Morning Report: Land prices still below bubble years.

Vital Statistics:

	Last	Change
S&P futures	2889	-9
Eurostoxx index	376.86	-2.5
Oil (WTI)	68.97	-0.89
10 year government bond yield		2.88%
30 year fixed rate mortgage		4.56%

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

Yesterday was a bit of a milestone as the 1 month T-bill briefly cracked the 2% level. Farewell, zero bound. 

Tropical Storm Gordon is hitting the Gulf Coast. Oil prices have softened as the storm looks to be weaker than expected. We can still expect to see flooding issues and servicers should be prepared for an uptick in delinquencies. Things to know about your insurance if you are in the storm's path. 

Not much in the way of data today, but we have a lot of Fed-speak. 

Emerging markets are getting slammed as a combination of central bank tightening, trade woes, and currency issues are pushing the asset class down. The flight to quality trade should support bond prices and help push yields lower. 

Like Freddie Kreuger, government shutdown threats just keep returning. Congressional Republicans are looking to wrap up funding by October 1. Controversial issues like funding the wall would likely get pushed until after the election. As far as shutdowns go, the markets generally do not care, but originators need to remember that things like tax transcripts were unavailable the last time we shut down. 

Mortgage applications fell 0.1% last week as purchases increased 1% and refis fell 1%. Rates increased about 2 basis points. 

Same store sales rose 6.5%, yet another indication that the back-to-school shopping season was strong. As goes BTS, so goes the holiday season, meaning growth in Q4 should be strong. Note the Atlanta Fed raised their Q3 GDP estimate to 4.7%. Consumption is 70% of GDP.

Wells is out with a call for a 3.2% 10-year yield by the end of the year. A combination of higher deficits, lower trade deficits, and the expiration of a tax provision will lower demand in the face of rising supply. With strong spending bolstering the economy and a tight labor market, the Fed may try and squeeze in an extra rate hike to provide more breathing room in case the economy rolls over. 

The September Fed Funds futures are at 99% chance of a rate hike, and the Dec futures are at a 70% chance of another. 

Single-family lot prices reached a record level last year, however if you adjust for inflation, they are below the peak. Note however that lot sizes have been falling, and I don't think this analysis corrects for that. For example, the typical lot size in the Northeast is 0.4 acres, and the typical price is $128k, which amounts to $320k an acre. On the Left Coast, the average lot size is .15 acres and the average price is $84k, which works out to be $560k an acre. Even if you correct for the declining lot size, we still aren't back to peak levels in inflation-adjusted land prices. Builders constantly mention that land availability is a constraint on building, but this analysis shows that things were worse during the bubble years. 

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: Strong jobs number

Vital Statistics:

			Last	Change
S&P futures			2818	1.75
Eurostoxx index			389.71	-1.9
Oil (WTI)			67.7	-1.06
10 Year Government Bond Yield				2.99%
30 Year fixed rate mortgage				4.62%

Stocks are higher this morning after good earnings from Apple. Bonds and MBS are down. 

Japanese government bonds got shellacked overnight, with yields rising 8 basis points, which is causing reverberations throughout global bond markets. 8 basis points is a lot in one day regardless, but when rates were only 5 bps to begin with, it is quite the move. 

Donald Trump threatened more tariffs with China. We seem to be going back and forth between detente and escalation. 

The FOMC announcement is scheduled to be released at 2:00 pm EST. No changes in rates are expected, however the action will be in the statement and the interpretations for a December hike. While Trump's criticism of the Fed's rate hikes was unfortunate, things have been testier between the Central Bank and the Executive branch in the past. LBJ shoved William (take away the punch bowl just as the party is getting going) McChesney up against the wall in the Oval Office. 

Mortgage Applications fell 2.6% last week as purchases fell 3% and refis fell 2%. We saw a 7 basis point increase in conforming rates to 4.84%. The government share of mortgages increased. 

The private sector added 219,000 jobs in July, according to the latest ADP report. The Street is looking for 190,000 in Friday's report, but as always, the bond market will be looking more at average hourly earnings than the headline payroll number. Construction added 17,000 jobs, while business services added 47,000 and healthcare added 49,000. 

Manufacturing decelerated slightly in July, but continued to its torrid pace. As expected, much of the talk is about steel tariffs and when those costs will get passed on to consumers. Labor is becoming a bottleneck as well - it is causing capacity constraints. 

Construction spending fell 1.1% in June (which missed estimates) and is up 6.5% on a YOY basis. Resi construction was down on a MOM basis, but increased 8.7% on an annual basis. 

