Morning Report: Goldman sees 3.7% unemployment in 2018

Vital Statistics:

	Last	Change
S&P Futures	2576.3	0.0
Eurostoxx Index	385.1	1.3
Oil (WTI)	56.3	-0.3
US dollar index	87.2	0.1
10 Year Govt Bond Yield	2.34%
Current Coupon Fannie Mae TBA	102.651
Current Coupon Ginnie Mae TBA	103.494
30 Year Fixed Rate Mortgage	3.9

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

Slow news day. 

This week should be relatively quiet with the Thanksgiving holiday. There won't be any market-moving economic releases, and the only thing out of the Fed will be the minutes from the November meeting on Wednesday. 

The Index of Leading Economic Indicators came in at 1.2%, doubling the Street estimate of 0.6%. 

Goldman is extremely bullish on 2018, as they see the job market getting even tighter and wage growth accelerating. They see the unemployment rate falling to 3.7% in 2018, and to 3.5% in 2019. They are forecasting 4 rate hikes as well, which is well above what the Fed Funds futures are predicting. The Fed Funds futures are pricing in between 1 and 2 hikes in 2018 (assuming that December is a given). 

More than half the refis in October were FHA / VA loans. This is due as much to home price appreciation as interest rates. Borrowers can save money by refinancing into a conventional loan once they have 20% equity. Loan officers, take a look at the FHA loans you did a few years ago and look for opportunities. 

Tax reform is scheduled for an 11/30 vote in the Senate, as Congress takes this week off. The upper middle class is probably going to benefit the least from tax reform, and Republicans are going to test the theory that they are indeed the third rail in US politics. The upper middle class consists of what demographers call the HENRYs (high income, not rich yet), who may appear to be rich according to the numbers, but often live in high cost areas and have lifestyles more similar to the middle class than the rich. We could see home price appreciation begin to moderate in some of the suburbs around DC and NYC. It probably won't affect California as much, as the CA real estate market inhabits its own universe. 

Morning Report: Small Business Optimism jumps

Vital Statistics:

	Last
S&P Futures	2264.5
Eurostoxx Index	363.6
Oil (WTI)	52.1
US dollar index	92.7
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.11

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

Job openings increased to 5.5 million, according to the JOLTS report. This is at levels not seen since 2000. The quits rate has been steady at 2.1%, and that is the ultimate measure of labor market strength and a leading indicator for wage growth and inflation. As long as that number is steady, the Fed can be reasonably comfortable that inflation is going to stay low. 

Small business optimism rocketed in December, according to the NFIB. The index rose 7.4 points to 105.8, the highest level since December 2004. The lion's share of the gain was due to improving expectations, so it probably will be given back if big changes in the regulatory and tax environment don't materialize. Job creation plans did hit a 9 year high, and capital expenditure plans jumped as well. That said, actual hiring in December was virtually unchanged from a month ago. That said, competition remains tight for skilled workers and a net 26% of respondents reported increasing compensation. 

Despite the improvement for small business, some in Corporate America (the automakers) are not sure what to think. Trump's jawboning over outsourcing has caused automakers general uncertainty, as the industry recovers from the worst slump since the Great Depression. The ultimate trade may in fact turn out that Trump will let Obama's new fuel efficiency standards die in return for more production in the US. 

Rising rates are hurting buyer sentiment, according to Fannie Mae. Their Home Purchase Sentiment Index fell for the fifth month in a row. The survey predicts that home prices will increase 2.1% next year, however the survey has been consistently lower than the professional forecasts, let alone actual price appreciation. Respondents also believe it is easier to get a mortgage than it was two years ago. Their view of the economy has improved dramatically, with roughly the same percentage of people thinking the economy is on the right track versus the wrong track. Note this optimism was reflected in the Gallup data as well. 

There were 26,000 completed foreclosures in November, according to CoreLogic. The seriously delinquent rate was 2.5%, which is the lowest since August 2007. Foreclosure inventory remains concentrated in the judicial states of New York, New Jersey, and Florida. The seriously delinquent rate remains highest in NY and NJ as well, with rates of 5% and 5.6% on average. 

Yesterday's change in FHA MIP caused some strange activity in the TBA market which affected pricing. Bonds were up yesterday and pricing was generally better for most products, except for higher-coupon FHA and VA loans. That pricing actually worsened. Why? Because the change in annual MIP caused investors to bump up their prepayment assumptions for higher coupon Ginnie securities (generally those with 4% coupons and up). This makes those higher coupon mortgage backed securities worth less than last week, all things being equal. So if you priced out a FHA loan on Friday expecting to see better pricing, only to get an unpleasant surprise, the MIP change was the reason. On the bright side, refinancing just got more attractive. 

Quicken CEO Dan Gilbert accused the Department of Justice of conducting a shakedown operation. 

Goldman's Dan Hatzius is handicapping a 35% of a March hike this year, while the Fed Funds futures are handicapping a 25% chance. Goldman is much more hawkish than the Fed in general, and they foresee a more linear hiking of rates while the Fed (and the futures markets) are forecasting a more gentle increase. 

Morning Report: FHA annual premiums drop

Vital Statistics:

	Last	Change
S&P Futures	2268.5	-3.0
Eurostoxx Index	263.4	-2.0
Oil (WTI)	52.9	-1.1
US dollar index	92.8	0.0
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.11

Stocks are lower this morning on overseas worries. Bonds and MBS are up.

The week after the jobs report is typically data-light, however we will have a lot of Fed-speak this week, especially today, Thursday, and Friday. 

The labor market conditions index slipped in December to -.3 from 1.2 in November. Note this is a meta-index of many leading and lagging indicators, so it is possible to have a so-so number just after a decent jobs report.

HUD announced they are cutting the annual insurance premium for most FHA loans by 25 basis points, which should save the typical homeowner about $500 annually. This will affect mortgages with a disbursement date after Jan 27. The reduction is due to the improving health of the housing market and the FHA's insurance fund. Since the crisis, FHA has increased premiums by 150% to restore capital reserves. This reduction reverses that move and brings annual premiums back down to close to pre-crisis levels. 

The current HUD Chairman, Julian Castro is worried that Ben Carson will roll back some of the HUD initiatives over the past several years. The one most likely to be on the chopping block is a controversial policy in which HUD sues local governments in order to force them to change their zoning laws in order to accommodate more multi-family housing. Westchester County in New York has been fighting this for the entire Obama administration. 

Notwithstanding the jump in wage inflation last month, overall wage inflation has been hard to come by, not only in the US, but globally. The relationship between unemployment and wages seems to have broken down. What is going on? First, the most likely explanation is that the new jobs being created pay less than the jobs that were lost. This is the most plausible explanation, as many of the construction jobs that were lost in the bubble never came back, and most of the employment growth is coming in lower-paying health care jobs. Second, workers lost so much bargaining power in the recession that they don't feel comfortable asking for more. A third explanation could be that the cost to employers has risen, but these costs are largely regulatory and don't flow through to wages. Regardless of the reason, wage growth is an imperfect representation of labor market strength. 

Now that it is becoming harder to find buildable lots, many homebuilders are returning to half-finished subdivisions that were abandoned as the housing bubble burst in 2007 and 2008. The supply of developed vacant lots (go-dirt) has fallen by 20% since 2011. The buyers seem to be the big national homebuilders like Lennar. The credit markets for homebuilders remains a case of "haves and have-nots." The big builders are able to issue corporate debt at super-low interest rates while the small guys are getting turned down by the local bank.