial and manufacturing production came in stronger than expected however, growing 1% in April. Capacity Utilization rose to 76.7%. Auto assembly drove the increase, pardon the pun. 

The Washington Post broke a story that Donald Trump shared classified info with Russia. There seems to be a shift in the political winds. You are starting to see mainstream Republicans distance themselves from the Administration. Don't know if this becomes a stampede, but the crowd is looking for their coats and nervously eyeing the exits. I don't think this is impeachment material (what he did was legal) however, you can probably stick a fork in the Trump legislative agenda. 

The machinations in Washington so far are not affecting the stock market, but the dollar is beginning to take notice. Bonds are not yet reacting however don't forget the 10 year was trading around 1.8% before Trump's surprise victory. The Trump reflation trade is running on fumes at this point. 

The National Association of Realtors estimates that if the mortgage interest deduction and the state & property tax deduction is eliminated, you would see a 10% drop in real estate values. The Trump plan would double the size of the standard deduction, which will go from roughly 12k to 24k. The increase in the standard deduction will make the mortgage interest deduction meaningless for anyone with a sub $600k mortgage because they will be better off taking the standard deduction. This will eliminate one of the advantages of buying versus renting for first time homebuyers, which in theory should create more renters and less buyers. Given all the other advantages of buying, this will probably be a second-order effect. I have a hard time seeing a 10% drop in prices - the FHFA House Price Index only had a 22% drop peak to trough - and inventories are tight. 

Absent any changes to the tax code, NAR is looking for prices to rise 7% - 8% this year.

Ex Fed Head Narayan Kocklerakota recommends that the Fed maintain its balance sheet and not let its QE assets run off as they mature. 

Morning Report: Fed funds futures reprice September

Vital Statistics:

	Last	Change
S&P Futures	2391.5	-1.8
Eurostoxx Index	395.9	0.1
Oil (WTI)	46.4	0.6
US dollar index	90.4
10 Year Govt Bond Yield	2.36%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	4.05

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

Last night, Donald Trump fired FBI Director James Comey. This will excite the chattering classes and provide endless fodder for the media, but it shouldn't matter much to the markets. At the margin, it will probably push bond yields lower. 

Mortgage applications rose 2.4% last week as purchases rose 2% and refis rose 3%. Conforming and jumbo rates were flat, while FHA ticked up a few basis points. 

Import prices rose .5% MOM and are up 4.1% YOY. Bonds are shrugging off the data, however it could be a sign of inflation creeping up. We did see a small sell-off in the dollar during April, but nothing of that magnitude. Something to watch. 

We will have some Fed-speak this afternoon with Eric Rosengren and Neel Kashkari speaking at 12:30 and 1:30 EST respectively. 

With all the data over the past week, Fed Funds futures are moving mainly for the September meeting, which now has a 40% chance of a 25 basis point hike, up from 20% about a week ago. June is currently pegged at 80%. The weak Q1 print so far has not had an effect on trader sentiment. 

Good advice for the first time homebuyer who is also saddled with student loan debt. Waiting until the deferral period has passed helps. Also look at FHA loans, however there are caveats. 

Boston Fed President Eric Rosengren warns that GSE reform could hit the multi-family market. F&F bear the credit risk of 44% of the multi-fam market, more than all the banks combined. 

Job openings in the construction sector are higher now than they were at the peak of the bubble. Yet the hiring rate is just off the lows of the bust. This certainly corroborates the claim that a labor shortage is a big reason why housing starts are still depressed. Lots of skilled labor left the sector after the bubble burst and got jobs in the energy patch. There is only one way to square that circle and that is to raise wages to attract talent. Which means compressing margins if builders are unable to pass on that cost increase. Regardless, it doesn't bode well for new home affordability unless we begin to see wholesale increases in wages across the US, which hasn't been happening. 

Morning Report: Pending Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2385.0	2.8
Eurostoxx Index	387.6	-1.2
Oil (WTI)	48.7	-0.9
US dollar index	89.7
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.63
Current Coupon Ginnie Mae TBA	103.68
30 Year Fixed Rate Mortgage	3.98

Stocks are mixed this morning as markets digest the ECB non-move. Bonds and MBS are down small. 

Pending Home Sales fell 0.8% in March as tight inventory reduced transactions. On a YOY basis, they are up 0.8%, as February was an unusually strong number. NAR chief economist, says sparse inventory levels caused a pullback in pending sales in March, but activity was still strong enough to be the third best in the past year. "Home shoppers are coming out in droves this spring and competing with each other for the meager amount of listings in the affordable price range," he said. "In most areas, the lower the price of a home for sale, the more competition there is for it. That's the reason why first-time buyers have yet to make up a larger share of the market this year, despite there being more sales overall."

Durable Goods orders rose 0.7% in March, lower than the 1.1% estimate. Ex transportation and defense, they rose 0.1%. Capital Goods orders, which is a good proxy for business capital investment, rose 1.2%. Yet another data point where the hard data isn't confirming the buoyant soft data. 

Initial Jobless Claims rose slightly to 257k last week, while retail inventories rose 0.4% and wholesale inventories fell 0.1%. The consumer comfort index edged up as well. 