Morning Report: Leading Indicators show strong growth ahead

Vital Statistics:

			Last	Change
S&P futures			2808	-8.25
Eurostoxx index			386.86	-18
Oil (WTI)			68.23	-0.53
10 Year Government Bond Yield				2.87%
30 Year fixed rate mortgage				4.51%

Stocks are lower as earnings continue to come in. Bonds and MBS are down.

Initial Jobless Claims fell to 207,000 last week, which is the lowest level since 1969. Despite the tightness of the labor market, wage growth is tough to come by.

I have discussed at length the disconnect between the Northeast and the rest of the country when it comes to the real estate market. It turns out that not only does the real estate market lag, so does mortgage banking. Last year was a rough year for mortgage banking, and the typical profit per loan was about 31 basis points. That varied by region, with the Midwest in the lead at 39 basis points while the Northeast lagged at 8. 

The Fed's Beige Book characterized the economy as strong, and said that labor shortages are beginning to impede growth. Engineers, skilled construction workers, truck drivers, and IT professionals are in short supply. So far increasing input prices are not translating into higher inflation - corporate margins are taking the hit. Residential housing continues to improve ever so slowly, and commercial real estate is flat. Overall, the picture points to a strong economy, with room to run. The lack of pricing pressures gives the Fed the leeway to go slow as they get off the zero bound. 

The Conference Board echoed this assessment, with the Index of Leading Economic Indicators increasing 0.5% in June. The LEI is still rising faster than the CEI (basically the future indicators are showing that growth should accelerate) which means we have no sign of a slowdown.

Kathy Kraninger, the Administration's nominee to run the CFPB, will appear before the Senate Banking Committee today. Little is known about her views on financial regulation. Congressional aides have said that she will have enough support to pass the Committee on a party-line vote. In her prepared remarks, she said she will continue Mick Mulvaney's work of balancing the need for consumer protection with the need to treat the financial sector fairly. Suffice it to say, having come from OBM, she doesn't really fit the type of bureaucrat who would normally be tapped to run the CFPB, and that may be the point. If her nomination bogs down, Mick Mulvaney can continue to run the agency.

Interesting stat: 70% of the Millennials who own a home have buyer's remorse. Many used their retirement savings to fund the down payment, which is generally a bad move. Many first time home buyers completely underestimate closing costs as well. Others underestimated the costs of upkeep, which is around $16,000 a year. I suspect many of these lessons are learned by every generation who buys their first home. 

The CoreLogic Mortgage Fraud Risk Index rose 12% in the second quarter compared to a year ago. An increase in borrowers taking on loans for multiple properties (i.e more professional investors) appeared to drive the increase. 

Morning Report: Productivity is revised downward

Vital Statistics:

			Last	Change
S&P futures			2755.25	3.75
Eurostoxx index			386.61	-0.28
Oil (WTI)			65.11	-41
10 Year Government Bond Yield				2.95%
30 Year fixed rate mortgage				4.54%

Stocks are higher this morning as trade negotiations continue with China. Bonds and MBS are down.

Italian bond yields are higher this morning, but so far the market seems to have concluded that this will not snowball into a larger European problem. That said, continuing issues in Italy will provide at least a marginal bid for Treasuries.

Mortgage applications rose 4% last week as purchases and refis rose the same amount. Grazie.

Nonfarm productivity was revised downward to 0.4% from 0.7% in the second estimate for first quarter productivity. Output increased 2.7% and hours worked increased 2.3%. Unit Labor Costs were revised upward from 2.8% to 2.9%. Compensation increased 3.3% and productivity increased 0.4%. Since productivity increases drive standard of living improvements and wage gains, this somewhat explains the anemic wage growth we have been seeing. These numbers are going to concern the Fed a little, given that it might increase inflationary pressures, at least at the margin. Productivity is notoriously hard to measure however, so it carries with it a lot of uncertainty. The theme of the US post-crisis has been low productivity.

Freedom mortgage was penalized for serial VA refinancings. As part of their punishment, they are no longer allowed to issue mortgages into multi-issuer pools, which will severely reduce the number of potential investors for their paper. This is a temporary restriction, and they could be out of the doghouse as soon as next year. A couple of other lenders - Sun West and NewDay also were penalized. 

Wells has sold its branches in the Rust Belt to Flagstar Bank. They will continue their presence in mortgage lending, commercial and wealth management however. 

