Morning Report: Quits rate jumps in May

Vital Statistics:

			Last	Change
S&P futures			2781	-11
Eurostoxx index			382.05	-4.2
Oil (WTI)			73.29	-0.82
10 Year Government Bond Yield				2.85%
30 Year fixed rate mortgage				4.53%

Stocks are lower this morning after Trump threatened tariffs on $200 billion worth of Chinese goods. Bonds and MBS are flat. 

China has vowed to retaliate if the Trump Administration follows through on its threat to impose 10% tariffs on about $200 billion worth of Chinese goods. Since China imports far less than $200 billion from the US, they may have to come up with other measures to retaliate - anything from denying visas to limiting tourism and increasing regulatory measures. Strategists are beginning to warn that the trade war could derail the recovery. 

Inflation at the wholesale level increased in June, according to the PPI. The headline number rose 0.3% MOM / 3.4% YOY. Ex food and energy, it was up 0.3% / 2.8% and ex food energy and trade services 0.3% / 2.7%. Services and motor vehicles drove the increase. 

Donald Trump nominated Brett Kavanaugh to the Supreme Court yesterday. He is generally a regulatory skeptic, and has ruled against overreach in the past. He has already weighed in on the CFPB, which he believes is unconstitutional. From CFPB vs PHH, writing for the majority: "The CFPB’s concentration of enormous executive power in a single, unaccountable, unchecked Director not only departs from settled historical practice, but also poses a far greater risk of arbitrary decision-making and abuse of power, and a far greater threat to individual liberty, than does a multi-member independent agency. The overarching constitutional concern with independent agencies is that the agencies are unchecked by the president, the official who is accountable to the people and who is responsible under Article II for the exercise of executive power." That said, Kennedy was already considered a vote against the CFPB, so the nomination won't move the needle there. 

Kavanaugh has also ruled against the EPA, which generally ignored the "cost" side of the "cost / benefit" analysis of regulations during the Obama Administration. Overall the regulatory environment for the financial industry could get a little easier with Kavanaugh on the Court. 

Speaking of the CFPB, Brian Johnson has been tapped to be the #2 of the agency. He replaces Leandra English, who resigned last week. 

Small business optimism remains elevated despite trade concerns, according to the NFIB Small Business Optimism Survey.  Employment continues to grow, with 1 in 5 firms adding employees in June on net. Sales are up overall, but margins appear to be facing pressure from higher labor and input prices. Credit needs are being fully met. 

Job openings fell to 6.6 million in May, which was just off the record high of 6.8 million set in April. Hires were strong at 5.8 million, led by health care and social assistance. The big number was the quits rate, which is one of the best leading indicators of wage inflation. It rose to 2.4%. 

The big question remains: how much slack is there really in the labor market? Most of the official numbers imply there is none. Yet, there is only modest wage inflation. I suspect the employment-population ratio tells the real story, and that number has yet to really recover from the Great Recession. Demographics are part of the story, but as people work longer, the assumption of 65 = retirement might have to change. I suspect many of those who are retired would gladly take a job if offered. 

For the construction sector, the number of unfilled jobs hit a record high. That sector has been facing labor constraints for quite some time, and this partially explains why housing starts have been so far below what is needed to meet demand. 

Mortgage Applications increased 2.5% last week as purchases rose 7% and refis fell 4%. Last week included the 4th of July, so there are all sorts of adjustments baked into that number. Refis fell under 35%, the lowest number since August 2008. ARMS decreased to 6.3%. Overall rates fell about 3-4 basis points last week. 

Meanwhile, the MBA's mortgage credit availability index improved last month as increases in conventional and jumbo availability offset a contraction in government. 

Morning Report: Job Openings equal the number of unemployed

Vital Statistics:

			Last	Change
S&P futures			2680	9.75
Eurostoxx index			390.81	0.81
Oil (WTI)			70.9	1.84
10 Year Government Bond Yield				3.00%
30 Year fixed rate mortgage				4.63%

Stocks are higher this morning after the US pulled out of the Iran deal. Bonds and MBS are down, with the 10 year trading over 3% again. 

The Iran deal was never ratified by the Senate, so it never reached the level of "treaty." It was basically a deal with the Obama Admin and Iran. 

Oil had a volatile day yesterday and is rallying again. China is the biggest customer of Iranian oil, so in theory it shouldn't affect the US all that much, but WTI will follow Brent on the relative value trade. Note that a sustained oil price over $70 is estimated to be about a 0.7% drag on GDP growth. 

Inflation at the wholesale level moderated last month, with the producer price index rising 0.1% MOM and 2.6% YOY. Ex-food and energy, the index rose 0.1% / 2.3% and the core rate rose 0.1% / 2.5%. 

