Morning Report: Existing home sales and signs of financial stress in Europe

Vital Statistics:

			Last	Change
S&P futures			2798.25	-2
Eurostoxx index			384.88	-0.74
Oil (WTI)			68.98	0.72
10 Year Government Bond Yield				2.89%
30 Year fixed rate mortgage				4.51%

Stocks are flattish this morning as earnings continue to come in. Bond and MBS are down.

This should generally be a quiet week with regards to market-moving data, although we will get the first estimate of Q2 GDP on Friday. Aside from that, we do get some real estate data with existing home sales today and the FHFA House Price Index tomorrow. 

Existing home sales fell 0.6% in June, according to NAR. They are down 2.2% on a YOY basis. Blame low inventory. Lawrence Yun, NAR chief economist, says closings inched backwards in June and fell on an annual basis for the fourth straight month. “There continues to be a mismatch since the spring between the growing level of homebuyer demand in most of the country in relation to the actual pace of home sales, which are declining,” he said. “The root cause is without a doubt the severe housing shortage that is not releasing its grip on the nation’s housing market. What is for sale in most areas is going under contract very fast and in many cases, has multiple offers. This dynamic is keeping home price growth elevated, pricing out would-be buyers and ultimately slowing sales.”

Other stats from the report:

• median home price 276,900 (up 5.2%)
• Inventory 1.95 MM homes (4.3 month's worth)
• Days on market 26 days (down from 28 last year)
• First time buyers 31% of sales
• All-cash transactions 22% (up from 18% last year)
• Sales rose in the Northeast and Midwest, fell in the South and West

Manufacturing activity picked up in June, according to the Chicago Fed National Activity Index. May's abrupt downturn appears to have been a spurious data point, and not an indication of a change in trend. Employment and production-related indicators drove the increase in the index. So far, we aren't seeing trade issues reflected in the production indices, however there is the possibility that manufacturers are stockpiling inventory and accelerating some production ahead of sanctions which is masking the effect. That said, we would expect to see a drop in the employment indicators, which isn't happening.

Liquidity in the bond market is starting to dry up, at least if you measure by bid/ask spreads. Dodd-Frank rules were intended to curb proprietary trading but not market-making. Markets continued to function after the law was implemented, which gave some comfort to regulators that they were on the right track. Now that QE is ending, some of the market structure problems are getting exposed. Banks are less involved in market making and we are seeing bid / ask spreads increase in many markets. This is so far largely a European problem, however an anecdote from one fund who had trouble unwinding an Italian bond position is worrisome. They had a position in Italian sovereign debt and had trouble getting bids larger than $10 million, which is a miniscule trade - especially for G7 sovereign debt. So far it hasn't had a huge effect in the US, but this is something to watch, especially the next time we get a credit crunch. Investors may find entire swaths of the bond market go no-bid, which will include the ETFs linked to these bonds. Tight bid-ask spreads and regulations might be good news for investors and taxpayers in normal times, but they aren't free. 

Despite the issues in the Euro bond markets, stress in the financial system did decrease slightly last month, according to the St. Louis Fed. Historically we are at very low levels, however the Fed is still employing extraordinary measures to support the market, so the past isn't really all that comparable. 

Interesting concept for real estate investors: Now there are a couple of online platforms that allow people to bid on single-family rental properties on line. Not sure what the fee is to transact, but the company also helps connect the investor with a mortgage lender and a property manager. 

CFPB nominee Kathy Kraninger took a lot of heat from Democrats on Friday regarding her role in the Trump Administration's border family separation policies. Not sure how much OMB (her current role) has in DOJ and DHS policy making but Democrats spent a lot of time on the issue. There is a lot of concern that she doesn't have the financial regulatory background to run the agency, however her nomination does allow the Administration to reset the clock on Mulvaney's tenure and he gets to stay if she doesn't get confirmed by the Senate. Either way, the CFPB is getting reined in.

Morning Report: New Home Sales jump

Vital Statistics:

			Last	Change
S&P futures			2745	-14.5
Eurostoxx index			379.79	-5.22
Oil (WTI)			69.07	0.49
10 Year Government Bond Yield				2.89%
30 Year fixed rate mortgage				4.57%

Stocks are lower this morning on continued trade tensions. Bonds and MBS are up

Economic activity decelerated in May, according to the Chicago Fed National Activity Index. Production-related indicators were a drag on the index (probably an effect of trade issues) while employment-related indicators had a positive impact once again. This index is a meta-index of 85 different sub-indices, and while it is backward-looking and generally not market moving, it provides a good global snapshot of the economy. 