The FTC and DOJ held a hearing on the potential competition issues between the Zillow and Redfin online real estate duopoly. It also covered in more general terms the effects of companies like Zillow and Redfin on the brokerage model in general. Will technology end the need for a realtor? Perhaps for the experienced and professional buyer, but probably not for everyone else. Fees could be affected though.

Steve Mnuchin urged President Trump to exempt Canada from steel and aluminum tariffs. While tariffs are in general counterproductive, it is important to remember the US has much lower tariffs than our trading partners.

The media discovers FHA lending. And no, FHA lending is not the same as the no-no loans of the subprime days. 

Morning Report: Markets sell off as 10 year breaches 3% level

Vital Statistics:

			Last	Change
S&P futures			2626.5	-9
Eurostoxx index			379.58	-3.53
Oil (WTI)			67.53	-0.22
10 Year Government Bond Yield				3.02%
30 Year fixed rate mortgage				4.59%

Stocks are lower this morning after yesterday's interest rate-driven sell-off. Bonds and MBS are down.

The 10 year breached the 3% mark yesterday, which served as a catalyst for a substantial stock market sell-off. Of course 3% is just a round number, but it is the highest rate since 2014. Some pros are looking for a global slowdown in the economy, which could make some corporate borrowers vulnerable. We certainly appear to be in the late stages of a credit cycle. Junk-rated bond issuance has been on a tear over the past few years, reaching $3 trillion as yield-starved investors have had to reach into the lower credits to make their return bogeys. That said, corporate bond spreads are still at historical lows, (investment grade spreads are still half of what they were as recently as early 2016. Let's also not forget that much of the bond issuance over the past 8 years went to refinance old debt at higher interest rates - in other words it was a net positive for these companies. 

We are now going to see just how much of the huge rally in financial assets over the last decade was due to the inordinate amount of stimulus coming out of the Fed. As stocks now have to compete with Treasuries, some changes in asset allocations are to be expected and the riskier assets are going to bear the brunt of the selling. Keep things in perspective, however. Interest rate cycles are measured in generations. 

One of the benefits of QE has been to goose asset prices (which was kind of the whole point). Increasing people's net worth would increase spending and therefore increase GDP. It probably worked, however that hasn't been costless. One of the problems with increasing real estate prices is that it shuts people out from places where there is opportunity (California in particular). If you already own property in CA and have been experiencing torrid home price appreciation, you can move since your increased home equity can be used to purchase another expensive property. But if you live in the Midwest were home price appreciation has been less, you might not be able to take that job in San Francisco since you can't afford to live there. That said, negative equity was probably a bigger problem and home price appreciation did mitigate that issue. 

Mortgage Applications fell 0.2% last week as purchases were flat and refis were down 0.3%. Conforming rates increased 6 basis points, while government rates increased 1. ARMs decreased to 6% of total applications. A flattening yield curve makes ARMs less and less attractive relative to 30 year fixed mortgages.  

Acting CFPB Director Mick Mulvaney has made some changes at the Bureau. First, he is ending the pursuit of auto lenders, which Dodd-Frank prohibited. The Cordray CFPB did an end-around by going after the big banks behind some of the auto financing, and that will end. Second, Mulvaney will no longer make public the complaint database against financial services companies, saying that “I don’t see anything in here that I have to run a Yelp for financial services sponsored by the federal government.” Finally, he plans to change the name from the CFPB to the BCFP. All of this is in keeping with Mulvaney's commitment to follow the law and go no further. 

Morning Report: Controversial CA housing bill dies in committee

Vital Statistics:

			Last	Change
S&P futures			2716.75	10
Eurostoxx index			380.83	0.06
Oil (WTI)			67.63	1.11
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.44%

Stocks are higher this morning as earnings from the financials continue to pile in. Bonds and MBS are flat. 

Mortgage Applications increased 5% last week as purchases rose 6% and refis rose 4%. The refi share was 37.8%, the lowest in a decade. Purchase activity was up on a YOY basis however. Mortgage rates were generally flat as international tensions and the FOMC minutes dominated the news. 

2017 was a tough year for the mortgage industry, as profits per loan were more or less cut in half, from $1,346 to $711. Revenues per loan were up, as higher loan balances driven by home price appreciation were offset by lower margins due to competitive pressures. Volumes were down 20% overall, and down 9% on a comparable basis. While revenues per loan increased, costs were up more, and productivity fell. 

The IRS's computer system crashed yesterday due to all the last minute e-filers. If you were unable to file yesterday, you are in luck - the IRS gave you an extra day to get it in without penalty.