Job openings hit 6.6 million last month, which is a new record for the index, which goes back to early 2000. The quits rate increased to 2.3%. The quits rate has been stuck in a 2.2% - 2.3% range for what seems like forever. Fun fact: The number of job openings has hit the number of unemployed for the first time. 

The labor shortage is particularly acute in construction, which is part of the reason why housing starts have been short of demand. This shortage has extended to home remodeling as well. 

While everyone seems to focus on the CPI / PPI / PCE inflation measures and imagines that a single point estimate accurately reflects the cost of living, it doesn't. First the relative weights of different goods and services differ. For example, PCE and CPI will weight healthcare differently, as well as owner-equivalent rent. The St. Louis Fed notes that the differences in inflation between regions of the US can be substantial as well. 

Mortgage Applications fell 0.4% last week as purchases fell 0.2% and refis fell 1%. Tough times for the smaller originators. 

Despite the slim pickings out there, mortgage credit has contracted a bit this year. Overall, it was a mixed bag, as government credit contracted on less streamlines while conventional increased as jumbos rose. Government credit has been tightening since early 2017, when the government began to crack down on serial VA IRRRL shops. 

How have things changed at the CFPB or the (BCFP) under Mick Mulvaney? Despite the ululating in the press, not that much. One of the panelists warned industry lawyers not to advise their clients that the CFPB is relaxing its enforcement activities. So far, the biggest change we have seen is that the name has been changed back to the Bureau of Consumer Financial Protection, which was the way it was written into Dodd-Frank. 

Fair Housing groups are suing HUD over Ben Carson's delay of the Obama-era re-interpretation of AFFH - affirmatively furthering fair housing. Their complaint is that HUD didn't provide advance notice before suspending the rule,. which would have required communities to "examine and address barriers to racial integration and to draft plans to desegregate their communities." HUD delayed the compliance deadline until 2024. In practice, this means that HUD wants communities to change or eliminate their zoning ordinances to include more multi-family housing in wealthier neighborhoods. 

Morning Report: What low bond volatility means for mortgages

Vital Statistics:

	Last	Change
S&P Futures	2751.3	4.5
Eurostoxx Index	400.3	1.9
Oil (WTI)	62.0	0.2
US dollar index	86.0	0.1
10 Year Govt Bond Yield	2.50%
Current Coupon Fannie Mae TBA	102.313
Current Coupon Ginnie Mae TBA	103.063
30 Year Fixed Rate Mortgage	3.92

Stocks are higher this morning on good economic data out of Europe. Bonds and MBS are down.

Small Business Optimism slipped slightly in December, capping the strongest year in the index since the early 80s. Hiring was sluggish in December, with a lack of qualified workers being the biggest problem in construction and manufacturing. Compensation is trending up as well, as a net 23% of small businesses intend to raise compensation this year. 

Job openings were little changed in November, according to the JOLTs survey. This was a slight drop from October, and a touch below expectations. Openings increased for retail, and fell for government, transportation, and utilities. The quits rate was unchanged at 2.2%. Until we start seeing the quits rate move up, we probably won't be seeing broad-based wage inflation. 

Volatility in the bond market has hit a 52 year low, according to a Bank of America / Merrill Lynch report. This is not surprising: volatility in the stock market is also at record lows. Volatility is generally a sign of stress in the system, and it tends to fall during periods of stronger growth.

The drop in bond market volatility has major implications for the mortgage market as well, and helps explain a bit of why mortgage rates are behaving the way they are. While the 10 year has been steadily moving higher over the past few months, mortgage rates have been relatively stable. While mortgage rates do tend to lag Treasuries, something else has been going on, and that something has been low volatility. 

30 year fixed rate mortgages have an embedded option in them, which is the right of the borrower to prepay their mortgage without penalty at any time. That right to prepay is worth something, and that value explains the yield differential between government backed mortgage debt and Treasuries. The value of the prepayment option is determined largely by the volatility of the bond market - when volatility rises, the right to prepay is worth more, and when volatility falls, it is worth less. So, when the market is stable, investors bid up mortgage backed securities as the value of that option falls, which translates into tighter MBS spreads and lower mortgage rates. In fact, the difference between a 30 year fixed rate mortgage and an adjustable rate mortgage is driven by the value of that prepayment option and risk-shifting between borrower and lender. When volatility is low, the borrower is paying less for that option and 30 year fixed rate mortgages will be more attractive than ARMS. When volatility is high, ARMS will be much cheaper. During periods of low volatility, it makes sense to scoop up that prepay option on the cheap and take out a 30 year fixed rate mortgage. When volatility is high, you will end up getting a much lower initial rate with the ARM. Co-incidentally, the economic backdrop (stronger growth, accelerating inflation, and a Fed raising short term rates) also favors the 30 year fixed over ARMS. 