Regular readers of this blog know I have been discussing the post-Trump interest rate sell-off for months. I lay out the full case in the latest issue of the Scotsman Guide: Finding Comfort in History. I discuss why the Fed might not move 3 times this year (because they have invariably been high in their GDP estimates), why a 75 basis point move in the Fed Funds rate won't necessarily translate into a 75 basis point hike in mortgage rates (because the yield curve usually flattens), and why the end of QE reinvestment won't have a dramatic effect on mortgage rates. 

Trump's tax plan which was unveiled yesterday was really more of a guidance to Congress than an actual plan. FWIW, legislation originates in Congress, not the White House, so it is unrealistic to expect a detailed, CBO-scoreable plan. That said, we know that the basis plan will be to reduce the number of tax brackets, lower the rates, increase the standard deduction, and to limit itemized deductions. What does that mean for real estate? Nobody knows for sure, but the National Association of Realtors is weighing in already, urging the government to maintain the mortgage interest deduction and the state / local tax deductions. Trump's plan will probably ding upper middle class homeowners in high tax states the hardest. 

Morning Report: Strong new home sales

Vital Statistics:

	Last	Change
S&P Futures	2375.3	5.3
Eurostoxx Index	387.5	1.4
Oil (WTI)	49.2	0.0
US dollar index	89.5	0.1
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.68
30 Year Fixed Rate Mortgage	3.98

Stocks are higher this morning as it looks like cooler heads are prevailing in the continuing resolution negotiations. Bonds and MBS are down small. 

New home sales increased to an annualized rate of 621k, well above the Street expectations of 587k. New Home Sales is a notoriously volatile number, but it looks like the Spring Selling Season is off to a good start. 

Pulte announced earnings this morning, with a 14% increase in revenues and a 17% increase in earnings. CEO Ryan Marshall had this to say about the spring selling season: “Buyer interest during the spring selling season of 2017 has been high and points to the ongoing strength in recovery for the housing industry. Strong buyer demand continues to be supported by an improving economy and resulting employment and wage gains, high consumer confidence, a low inventory of new and existing homes, and the powerful demographic forces of Millennials and Baby Boomers. Given the strength of our land pipeline and our disciplined investment practices, PulteGroup is well positioned to grow its market presence and improve its financial performance within this operating environment.” Note that gross margins fell by 230 basis points, which shows costs are outpacing price growth. 

In other economic data, consumer confidence slipped in April, but is still strong, while the State Street Investor Confidence Index unexpectedly rose. The Richmond Fed Manufacturing Index improved as well. 

Home price appreciation accelerated in February, according to the FHFA House Price Index. Prices were up 0.8% MOM and are up 6.4% annually. Prices have risen 6.2% annually since bottoming in early 2012. Regionally, the Mountain states had the biggest increase, coming in at 9.5%. Even New England, historically a laggard, increased by 6.5%. The worst area - Mid atlantic - rose 4.6%. 

Meanwhile, the Case-Shiller Home Price Index rose 0.7% MOM and is up 5.9% YOY. 

In politics, Donald Trump seemed to moderate his comments about marrying the wall with funding the government through the end of the fiscal year. Given that Republicans hold all 3 branches of government, why does Trump need Democrats? The reason is the same thing that vexed Obama: The House Freedom Caucus, who won't support anything that doesn't repeal Obamacare or cut spending enough. This gives Chuck Schumer and the Democrats more leverage than they would ordinarily have. Note Congress can play some accounting games to move the deadline back a couple of weeks, so this Friday isn't necessarily a drop-dead date. A government shutdown is probably unlikely, but LOs should be thinking about ordering 4506-Ts if they need them. 

Donald Trump is targeting a corporate tax rate of 15%, which will be unveiled tomorrow. House Speaker Paul Ryan is closer to 20%, and believes that 15% is too low to be revenue-neutral. While even Democrats recognize our corporate taxes are too high, they won't get onboard anything that amounts to a tax cut. Take a look at the chart below. It has our taxes (and our competitors') tax rates from 2000 to 2016. Pretty much everyone has cut taxes except for us. Trump will also reveal a plan for individual income taxes as well. 

Having trouble saving? There's an ap for that. New fintech companies are micro-analyzing an individual's earnings and spending patters, and using credit and savings sweeping to normalize their client's income (think a freelancer or an Uber driver). Some will pay all your bills for you, and others will ensure your checking account doesn't overdraft. Some will extend credit at high rates, however those rates are generally better than payday lenders. 

Another blow for cheap new housing construction. The US is imposing tariffs on Canadian softwood exports in an ongoing trade dispute. Softwood (basically pine) is primarily used for framing in housing, so we could see lumber prices increase further. While "sticks and bricks" are not the main driver of housing construction cost, this doesn't help matters. It is getting to be a problem when the typical starter home is unaffordable to its target market. 

The MBA has rolled out its plan for the GSEs. The idea would be to turn Fannie and Freddie into public utilities and to take steps to open up the market for private mortgage guarantors. They estimate it could take up to 10 years to implement. Note the clock is ticking: As the government continues to sweep all of Fannie's profits to Treasury, their net worth is decreasing.