The trade war is beginning to have some real economic effects as the CFNAI indicated. While it is primarily limited to steel, many companies that use it as an input are raising prices, which is going to have a few negative effects on the economy - first firms that use steel and cannot pass on price increases are probably going to lay off workers, while the inflationary pressures from increased prices will keep the Fed raising interest rates. Retaliatory tariffs from our partners are causing US exporters to shift production overseas. Note that lumber tariffs are increasing the price of home construction, which is another drag on the economy. 

Given the recessionary potential of trade wars the shape of the yield curve is going to become a bigger talking point for the business press and will be watched closely by the Fed. The shape of the yield curve essentially means the difference between short term rates and long term rates. The most common description is the 2s-10s spread, which is about 34 basis points at the moment. When the yield curve is strongly upward sloping (in other words, the 10 year yield is a lot higher than the 2 year yield) it generally means one of two things: either (a) the market is worried about inflation, and is therefore requiring a high interest rate to entice people to invest in Treasuries long term, or (b) the economy is so strong that investors prefer to put their money in more risky assets and therefore Treasuries have to offer a higher rate to get people interested. For the most part, the US yield curve has been in the second camp. 

As the Fed has been raising the Fed Funds rate, the yield on shorter-term paper (like the 2 year) has been going up faster than the rate on the 10 year. Historically, the yield curve has flattened during tightening cycles, so this is nothing to be alarmed about. If the yield curve inverts, then that has historically been associated with the Fed overdoing it and it is taken as a recessionary signal. In the current environment, the flattening of the yield curve looks more like typical curve behavior during a tightening cycle, and not a signal of a recession. Don't forget the yield curve has been highly influenced by central bank behavior. The Fed could drive up long-term rates by hinting at the possibility of selling some of its portfolio. Bottom line, the business press will be talking about the curve more and more, especially if the trade war begins to snowball and we start seeing a combination of rising input costs with a slowing out output. 

New Home sales increased 6.7% MOM and 14.1% YOY to a seasonally adjusted annual rate of 689,000. This is the highest print since November last year. Interestingly, sales rose in the South, but fell everywhere else. In the West, where the supply shortage is most acute, sales fell by 9% MOM and are flat YOY. Both the median and average sales price fell, which is surprising given the torrid pace of home price appreciation in the home price indices like Case-Shiller and the jump in existing home sales prices according to NAR. It appears that more sales at the lower price points was behind the drop. Luxury sales have been more or less flat for the past year. Eventually tax reform is going to have an effect on the top end of the market, as luxury real estate is simply more expensive due to the changes in mortgage interest and the fact that most of the $1MM+ inventory is in high tax states. We will get more of a read on new homes this week as Lennar and KB both report earnings. 

Fears of rising interest rates have clearly had no negative effects on new home sales. Given the acute housing shortage and the fact that rates are still very low historically, this isn't really a surprise

The Trump Administration announced a plan to reorganize many governmental agencies. The biggest one would merge the Department of Labor and the Department of Education into one agency. On the housing side, USDA loans would be moved from USDA to HUD, which is where they probably belonged in the first place. VA loans will remain under the VA however. Community Development Block Grants would move to Commerce from HUD. The document discusses the need to reform the GSEs and lays out broad ideas, but nothing concrete. 

Morning Report: Consumer debt to hit $4 trillion this year

Vital Statistics:

			Last	Change
S&P futures			2737	4.75
Eurostoxx index			396.69	0.82
Oil (WTI)			72.55	0.31
10 Year Government Bond Yield				3.07%
30 Year fixed rate mortgage				4.66%

Stocks are higher this morning as the trade rhetoric with China cools. Bonds and MBS are up.

China said overnight it would cut its tariff duties on automobiles from 25% to 15%. 

Things are looking grim for the origination business, according to people at the MBA Secondary Conference in NYC. A combination of declining volumes and skinnier margins are pushing the smaller originators out of the market. Hard to see what changes things, although an increase in homebuilding would help. 

McMansion builder Toll Brothers missed quarterly earnings estimates on higher costs, driven by building materials, land and labor. Gross margins contracted 150 basis points, while revenues increased 17%. The stock is down 7% this morning. 

Economic activity accelerated slightly in April, according to the Chicago Fed National Activity Index. Production-related indices accounted for the majority of the index gain, followed by employment indices. The CFNAI is a meta-index of 85 different economic indicators. 

Oil continues its strong run on the back of OPEC cuts and supply disruptions out of Venezuela and Iran. Oil is the highest it has been in almost 4 years. The ability to turn on incremental supply quickly and cheaply will help keep a lid on prices, although higher gas prices for the summer driving season are going to dampen sentiment. 

JP Morgan might get bigger in FHA loans, according to statements made at the MBS Secondary Conference. Regulatory risk caused the bank to publicly state it was pulling back from that market. Regulatory reform is helping, but the bank says that further fixes will be needed. Chase does do FHA lending, but it is tiny. 