Morning Report: Home ownership rate ticks up

Vital Statistics:

	Last	Change
S&P Futures	2588.5	-0.3
Eurostoxx Index	396.3	-0.3
Oil (WTI)	57.3	-0.1
US dollar index	87.9	0.0
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.95

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

Small business optimism slipped in September, according to the NFIB. The big driver was a drop in sales expectations, which may have been influenced by the hurricanes in Texas and Florida. The drop was not just concentrated in the affected areas, so it is hard to attribute the drop to simply that. Small business shed an average of .17 workers during the month, and again this was not simply a hurricane effect. Small business optimism is high by historical standards, however and the Atlanta Fed is forecasting a 4.5% jump in GDP growth the fourth quarter of 2017. 

Job openings were 6.1 million at the end of September. The quits rate edged up to 2.2%. The quits rate has historically been a leading indicator for wage growth, and a data point the Fed invariably references during their FOMC deliberations. 

Tax reform continues to work its way through the committee process. Partisan tensions are already beginning to show. One thing to note: the Senate bill maintains the mortgage interest deduction at $1 million versus the House's plan to cap it at $500,000. Corporations are digesting a surprise provision that levies an excise tax on payments made to overseas affiliates. Here is the state of play. 

Home prices rose 7% YOY, according to CoreLogic. They are up 0.9% MOM. Rental price inflation was about 3%, less than half the increase in the index, which reflects tight inventory conditions. They estimate that about a third of the major metropolitan areas are overvalued. Rental price inflation is lagging as the homeownership rate increases. It hit 63.9% in the third quarter, according to the Census Bureau.

The Bank of England plotted the real risk free rate of interest going back to 1311. It puts into perspective how depressed the current global economy is, when you consider the real rate has been around 4% historically. The blue shaded areas are real rate depressions, and the one starting in the early 1980s has been the second-longest and is most similar to the long depressions of the late 19th century. These periods have been historically associated with low productivity growth, populism, and protectionism. Note that the bounceback from these periods has been sharp: typically you have seen an increase of 315 basis points in the two years after the cycle ends. The late 19th century phase was associated with the birth of Marxism. Is it a coincidence that Millennials are embracing socialism and communism? 

JP Morgan estimates there will be 4 rate hikes in 2018. A tightening labor market will drive the increases, however we are seeing commodity price inflation as well, which will eventually flow through to overall inflation. Food and energy prices are increasing, and for the builders, lumber prices are at multi-year highs. 

Morning Report: Job openings hit a record high

Vital Statistics:

	Last	Change
S&P Futures	2428.3	-6.3
Eurostoxx Index	389.5	-2.6
Oil (WTI)	47.4	-0.1
US dollar index	88.1
10 Year Govt Bond Yield	2.15%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.9

Definitely a risk-off feel this morning as we head into the UK elections, James Comey's testimony, and the ECB meeting later in the week. Bonds and MBS are up as we begin the Fed blackout period with the the 10 year bond yielding around 2.15%.

Job openings hit a record of 6 million, according to the JOLTs job openings survey. The quits rate was flat at 2.1%. The quits rate is the most important number in this report (every FOMC statement will reference it) as it is a harbinger for future wage growth. Overall, it shows that there is strong demand for employees, however there is still a mismatch between what employers want and what is available. The reservoir of the long-term unemployed will probably continue to keep a lid on wage growth, however we are seeing wage inflation in certain disciplines that are in low supply (mainly skilled labor).

The Trump reflation trade looks dead and the 10 year bond yield looks to be heading back to pre-election levels. If you look at a Fibonacci chart of the 10 year yield, pretty much all the support levels have been broken. 

The death of the Trump Reflation Trade is affecting economic confidence as well, at least according to the Gallup US Economic Confidence Index. It is still well above pre-election levels and historical norms but it has given back a lot of the post-election froth. Trump is ready to pivot to infrastructure spending, and the Democrats have historically wanted to spend on infrastructure as well, however they philosophically don't like the fact that much of this uses the private capital and prefer to use direct government spending on their priorities like mass transit. Given that mass transit is almost entirely a blue-state phenomenon, that is going to get very little interest from Red state Republicans. Maybe there is some common ground, but it is going to hard to find. 

Case in point: Many want to see high speed rail in the US. Fine, but when airlines are offering $50 fares, it is going to be impossible to compete. Note that Donald Trump proposed to privatize air traffic control, in order to get private capital to spend the money to update the system. 

Home prices rose 6.9% last month according to the CoreLogic Home Price Index. Rents increased 3%. Scarcity remains the biggest issue driving home price appreciation, as lower mortgage rates have fed a buying frenzy. The West continues to lead the charge. 

Despite the Fed rate hikes, financial conditions are the loosest in 3 years. Definitely a disconnect is going on between Fed intentions and actual market behavior. 

Regulatory reform is probably going to be smaller for the financial sector than imagined. After spending billions to come into compliance with Dodd Frank, banks are loath to see a new regulatory regime. 