Most consumers don't rate shop when getting a mortgage. This is a surprise since the savings is actually pretty big: between $1,000 and $2,000 over the life of the loan when getting a single competing quote. It increases to $2,000 - $4,000 when the borrower gets 5 competing quotes. Why more don't do that is a mystery. 

An unprecedented bill (SB 827) allowing the state to overturn local zoning ordinances died in committee yesterday. California has an acute housing shortage, and affordable housing advocates had been pushing hard for a bill that would force cities to accept dense multi-family housing complexes within a half mile of rail stops. The bill's early demise was a blow to affordable housing advocates and environmentalists, who want to reduce the need for driving. 

The IMF is warning that years of 0% nominal interest rates have created risks in the financial system, with valuations of risky assets stretched and some late-stage credit cycle behavior. The subprime auto sector in the US is one case in point, and we have multiple residential real estate bubbles globally, especially in China and Canada. That said, the banking system is much more safe and capitalized now than it was 10 years ago. They warn that investors aren't positioned for a sharp increase in inflation and interest rates over the next several years. Which is probably the right bet - if the Chinese credit and real estate bubble implodes, it will be deflationary, not inflationary. 

A very NYC scene..

Morning Report: Bonds testing support

Vital Statistics:

	Last	Change
S&P Futures	2741.5	-10.8
Eurostoxx Index	398.0	-216.0
Oil (WTI)	63.6	.06.6
US dollar index	85.6	-0.4
10 Year Govt Bond Yield	2.58%
Current Coupon Fannie Mae TBA	101.75
Current Coupon Ginnie Mae TBA	102.875
30 Year Fixed Rate Mortgage	4.01

Stocks and bonds are lower this morning on news that China may slow or halt its purchases of Treasuries. 

Bonds are currently trading at 2.58% after Chinese officials recommended slowing or halting purchases of US Treasuries. Driving this decision are the relative attractiveness of US Treasuries and the possibility of a trade war. Between the Fed tapering their purchases of Treasuries, and potential disinvestment of the Chinese, Treasuries are heavy. Ultimately, this is about the trade deficit, which is the difference in value between what we import from China and what we export to China. The deficit is simply filled in by Treasury purchases. While a trade war is probably just saber-rattling, a drop in trade will probably mean a drop in the trade deficit, which means less demand for Treasuries. Ultimately, the US would prefer the Chinese to buy less Treasuries since that would mean they are buying more goods and services. 

Note that the recent peak in the 10 year was 2.62% in March this year. We are close to breaking through support, which would probably trigger at least some technically-driven selling. We have a 10 year bond auction this afternoon at 1:00 pm EST. If we get a lousy bid / cover ratio that could be the catalyst to break through that level. 

We have a lot of Fed-speak today, with Charles Evans, Robert Kaplan and James Bullard speaking. 

Mortgage Applications rose 8.3% in a holiday-shortened week, as purchases rose 5% and refis rose 11%. The average contract rate for the 30 year conforming rate rose a basis point to 4.23%. 

Import prices rose 0.1% MOM and 0.3% YOY, while export prices fell 0.1% MOM and rose 2.6% YOY. 

Lennar reported fourth quarter earnings of $1.29 a share which missed analyst expectations. An undisclosed "one-time strategic transaction" was delayed until the first quarter, which apparently drove the miss. Revenues increased 12%, while deliveries were up 5% in units. Backlog was up 17% in units and 23% in dollars. Gross margins fell by 90 basis points to 22.4%. Lennar is also in the process of buying CalAtlantic, and that deal should close in February. 

The National Association of Homebuilders projects that 653,000 new homes will be sold in 2018, an increase of 5.4% from 2017. This won't be enough to meet demand. Lack of labor and land are the limiting factors, as well as government regulations. It seems that "urban villages" are the flavor du jour, with apartments and walkable developments that mix commercial and residential. 

Morning Report: Awaiting the Fed

Vital Statistics:

	Last	Change
S&P Futures	2667.8	0.0
Eurostoxx Index	391.3	-0.4
Oil (WTI)	57.7	0.5
US dollar index	87.3	0.0
10 Year Govt Bond Yield	2.42%
Current Coupon Fannie Mae TBA	102.531
Current Coupon Ginnie Mae TBA	103.591
30 Year Fixed Rate Mortgage	3.88

Stocks are flat as we await the FOMC decision today at 2:00 pm. Bonds and MBS are up on a weaker-than-expected CPI number.