The level of consumer debt in the economy has a lot of people talking. Consumer debt is probably going to hit $4 trillion by the end of 2018. Certainly the chart of consumer debt looks worrisome:

Increased student loan debt is a big driver of the increase. That said, does that mean consumers are in over their heads? Can they service that debt? Well, if you look at this chart, it doesn't appear to be a problem:

In other words, consumer debt is high, but the amount people are actually paying to service that debt is very low. Higher interest rates will move that debt service ratio up, but it is hard to make an argument that consumers are over-extended, at least by looking at that chart. 

Freddie Mac is launching its Borrower of the Future Campaign to take a look at how the industry will have to address the younger homebuyer. “The increase in self-employed and the rise of the sharing economy and digitally-driven lifestyles are having a tremendous impact and leading to shifts in behavioral, economic and societal factors,” said Chris Boyle, Chief Client Officer at Freddie Mac. “Collectively, the industry must now take into account these dynamics as we think about how to effectively help the next generation find the home of their dreams. We’re excited to serve in this important role to help the industry better understand the Borrower of the Future, and then drive the conversation on how to apply these insights to make the mortgage process more efficient and affordable.”

Neel Kashkari discusses how the Fed has beaten the Phillips Curve. The Phillips Curve dates back to the 1950s, and plots a relationship between unemployment and inflation. Kashkari cites the 2009 interventions, which should have caused deflation, but didn't. We have unemployment below 4% and still no signs of real inflation. 

Morning Report: 10 year pushing towards 3%

Vital Statistics:

			Last	Change
S&P futures			2675	3.9
Eurostoxx index			381.41	0
Oil (WTI)			67.33	-1.07
10 Year Government Bond Yield				2.97%
30 Year fixed rate mortgage				4.51%

Stocks are higher this morning on no real news. Bonds and MBS are down. 

US Treasury Secretary Steve Mnuchin signaled that the US is ready to discuss a truce in the trade war with China. He characterized his mood as "cautiously optimistic" and said he won't make a commitment on timing. Beijing welcomed the announcement. Separately, Mnuchin also discussed easing sanctions on Rusal which sent aluminum prices back down. 

Existing home sales rose on a month-over-month basis in March, but are down on an annual basis according to NAR. Lawrence Yun, NAR chief economist, says closings in March eked forward despite challenging market conditions in most of the country. "Robust gains last month in the Northeast and Midwest – a reversal from the weather-impacted declines seen in February – helped overall sales activity rise to its strongest pace since last November at 5.72 million," said Yun. "The unwelcoming news is that while the healthy economy is generating sustained interest in buying a home this spring, sales are lagging year ago levels because supply is woefully low and home prices keep climbing above what some would-be buyers can afford."

The median home price was $250,400, up 5.8% YOY. Inventory is down over 7% YOY to 1.67 million units, which represents a 3.6 month supply at current sales levels. A historically balanced market would be 6.5 month's worth. Properties stayed on market for an average of 30 days, which is down almost a week YOY. The first time homebuyer accounted for 30% of sales, and all-cash sales were 20% of transactions.

Commodity price inflation has pushed the 10 year yield to 3%. Many technical analysts consider that to be confirmation that the 3 decade bull run in bonds is over. The one caveat is that the sell-off is being driven by rising commodity prices which tends to be temporary, especially if it doesn't translate into wage growth. You can see the pop in yields post-election below. Hard to believe we were sub 1.8% in late October 2016.

This week will have some important data to the bond market, with GDP and the employment cost index on Friday. We will also get a slew of housing data with existing home sales, new home sales, and Case-Shiller. 

The Street estimate for Q1 GDP is 2%. Generally speaking, the estimates from the banks are lower than the estimates from the regional Federal Reserve banks. 

Economic activity moderated in March, according to the Chicago Fed National Activity Index. Production and employment indicators fell. February's reading was unusually strong, however. The CFNAI is a meta-index of 85 different economic indices, and can be volatile. It isn't a market-mover. 

A paper suggests that the ratings agencies largely got it right with the bubble-era RMBS. The AAA tranches (even subprime) were largely money good, and the study pours cold water on the popular narrative that inflated ratings on RMBS caused the financial crisis. 

The big banks are rushing to launch websites and apps for mortgages as volume contracts. Bank of America, Wells Fargo, and JP Morgan have either launched or plan to launch mortgage banking tech products in response to Rocket Mortgage from Quicken. The company claims that 98% of its customers in the first quarter (some $20 billion in origination) accessed Rocket at some point in the application process. That is an astounding number, though I wonder if that includes push notifications that the borrower didn't necessarily respond to or interact with. 