Morning Report: Home Purchase sentiment slips

Vital Statistics:

	Last	Change
S&P Futures	2123.5	-6.0
Eurostoxx Index	333.4	-0.4
Oil (WTI)	44.7	-0.2
US dollar index	88.1	0.1
10 Year Govt Bond Yield	1.82%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.61

Markets are flattish as Americans head to the polls. Bonds and MBS are flat.

The NFIB Small Business Optimism index improved in October, however it remains below historical norms. Labor markets remain tight: 55% of all respondents tried to hire in the past month, and 48% reported few or no qualified candidates. A net 25% of all respondents reported increasing employee compensation. A net 19% plan to increase wages over the next six months, which is among the strongest post-recession numbers. Earnings trends are negative, however which means companies are unable to pass along cost increases to customers, at least not yet. Overall, a net 7% of all respondents expect the economy to worsen over the next 6 months.

Job openings were little changed in September, according to the BLS's JOLTS jobs report. JOb openings were at 5.5 million, while separations were 4.9 million. The quits rate was unchanged, while layoffs decreased. The quits rate is the best indicator for wage growth going forward. 

There were 36,000 completed foreclosures in September, according to CoreLogic. The current foreclosure inventory is about 340,000 homes, which is down 31% from a year ago and represents about 0.9% of all homes with a mortgage. The seriously delinquent rate fell to 2.6% which is the lowest since late 2007. Foreclosures remain concentrated in the judicial states.

Fannie Mae's Home Purchase Sentiment Index slipped in October to 81.7 from 82.8 the month before. Sentiment about the direction of home prices over the next 12 months slipped to a net 31% of bullish respondents from 34% in September. The most surprising statistic out of this survey was the decline in the number of people who say their net income is significantly higher: A net 4% said it was significantly higher versus 12% a month ago. Not sure what is happening there, and it doesn't comport with some of the other labor indicators we have been seeing, but there it is. Overall, respondents think the economy is on the wrong track by a wide margin: 56% to 36%. 

Dodd-Frank and the Volcker rule have reduced the market-making functions of banks. Historically, when a large customer like a mutual fund would want to sell a large order of Treasuries, they would call up someone like J.P. Morgan, who would buy the bonds and then try and sell them to their customers. The specialist on the floor of the NYSE did something similar. If a big buyer (or seller) came in for Apple stock and created an imbalance, the specialist would send out an imbalance notification to the newswires in hopes of attracting investors to take the other side. This had the effect of taking volatility out of the market. That function doesn't really exist anymore, and the net result will be more volatility. It won't matter until the next crash, and many investors who call their brokers asking to sell will find a no-bid market. Know where this could get particularly ugly? Munis. 

Morning Report: The Fed shrinks its balance sheet using this one weird trick...

Vital Statistics:

	Last	Change
S&P Futures	2130.8	-4.0
Eurostoxx Index	339.6	-0.6
Oil (WTI)	50.8	0.0
US dollar index	88.4	0.1
10 Year Govt Bond Yield	1.79%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Stocks are down again after getting roughed up yesterday. Bonds and MBS are down as well. 

Mortgage applications fell 6% last week as purchases fell 3% and refis fell 8%. 

Job openings decreased by 400k to 5.4 million in August, according to the BLS. The quits rate (which is probably the best indicator for strength in the labor market) was steady at 2.1%. I wonder if we are seeing employers begin to hire the long-term unemployed, which would account for the drop in openings and the flat quits rate. The labor force participation rate is beginning to pick itself off the floor, as we saw in the latest jobs data. 

We will get the FOMC minutes from the September meeting at 2:00 pm EST today. Be aware of possible market movement around then, especially if the minutes turn out to be a bit more dovish than expected. On Sunday, Fed Vice Chairman Stanley Fischer said that September's decision to wait on hiking rates was a "close call." The minutes will hopefully shed further light on that statement. 

The biggest problem with QE is what to do with all of these assets that now sit on the Fed's balance sheet. The Fed can't sell the Treasuries it bought without withdrawing liquidity from the system. That would be contractionary, and the economy (or at least the financial system) might be too fragile to handle it. That would be the case even if the Fed just lets it run off by not re-investing maturing proceeds. There is now a school of thought that the Fed's balance sheet should simply remain the size it is now, and we shouldn't return to pre-bubble levels. The thinking is that governments should simply consolidate the Fed's assets onto its own balance sheet. (called "permanent monetization") Given that central banks are ultimately owned by the government, its Treasuries would effectively "cancel out" the debt issued by the government. This is why looking at the debt to GDP ratio is somewhat misleading: about a quarter of our debt is owned by the central bank. It is like taking out a loan and leaving the money in your savings account. In nominal terms, your debt is up, but your net worth is unchanged. One thing is for sure: none of this is in the econ textbooks. We are all making it up as we go along. 