The FOMC decision is set to be released around 2:00 pm EST. The Fed is almost certainly going to hike by 25 basis points, but the economic forecasts and the fed funds forecasts (the dot plot) will be the focus. The language of the statement will come into play as well, but the dot plot will be the first thing traders will look at. Loan officers, be careful locking around then. 

Mortgage applications fell 2.3% last week as purchases fell 1% and refis fell 3%. The 10 year bond yield inched up and mortgage rates hit their highest levels since March. 

Prices at the consumer level rose 0.4% in November and are up 2.2% YOY. Ex-food and energy, they rose 0.1% MOM and 1.7% YOY. The Fed prefers to focus on the personal consumption expenditure index, not CPI. Energy prices rose smartly in November, and accounted for about 3/4 of the increase in the index. The core rate was a touch below expectations. 

The House and Senate continue to work on reconciling their tax bills. It looks like the final compromise will result in a corporate tax rate of 21%, a mortgage interest cap of $750k, lowering the top rate to 37%, and setting the pass-through rate at 23%. Congress hopes to vote on a bill early next week, before Democrat Doug Jones, who won in Alabama last night, takes his seat. 

If the mortgage interest deduction cap falls to $750,000 it probably shouldn't make that big of a difference for home prices, and certainly not at the lower price points. Remember, the median house price in the US is about 1/3 of that number. But the bedroom communities of some of the bigger cities could see a softening, especially at the top end. 

The lack of affordable housing is a critical problem in this country, and many advocates are worried about tax reform. Affordable housing is largely driven by tax benefits, and those benefits are a function of tax rates. Lower tax rates, and the value of the tax benefits fall. A second issue is that commodity prices are rising, which increases construction costs. Lumber is up almost 15% from the beginning of the year, and OSB products are up 30%. 

Homeowners' equity increased by 1.3 trillion over the past year ending in September, as the value of the housing assets rose to $24.2 trillion and outstanding mortgage debt rose to $10 trillion. Homeowner's equity as a percentage of home value is pretty much back to pre-crisis levels. It has been mainly driven by home price appreciation, not decreasing mortgage debt, however. 

Morning Report: New Home Sales rise smartly

Vital Statistics:

	Last	Change
S&P Futures	2564.0	-3.3
Eurostoxx Index	389.9	0.6
Oil (WTI)	52.3	-0.2
US dollar index	87.3	0.0
10 Year Govt Bond Yield	2.46%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.93

Stocks are lower on no real news. Bonds and MBS are down. 

Stocks are in the middle of earnings season. Companies that beat their numbers are seeing a slight bump, while companies that miss are being taken to the woodshed. AMD is down 8% this morning, and Chipotle is down 14%. This has been a historical warning sign for stocks, along with declining breadth. 

New Home Sales shocked to the upside, rising 19% MOM and 17% YOY to an annualized pace of 667,000. FWIW, the margin of error on these estimates out of Census is gargantuan, and building permits / housing starts have not really confirmed this data. Regardless, it is great news, if it holds up. The biggest growth was in the South, although we saw increases everywhere. 

Mortgage Applications fell 4.6% last week as purchases fell 6% and refis fell 3%. Rising rates affected the numbers as well as the comparison to the holiday-shortened week previously. Overall, mortgage rates increased about 4 basis points to 4.18%. The purchase index is up 10% YOY. 

Durable goods orders came in better than expected, increasing 2.2%, a touch better than expectations. Ex-transportation, they rose 0.7%. Core capital goods expenditures rose 1.3%. 

Home prices rose 0.7% MOM and 6.6% YOY, according to the FHFA House Price Index. 

The 10 year bond yield is trading above 2.4% - a key technical level over the past year. If it holds, it means the bond bears might have their day at last. Much of this will depend on whether we get tax reform, and what shape it takes. Republicans are supposedly releasing their tax bill on November 1. 

Machinations in DC are not the only thing influencing bonds, though. Overseas strength is also playing a role here: the UK economy grew faster than expected, and German business confidence is at a high. Despite the differences between economies, sovereign debt does trade as an asset class and therefore strength and weakness overseas will flow through to our bond market. 

One thing to keep in mind is that mortgage rates generally lag Treasuries. In other words, if the 10 year bond yield spikes, mortgage rates will generally take a few days to adjust. So, if you are floating and wondering whether to lock, mortgage rates will probably move up over the course of the next few days if this level holds in the 10 year. It pays to check the movements in the 10 year and the mortgage market to get an idea of where mortgage rates are headed over a day or two. 

