Morning Report: Just how risky is the financial system right now?

Vital Statistics:

	Last	Change
S&P Futures	2434.5	2.5
Eurostoxx Index	389.4	0.2
Oil (WTI)	45.5	-0.3
US dollar index	88.2	0.2
10 Year Govt Bond Yield	2.19%
Current Coupon Fannie Mae TBA	103.47
Current Coupon Ginnie Mae TBA	104.33
30 Year Fixed Rate Mortgage	3.92

Stocks are up small after the ECB decision. Bonds and MBS are down.

James Comey testifies today at 12:30 pm EST. Here are his prepared remarks. Punch line: Nobody looks good in this situation, but nothing impeachable. There is a small chance that something could come out in questioning, but this should be a non market-moving event. 

Initial Jobless Claims fell to 245k last week. Jobless claims are hovering around lows not seen for 45 years. 

Bill Gross sees the bond market as fraught with risk - the worst since 2008 - but he says he feels required to stay invested. His concern is not necessarily risk within the financial system, but simply the prices people are willing to pay for risk. As he says, people are not buying low and selling high - they are buying high and crossing their fingers. His view is that central banks are behind this mindset, which has been a common objection for decades (remember the "Greenspan put?"). That said, the Fed is systematically removing that support, which should help risky asset prices normalize. Any sort of pullback in asset prices will inevitably be Treasury bullish, which means lower mortgage rates.

Meanwhile, Paul Singer of Elliott fame is very concerned about the current state of the market. He notes that the leverage in the system is higher than 2008. Yes, that is true, however the assets being leveraged today are much higher quality than they were a decade ago. Think of it this way: You borrow 95 cents on the dollar to buy a Treasury bond. Yes, you are leveraged, but the asset you hold is pretty low risk. Can you lose 5% on that asset? Maybe, but you probably won't. In 2008, people were borrowing 90 cents on the dollar to buy MBS backed by no-doc pick-a-pay loans. Can you lose more than 10% on that asset? Easily. Which is a more risky trade? Yes, the leverage today is higher (95 cents on the dollar versus 90 cents on the dollar), however the underlying assets being leveraged are much safer. Note that Paul is a bit of a perma-bear who has hated the stock market since 1982. 

Case in point: Over 9 million borrowers have regained equity in their homes since the 2008 crisis. Negative equity fell to 3.1 million homes, or about 6% of mortgaged properties. The biggest markets with negative equity? Miami, Las Vegas, and Chicago. 

Higher home prices have begun to temper homebuyer bullishness, according to Fannie Mae's Homebuyer Sentiment Index. The net number of people who believe now is a good time to buy fell 8 percentage points to a record low, while the number of people who believe now is a good time to sell hit a record as well. 

The House is looking to reform the National Flood Insurance Program, which is heavily subsidized and currently running a $25 billion deficit. Reforming it will be tough without imposing sticker shock on many homeowners. 

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: 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.