A Federal Appeals court ruled yesterday that the CFPB's structure is unconstitutional. The director of the CFPB is appointed for a 5 year term, and can only be fired for cause by the President. The court found that this structure puts too much power in the hands of one person, and is more or less unaccountable. Rob Chrisman takes a look at what is going on. 

A study from the Urban Institute forecasts that the homeownership rate will continue to decline. The question ultimately rests on whether the Millennials are going to follow a different path than previous generations, or are they simply late bloomers who will eventually marry, have kids, and want a place in the suburbs. Note that the homeownership rate started going vertical in 1994, with the Clinton Administration's policies to encourage homeownership, as a tool for social engineering. Post-crisis, the rates has returned to its previously undisturbed rate. 

Morning Report: Job openings flat

Vital Statistics:

	Last	Change
S&P Futures	2180.0	3.0
Eurostoxx Index	344.3	4.0
Oil (WTI)	42.6	-0.2
US dollar index	86.0	-0.2
10 Year Govt Bond Yield	1.51%
Current Coupon Fannie Mae TBA	103.8
Current Coupon Ginnie Mae TBA	105.2
30 Year Fixed Rate Mortgage	3.52

Markets are up this morning on no real news. Bonds and MBS are rallying

Bond markets worldwide are rallying after the Bank of England tried to buy Gilts as part of its QE program and had a tough time finding sellers. 

Mortgage applications rose 7% last week as purchases rose 3% and refis rose 10%. 

Job openings were unchanged in June, at 5.6 million. The quits rate at 2% was more or less unchanged. This number is the tell for a strengthening labor market. 

The bond market has given back the losses from the strong payrolls report last Friday. The Fed Funds futures markets are pricing in a 45% chance of another rate hike this year. Meanwhile, global bond yields continue to fall, with the German Bund at -9 basis points. 

Affordable starter homes are becoming scarce in many parts of the country. We are seeing bidding wars in the hotter markets. Low housing starts are playing a factor here, and government regulation is a big driver of that. Mandates that increase the cost of construction make starter homes too expensive for an entry-level income. 

Technology is helping drive down realtor commissions, according to Redfin. Of course Redfin is talking its own book, however many sellers are foregoing the use of an agent, especially at the higher price points, which makes sense. 

Morning Report: Job openings high, quits flat

Vital Statistics:

	Last	Change	Percent
S&P Futures	2062.2	8.5	0.37%
Eurostoxx Index	2973.5	36.6	1.25%
Oil (WTI)	44.82	0.2	0.36%
LIBOR	0.63	-0.002	-0.35%
US Dollar Index (DXY)	94.02	0.134	0.14%
10 Year Govt Bond Yield	1.75%	0.00%
Current Coupon Ginnie Mae TBA	105.6
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.58

Stocks are higher this morning as commodities rally. Bonds and MBS are flat.

Why are markets looking at commodity prices? Because we have an enormous speculative bubble in commodities unraveling in China. As China deflates its many bubbles (including residential real estate), the reverberations will be felt in developing markets as China looks to export its way out. The deflationary impulse emanating from China threatens to send the European markets (who are closer to the edge than we are) into a Japanese-esque deflationary spiral. The German 10 year Bund yields 12 basis points, and is pushing towards its lows. The net effect to the US? Pain in the high end of the real estate market (think Seattle, San Francisco, Manhattan), and lower Treasury yields.

Speaking of Treasury yields, Citi is out with a call of 1.5% on the 10-year.

Despite a dovish bent, and a call to let the labor market run hot, Minneapolis Fed President Neel Kashkari still says 2 more rate hikes this year is a "reasonable expectation." 

Small business optimism increased slightly in April, according to the NFIB. The index rose about a point to 93.6, still well below its long term average of 98 and below the post-recession peak of 100 set in 2014. While the political climate is certainly not helping, small business is becoming more pessimistic about the economy, which certainly is consistent with the weakening economic data. The conundrum continues to be the labor force, where we have enormous slack, yet businesses talk about an inability to find qualified applicants. Will there be a bidding war for the current people in the labor force (and thus wage inflation), or will businesses decide to hire and train people who don't quite fit what they are looking for? That dynamic will determine how fast the Fed moves to hike rates.

Job openings are higher than they were in 2000, according to the latest JOLTS data. Last month, job openings increased to 5.8 million, just under the high set in July last year. You can see in the chart below how job openings have looked since the index began in the year 2000.

That said, the job openings data might not be the best snapshot of the state of the labor market. The quits rate is a much better barometer of the health of the labor market. The quits rate was flat in March, and is still heading higher, but has not eclipsed the pre-recession highs.