Arizona Senator Jeff Flake announced yesterday that he will not run for re-election. Republicans have a huge advantage in the Senate midterms as they are defending only a few seats while Democrats are defending a lot. There was always a rift in the Republican Party between Trump and Establishment Republicans, who were never comfortable with each other. Establishment Republicans like Corker and Flake were going to be primaried, and it appears that their constituents are further to the right than they are. Despite all the media spin, Jeff Flake was going to have a tough re-election anyway. This is nothing new: In 2010, Republicans hoped to re-take the Senate, however they ran some Tea Party types who ended up losing. The entire US electorate is becoming more polarized, which makes legislation all that more difficult, and shows the importance of controlling the regulatory agencies. 

Fannie Mae is collaborating with fintech companies to launch Single Source Validation, part of its Day 1 Certainty program. Single Source Validation will augment a borrower's credit report with data from other sources. The program is being piloted right now with Quicken. They are also working with companies to improve security and to allow lenders to get info directly from the borrower's bank without having to scan and email statements. 

What jobs are most likely to not be replaced by robots and AI? Many in healthcare. 

Morning Report: Strong GDP and ADP numbers

Vital Statistics:

	Last	Change
S&P Futures	2448.5	1.5
Eurostoxx Index	368.4	-3.8
Oil (WTI)	46.3	-0.1
US dollar index	85.5	-0.1
10 Year Govt Bond Yield	2.15%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.84

Stocks are higher this morning on some strong economic data. Bonds and MBS are down. 

The economy added 237,000 jobs in August, according to the ADP jobs report. The Street is looking for 180,000 jobs in this Friday's jobs report. In a reversal of recent trends, large businesses are starting to add workers. 

Second quarter GDP was revised upward to 3% from 2.6% as consumer spending increased 3.3%. The GDP price index was unchanged at 1%, which gives the Fed the leeway to maintain an easy monetary policy. 

Mortgage Applications decreased 2.3% last week as purchases fell 3% and refis fell 2%. The 30 year conforming rate fell by a basis point to 4.11%. 

Corporate profits fell in Q2 from 11.5% to 8.1%. 

The FHFA is changing some of the limits for reverse mortgages, after it found that the program amounts to a 7.7 billion a year loss for the government. The borrowing caps will fall, such that a 62 year old would be able to only access 41% of the equity in their property, down from 52%. An 82 year old would only be able to access 51%, down from 60%. Reverse Mortgages are a way for seniors to tap an illiquid asset (their home equity) and turn it into a liquid asset (cash) while still living in their home. They are a great deal for the senior, however they are a money-loser for the taxpayer. 

CoreLogic takes a look at which housing markets are most at risk for a downturn, using its Market Health indicator. This looks at home price appreciation relative to income growth and rental inflation. 8 of the top 10 riskiest markets are in Florida. Note that the highest risk areas are the ones that fell the furthest when the bubble burst. The low risk ones are the areas that didn't really experience the huge peaks and valleys. 

Wells Fargo is being sued over lock extension fees. The suit claims that they charged extension fees when the bank was the reason the lock was blown. 

Morning Report: Mortgage applications fall

Vital Statistics:

	Last	Change
S&P Futures	2474.8	2.5
Eurostoxx Index	379.4	-0.9
Oil (WTI)	49.2	0.0
US dollar index	86.0	0.1
10 Year Govt Bond Yield	2.28%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

Stocks are up this morning after Apple earnings beat estimates last night. Bonds and MBS are flat. 

We will have some Fed-speak later this afternoon, but with the Fed on hold for the moment, it shouldn't be market-moving. 

Mortgage applications fell 2.8% last week as purchases fell 2% and refis fell 4%. Mortgage rates were more of less flat last week after the FOMC maintained interest rates and released a somewhat dovish statement. 

The US economy added 178,000 jobs in July, according to the ADP payrolls number. The street is looking for 178,000 jobs in Friday's employment situation report. Meanwhile, the Gallup jobs creation index ticked up to a record high. 

CoreLogic's mortgage fraud index ticked up to a new high. This is largely a reflection of 2 things: first, the index didn't exist during the bubble days, and second it reflects the movement to a more purchase dominated market, which has more moving parts and opportunities for fraud. They note two schemes that are gaining traction right now. The first is the reverse occupancy scam, where a borrower claims they are buying a property to rent out. Future rental income is used to qualify the borrower. Once the loan is closed, the borrower moves in and doesn't rent it out. The second is a pitch to investors in high cost areas to buy Rust Belt properties sight unseen and have the company manage them. Of course the buyers are paying inflated prices. 

Multigenerational homes are making a comeback as kids either move back in with their parents or bring their aging parents into their homes. This is probably a temporary phenomenon driven by high real estate prices and a softish economy, however it is also cultural as multi-generational living is common in Asia. Don't think the Waltons though. These new homes often have separate entrances, multiple kitchens and more than one master bedroom. 

We might see a debt ceiling fight this fall, as Treasury has enough money to get through September. Treasury Secretary Steve Mnuchin is asking for a clean debt ceiling hike from Congress, but it probably won't be that easy. This issue is probably one of the reasons that Sep Fed Funds futures are pricing in a negligible chance for a rate hike next month. 

The MBA's Dave Stevens weighs in on the state of the housing market. Biggest issue: tight credit and slow wage growth. 

Morning Report: Housing starts rebound

Vital Statistics:

	Last	Change
S&P Futures	2459.5	1.8
Eurostoxx Index	384.1	1.5
Oil (WTI)	46.5	0.0
US dollar index	86.9	-0.4
10 Year Govt Bond Yield	2.27%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.96

Stocks are higher this morning as the ECB starts its two day meeting. Bonds and MBS are flat.

Bonds staged a strong rally yesterday after the Senate was unable to repeal and replace Obamacare. Obamacare repeal was to be the source of funds for infrastructure spend and tax reform, and this failure largely means the rest of the Trump reflation trade is pretty much dead.

Mortgage applications rose by 6.3% last week as purchases rose 1% and refis rose 13%. Treasury yields fell last week on dovish comments by Janet Yellen. 

Housing starts rose to 1.22MM and building permits rose to 1.25 million. Starts were up 8.3% MOM and 2.1% YOY. Activity rebounded in the Northeast and the Midwest while falling in the South. The West was unchanged. This is a strong rebound after a terrible May. Tariffs on framing lumber are increasing home construction costs, just as the first time buyer re-enters the housing market. Historically starts have averaged around 1.5 million a year, which largely explains the current housing shortage. In reality, we should be closer to 2 million a year, which is typical for a post-recession rebound. 

CNBC discusses the pros and cons of a 30 year mortgage versus a 15 year mortgage. Yes, the payments on a 30 year will be lower, but the interest paid over the life of the loan will be much higher. One thing worth remembering: you tend to get a decent drop in rate for moving from a conforming 30 year to a 15 year. That pickup is much, much smaller on a FHA or VA loan, due to the illiquidity of 15 year TBA. The one thing the article doesn't really touch on is inflation. US Treasuries are priced as if inflation is never, ever coming back - if you are buying Treasuries at 2.27%, you are really betting that "this time is different," which are the 4 most dangerous words in investing. If you can borrow money for 30 years at under 4%, you will almost assuredly see inflation running hotter than that at some point during the mortgage's life. The world's central bankers are on a mission to create inflation. Eventually they will succeed. 

Morning Report: Fed minutes show balance sheet normalization this year

Vital Statistics:

	Last	Change
S&P Futures	2419.3	-8.8
Eurostoxx Index	379.0	-4.0
Oil (WTI)	45.9	0.7
US dollar index	88.3	0.1
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4.06

Stocks are down this morning along with overseas markets. Bonds and MBS are down as European bond markets sell off. 

The German Bund is getting whacked this morning after a lousy French auction and is up 10 basis points in yield to 55 bps. The Bund yield is at the highest level since early 2016, and this is pulling yields higher globally.

The FOMC minutes didn't reveal anything market-moving. The Fed still plans to raise interest rates gradually, and there is some disagreement between members over when and how to begin balance sheet normalization (which is their term for letting bonds mature and not re-investing the proceeds). It looks like they will gradually reduce reinvestment activity, not stop all at once. The proposed idea would be to reduce reinvestment of Treasuries by $6 billion a month and increase that in increments of $6 billion every 3 months until they hit $30 billion. For MBS, it will be $4 billion a month, increasing in $4 billion increments every 3 months until they hit $20 billion a month. The FOMC members were divided over timing, with some wanting to move in Q3, while others want to begin in Q4. 

The September Fed Funds futures didn't move in response to the minutes, but the December futures did move more towards a higher probability of a rate hike. December is pricing in a 42% chance of no changes, a 47% chance of a 25 bp hike and a 10% chance of a 50 bp hike. 

The overall economic outlook was positive, however residential investment "appeared to be slowing after increasing briskly in the first quarter." The Fed suspects that weather, along with homebuyers getting ahead of expected interest rate increases drove the bump in Q1. The staff also noted that the market seems to be handicapping a smaller chance of fiscal expansion. 