Wholesale inventories increased by 0.1%, while sales rose 0.7%. We still have an inventory problem in the economy however, and that is one signal that is pointing towards a downturn this year. The inventory to sales ratio is at 1.36, which is pushing towards the highs experienced during the Great Recession.

Fannie Mae is launching a no-FICO product for people who don't have credit scores. The loan will price out as if your credit score is 620. Proof of payment of your rent and some other bill will suffice. They will go to 90 LTV for purchase and no cash-out refis. The down payment is gift-able. However, for the very young borrower who has yet to establish a track record, this could be a way in. 

Interesting battle between Quicken and the government. It speaks to the question of what constitutes fraud and what constitutes honest, normal mistakes. 

Morning Report: The global engines of growth are stalling

Vital Statistics:

	Last	Change	Percent
S&P Futures	1847.6	-4.9	-0.12%
Eurostoxx Index	2882.8	-13.8	-0.48%
Oil (WTI)	32.15	-0.1	-0.40%
LIBOR	0.619	0.001	0.10%
US Dollar Index (DXY)	96.44	-0.850	-0.87%
10 Year Govt Bond Yield	1.73%	-0.02%
Current Coupon Ginnie Mae TBA	105.3
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.69

Markets are down after yesterday's blood bath. Bonds and MBS are up small.

Since the Fed tightened rates at the December meeting, the 10 year bond yield has fallen by 58 basis points. Fun fact: The Japanese 10 year bond yield is now negative.

In economic data, the NFIB Small Business Optimism Index fell from 95.2 to 93.9 last week. This is surprisingly tame given the activity in the markets over the past couple months. That said, small business optimism didn't ride the post-2009 rally in the markets up, so it probably will be a little insulated on the way down. Hiring plans remain intact, which is a good sign, however finding qualified applicants continues to be an issue. 

Job openings are pushing close to new highs, according to the JOLTS job report. Quits are increasing, which is a bullish sign for the labor markets.

Wholesale sales and inventories both fell in December. We are seeing a buildup in inventory, which is bearish for the economy.

Bottom line: the markets are signalling pain in the global economy, but it is hard to draw the conclusion that conditions in the US are driving it. If anything, the US appears to be taking its historical role of the engine of growth in a soft global economy.

The canary in the coal mine (besides oil) has been the absolute carnage in the banking sector, especially overseas. Deutsche Bank has been cut in half since September. Same as Credit Suisse. Citigroup is down 27% since Jan 1. So is BNP Paribas. Not sure what this is signalling (exposure to energy? exposure to China?) but it is a big warning button for the global economy and it is flashing red.

Even though the economy has recovered, the hatred of the financial sector hasn't changed, and it is being channeled through Bernie Sanders. The ironic thing is that the "Wall Street" they are railing against hasn't existed for 10 years. Regardless it isn't an environment conducive to risk-taking. 

Speaking of politics, the New Hampshire Primaries are today. Clinton and Sanders look neck and neck, and Trump looks to be ahead of the pack for the Republicans. 

Completed Foreclosures fell to 32,000 in December, which is down 2.4% from November and 22.6% year-over-year. 

Morning Report: Commodities continue to slide

Vital Statistics:

	Last	Change	Percent
S&P Futures	2058.2	-22.8	-1.10%
Eurostoxx Index	3310.6	-49.6	-1.48%
Oil (WTI)	36.8	-0.9	-2.26%
LIBOR	0.462	0.010	2.21%
US Dollar Index (DXY)	98.47	-0.182	-0.18%
10 Year Govt Bond Yield	2.20%	-0.03%
Current Coupon Ginnie Mae TBA	104.5
Current Coupon Fannie Mae TBA	103.7
BankRate 30 Year Fixed Rate Mortgage	3.97

Stocks are lower this morning as commodity prices continue their downward spiral off of weak economic news out of China. Bonds and MBS are up. 

Job openings fell in October to 5.4 million from 5.5 million. Note that payrolls increased by a lot in October (almost 300k), so that drop makes some sense. 

The NFIB Small Business Optimism Index fell to 94.8 from 96.1 last month. Small business wants to hire and expand, but is finding it difficult to hire qualified workers. Small business also intends to increase capital expenditures, which have been deferred since the Great Recession.

The IBD/TIPP Economic Optimism index increased in December to 47.2 from 45.5. As a general rule, the indices tend to inverse gasoline price indices. When gas prices fall, people are generally more upbeat. 

Oil continues its downward spiral. If you look at the chart below, you can see how oil has traded since 2007. We are approaching the 2008 lows in oil right now. Note that oil has its own dynamic, particularly with Iran, who will be adding about 3.8 million barrels of oil per day. The problems in the oil patch are creating problems for the banks, as oil is trading at 37 bucks a barrel and it costs something like $40 - $45 to get it out of the ground. 

The story is more than oil, however. Commodities are down across the board, from the softs like coffee to the industrial metals like copper. This is the canary in the coal mine for global demand. The ISM data indicates manufacturing is going through a soft spot, if not a recession. If you look at the Commodity Research Bureau commodity index, you can see we are well below the lows of 2008 and are approaching the lows of 2002. 

So if global demand is falling, and inflation is nonexistent, why is the Fed going to raise rates next week? At the end of the day, the Fed has more or less painted itself in a corner, and will have to move for credibility's sake. They have telegraphed this move so much that they have to follow through. The punch line is that the Fed may hike the Fed Funds rate next week and mortgage rates might not move much, if at all. 

In spite of all the carnage in the commodity markets, there is one that is holding up better than most: lumber. And that speaks to future demand for construction. Note that in last Friday's jobs report, construction employment increased again. Next year could be the beginning of the return of housing construction, hopefully.

Speaking of homebuilders, McMansion builder Toll Brothers reported earnings this morning, and beat on the top line while missing on the bottom line. Net signed contracts increased 29% in dollars and 12% in units. ASPs increased 4.4% to $790k. 

Foreclosures continue to fall, according to CoreLogic. Completed foreclosures fell 27% YOY to 27k in October. There are 463,000 homes in some state of foreclosure, which is the lowest level since November 2007. 

Morning Report: Strange things happening in the financial markets

Vital Statistics:

	Last	Change	Percent
S&P Futures	2062.0	-7.0	-0.34%
Eurostoxx Index	3409.0	-39.4	-1.14%
Oil (WTI)	42.2	-0.7	-1.70%
LIBOR	0.356	0.001	0.14%
US Dollar Index (DXY)	99.05	0.039	0.04%
10 Year Govt Bond Yield	2.33%	0.00%
Current Coupon Ginnie Mae TBA	103.9
Current Coupon Fannie Mae TBA	102.9
BankRate 30 Year Fixed Rate Mortgage	3.86

Stocks are lower this morning as comments from Mario Draghi fail to inspire markets overseas and commodity prices cannot get out of their own way. Bonds and MBS are flat. 

Job openings increased to 5.5 million in the US last month. 

Macy's cut its profit outlook, which is an ominous sign for the holiday shopping season. Note we get retail sales tomorrow.

The Bloomberg Consumer Comfort Index rose from 41.1 to 41.6 last week. Sentiment regarding the economy and people's personal finances were unchanged, but the perception of the buying climate improved. I am sure low gas prices are having an effect here. 

Initial Jobless Claims were flat at 276k last week. They are at a 5 week high, but are still below 300k and are sitting at lows we haven't seen since the 1970s. 

Mortgage Applications fell 1.3% last week as purchases rose 0.1% and refis fell 2.2%. 

Five head scratchers in the market which are caused by regulation and central bank distortions. People are demanding higher rates from the government than they are demanding from other banks. Theoretically this should be impossible, however capital requirements have made it happen. There are other strange pricing / volatility events happening, which is why the Fed is anxious to get off the zero bound, even though inflation remains well controlled and the economy remains tepid. 

Completed foreclosures increased to 55k in September as the judicial states continue to work through their foreclosure inventory. The national foreclosure inventory stands at 470,000 homes, which amounts to about 1.2% of all homes with a mortgage. This is down 24% YOY. Here is what is behind the spike in REO. Part of it is seasonal - many states have foreclosure moratoriums around the holiday season. 

Sentiment for home purchases declined slightly in September, according to the Fannie Mae Housing Survey. Overall, sentiment about the real estate market is slowly improving, but it has been a tough slog. 

Morning Report: Job openings at another record

Vital Statistics:

	Last	Change	Percent
S&P Futures	1984.9	19.2	0.98%
Eurostoxx Index	3315.0	81.1	2.51%
Oil (WTI)	45.49	-0.4	-0.98%
LIBOR	0.333	0.001	0.30%
US Dollar Index (DXY)	96.34	0.358	0.37%
10 Year Govt Bond Yield	2.23%	0.05%
Current Coupon Ginnie Mae TBA	104	-0.2
Current Coupon Fannie Mae TBA	103.7	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.84

Stocks are higher this morning on overseas strength in equity markets led by Japan. Bonds and MBS are down. 

Mortgage Applications fell 6.2% last week, with purchases falling 0.9% and refis falling 9.9%. 

Job openings hit a record in July, with the JOLTS job openings hitting 5.7 million. Compare that number with the number of unemployed at 8 million. The quits rate (which is a measure of economic strength) has been unchanged for the past year however at between 2.7 million and 2.8 million. It seems surprising to see a labor force participation rate at 38 year lows, job openings at highs, an unemployment rate at boom time levels, and almost  no real wage growth. It speaks to a mismatch between what business wants and who is available. 