Mortgage Applications increased 1.4% last week as purchases 3% and refis fell 0.4%. The refi share continues to decline and the ARM share is ticking up slightly, however it is still in the single digits. 

The ADP payrolls number came in lower than expected, at 158,000 versus expectations of 180,000. The consensus for tomorrow's payroll number is 170,000. Note that lately the ADP number has been a lousy predictor of the BLS numbers. 

Employers are hanging on to their employees, according the Challenger and Gray Job Cuts report. While job cuts continue in retail, overall they remain low, at 31k. Note that these numbers come from press releases, where companies announce job cuts they expect to make. They aren't actual job cuts. Meanwhile, initial jobless claims ticked up slightly to 248k. 

Redfin has filed for an IPO. For those keeping score, Blue Apron has been an unmitigated disaster, trading at $8.31 a share after going public last week at $10. 

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: Rates rise on strong ADP report

Vital Statistics:

	Last	Change
S&P Futures	2368.3	1.8
Eurostoxx Index	372.8	0.6
Oil (WTI)	52.5	-0.6
US dollar index	92.0
10 Year Govt Bond Yield	2.57%
Current Coupon Fannie Mae TBA	101.438
Current Coupon Ginnie Mae TBA	102.784
30 Year Fixed Rate Mortgage	4.19

Stocks are higher after a strong ADP jobs report. Bonds and MBS are down. 

The private sector added 298,000 jobs in February, according to the ADP jobs report. This reading was the highest in 3 years and beat the consensus number by 115,000 jobs. January was revised upward as well. Construction employment increased by 60,000, which bodes well for home construction, although a mild winter probably affected that number.  Friday's payroll number is forecast to be 195,000. The report sent the 10 year and the 2 year bond yield up 3 basis points. 

Mortgage applications rose 3.3% last week as purchases rose 2% and refis rose 5%. Refis as a percent of total production increase marginally after hitting a 9 year low last week at 45.4%. The average mortgage rate increased by 6  basis points last week. 

Productivity increased at a 1.3% annual pace in the fourth quarter as output rose 2.4% and hours worked increases 1%. Unit Labor costs increased 1.7%. Productivity was marginally below expectations, while unit labor costs were above. Productivity (or lack thereof) has been a consistent issue over the past 10 years. Productivity ultimately is what drives increases in standards of living. 

Given the strong economic data, the Fed has been jawboning the markets, sending Fed Funds forecasts higher. The move over the past 3 weeks in the Fed Funds futures contracts was the result of a number of speeches designed to wake up the markets. "We didn't clearly see how the balance of risks was shifting, so they have to slap our faces, and say, 'Look, you are missing the point'," said Tim Duy, an economics professor at the University of Oregon. You can see the huge change in sentiment in the chart below, which calculates the implied probability of a March hike:

Despite the chance of 2-3 hikes this year, the Fed isn't really moving to a contractionary monetary policy regime. On a scale of 1 to 10, we are going from 9 to maybe 8.5. We aren't even remotely near a normal level in the Fed Funds rate, which is still negative by about 100 basis points (the effective FF rate is trading at 67 basis points and the inflation rate is around 1.7% or so, so the real rate is about -1%). 

Janet Yellen's Fed is almost the mirror image of Alan Greenspan's Fed in that Yellen communicates to the markets what the Fed is thinking, while Greenspan stayed as opaque as possible. Note that the last 3 times the Fed went into a tightening cycle, they blew up the mortgage backed securities markets (1994) the stock market bubble (1999) and the residential real estate bubble (2006). You could argue that we currently have a bubble in global sovereign debt in that bond prices are assuming that inflation has been vanquished and is never, ever, ever coming back. 

Republicans released their repeal and replace of Obamacare, and for the most part it is pretty similar to Obamacare. There are some small changes, but it more or less keeps the same structure. Direct subsidies are being replaced by refundable tax credits, while the Medicaid expansion gets block granted to the states. The Cadillac Tax gets pushed out to 2025, and pricing becomes more of a function of age than income. Conservative Republicans are against it, as well as pretty much every Democrat. 

When dealing with corporations, there is a public Trump (the tweeter) and the private Trump. Since taking office, he has hit pharma companies on drug prices, automakers on outsourcing, and even retailers. Behind closed doors he is more accommodating. This explains why business confidence has been increasing despite these public statements. 

Despite the strong data, the Atlanta Fed revised its forecast for Q1 GDP to an increase of only 1.3%.