Chart: JOLTS job openings:

Citi is forecasting a better than 50% chance of a global recession in the next couple of years. This will be led by emerging markets and China. While that doesn't necessarily mean the US will head into a recession, it does mean that there will be little to no upward pressure on interest rates. The biggest risk to the US is a sharp increase in the US dollar, which will hurt exporters. The policy response to a recession will be limited - monetary policy is already at pretty much full stimulus. Much more worrisome however, is the fact that protectionist policies are gaining in popularity. 

Homebuilder Hovnanian reported earnings this morning. Deliveries fell 3.8% compared with last year. Gross margins were down as well. Contracts did expand however, to almost 20%. It seems like the builders in general had a bit of a lull in deliveries over the summer, but almost all reported bit increases in contracts and backlog. We are entering the slow season for the builders, which lasts about as long as football season. While I sometimes feel like Linus in the pumpkin patch, 2016 could be a big year for the builders. Would be nice to get housing starts back around historical levels of 1.5 million or so. 

Larry Summers is out with another editorial which lays out the case for keeping rates at zero. His argument is that credit spreads have widened (which means the interest rate companies have to pay to borrow) has increased over the past month and that in of itself constitutes a tightening. David Stockman (Reagan's budget director) was on Bloomberg Radio this morning excoriating the "clowns at the Fed" for not having raised rates already. His point is that the unemployment rate is in the middle of the range of what the Fed considers full employment. In fact, the 5.1% unemployment rate is in the bottom quintile of unemployment rates over the past 40 years. 

Morning Report: How will China affect bond yields?

Vital Statistics:

	Last	Change	Percent
S&P Futures	2064.5	-15.2	-0.73%
Eurostoxx Index	3518.2	-87.0	-2.41%
Oil (WTI)	43.63	0.6	1.28%
LIBOR	0.314	0.003	0.83%
US Dollar Index (DXY)	96.33	-0.961	-0.99%
10 Year Govt Bond Yield	2.11%	-0.03%
Current Coupon Ginnie Mae TBA	104.5	0.3
Current Coupon Fannie Mae TBA	103.7	0.1
BankRate 30 Year Fixed Rate Mortgage	3.83

Stocks are lower in the US on overseas weakness. Bonds and MBS are up

Mortgage Applications rose 0.1% last week as purchases fell 3.5% and refis rose 3.1%. 

Job openings fell in June, according to the JOLTS job openings report. The quits rate was steady at 1.9% and hires was steady as well. The quits rate is an important labor market indicator to the Fed. 

Chinese weakness has been driving the sell-off in stocks and the rally in bonds. Does it have staying power? Can it affect the Fed's thinking with interest rates? IMO, the answers are yes and no. The Chinese real estate bubble is deflating - the only question is whether it will be a disorderly mess or whether the government can let the air out slowly. Given the amount of state control over the economy they may be able to engineer a soft landing, but no one else has been able to do it  - Japan came close, however they took their debt to GDP ratio to 2.2x and have had to endure 25 years of no growth (and counting) to do it. 

The punch line however is that China's economy will slow, and that will depress commodity prices and increase deflationary pressure worldwide. This probably is Treasury bullish at the margin, but it isn't going to be the driver of Treasury prices - the US recovery and the Fed are. If anything, turmoil in China is going to be a secondary effect. I still think the Fed hikes rates 25 basis points in September and then waits to see what happens. If the economy accelerates, maybe they hike another 25 in December. If the economy flatlines, maybe they wait. Note the Fed has historically been reticent to make big changes in an election year, for fear of being accused of being political. 

Everyone knows that Dodd-Frank's limits on market-making has affected liquidity in asset markets. Stocks are already susceptible to air pockets as tight spreads and low commissions have made the market-making business unprofitable. However we are seeing it in other markets as well - gold, currencies, etc.. Citi makes an interesting observation: performance-chasing by professional investors is also exaggerating market moves. They call this a "fundamental change" in the markets. I wonder how much of it is due to ZIRP. If professional investors cannot make a return in buy and hold strategies because interest rates are too low, they have to chase performance. I suspect as rates go up, this dynamic will reverse as professional investors return to classic buy and hold strategies that work. That said, the market-making aspect is a new normal that we need to get used to. 

For all the sturm and drang about volatility, the VIX (a measure of fear in the market) is remarkably sanguine at 16. 

Hillary Clinton gave her server and a thumb drive to the FBI last night under subpoena. Supposedly the IG found top secret messages on her server, so this could (or at least should) potentially be serious, if Obama decides to make it serious. Supposedly the admin was the one who initially leaked the story to the press, so they may treat it seriously. As a former Naval Officer who handled classified material, I know if I had taken home top secret material, I would have been thrown in jail. Also, regardless of what the Obama Administration decides to do, someone has everything that is on that server. If it is someone's interest to not have Hillary as president, it will get leaked to the press.