Speaking of tech, HUD is looking into allegations of housing discrimination by Facebook. Facebook uses big data to allow advertisers to slice and dice the demographics any way they want to target their specific market. What if advertisers decide to target some demographics and not others? That is considered non-problematic for things like consumer products, but housing could be a different story. 

Morning Report: SOFR gets introduced next week

Vital Statistics:

			Last	Change
S&P futures			2636.75	38.75
Eurostoxx index			368.03	2.21
Oil (WTI)			65.81	-0.07
10 Year Government Bond Yield				2.85%
30 Year fixed rate mortgage				4.46%

Stocks are higher this morning on optimism that a trade war with China can be averted. Bonds and MBS are down.

We will have a short week, with the bond market closed on Friday. On Thursday, we will have an early close. There will be a lot of Fed-speak this week, although not much in the way of market-moving reports.

Economic growth picked up in February according to the Chicago Fed National Activity Index. Production and employment-related indicators drove the increase.

San Francisco Fed Chairman John Williams is the front-runner to replace William Dudley at the New York Fed. Policy-wise he is considered a centrist, although not necessarily a markets guy. He is a long-term macro sort of guy - he doesn't keep a Bloomberg terminal on his desk - which makes him somewhat of an odd pick to run the NY Fed which is all about markets.

Speaking of the NY Fed, it is set to launch its replacement for LIBOR next week - the SOFR (or secured overnight funding rate). Regulators are looking for a replacement for LIBOR after it was found that banks were manipulating it in order to help their own proprietary positions. LIBOR is a reference rate for many adjustable rate mortgages, as well as lines of credit so its replacement will affect the mortgage industry. The big difference between the two is that LIBOR is set based on the forecast of bankers, while SOFR will be based on actual transactions in the money markets. This makes it much less susceptible to manipulation.

Bond market observers will be watching as the Fed auctions off almost $300 billion in paper this week, with the biggest 2 year auction since 2014. Amid weakening demand for US Treasuries, the results could buffet rates a bit. Note China has threatened to stop buying US Treasuries in response to tariffs.

Mortgage banking profits fell in the fourth quarter to $237 a loan from $929 in the third quarter. This was the lowest reading since Q1 when it hit $224. Higher costs and decreasing volumes drove the decrease. Margins also fell as banks cut margins in a more competitive environment. 56% of the firms in the study reported positive pre-tax profit in the quarter, down from 77% in the prior quarter.

California is mulling a new idea to increase the supply of homes on the market, by giving a tax break to people 55 and older who downsize and move to a new county. Many homeowners are reluctant to move because they will get hit with higher property taxes on the new property.

Morning Report: Existing Home Sales fall again

Vital Statistics:

	Last	Change
S&P Futures	2590.3	8.3
Eurostoxx Index	388.5	2.1
Oil (WTI)	56.2	-0.3
US dollar index	87.4	-0.1
10 Year Govt Bond Yield	2.36%
Current Coupon Fannie Mae TBA	102.651
Current Coupon Ginnie Mae TBA	103.494
30 Year Fixed Rate Mortgage	3.9

Stocks are higher this morning on overseas strength. Bonds and MBS are flat.

Existing Home Sales rose 0.7% in September, according to NAR. This was the second slowest this year, behind August. Overall, sales were down 1.5% YOY. Tight inventory and the hurricanes affected sales. The median home price increased 4.2% YOY to 245k. Inventory was 4.2 month's worth. First time homebuyers fell to 29% of sales, driven by a dearth of inventory at the lower price points. The NAR also puts in a plug for maintaining the mortgage interest deduction and the state / local tax deductions, as eliminating them will make homeownership more expensive. “There's no way around the fact that any proposal that marginalizes the mortgage interest deduction and eliminates state and local tax deductions essentially disincentives homeownership and is a potential tax hike on millions of middle-class homeowners,” said Brown. “Reforming the tax code is a worthy goal, but it should not lead to the middle class, who primarily build wealth through owning a home, footing the bill. Instead, Congress should be looking at ways to ensure more creditworthy prospective buyers are able to achieve homeownership and enjoy its personal and wealth-building benefits.”

Economic activity picked up in October, according the Chicago Fed National Activity Index. Production-related indicators drove the increase. Employment-related indicators were positive, but less so than September. The economy definitely seems to be accelerating. 

What is driving global growth? China and India for the most part, but it looks like Japan is waking from its long slumber at last. Japanese growth has been missing since the early 90s and is transitioning from being a drag on global growth to a driver of it. Don't forget, Japan is the third biggest economy in the world and has been largely moribund since the early 90s. Want to see what a real bear market in stocks looks like? Take a look at the long term chart of the Nikkei 225: The Nikkei is hitting 20 year highs, and is still 43% below its 1989 peak. 

The Japanese resurgence will probably mean higher interest rates, at least at the margin, as well as higher commodity prices. Much of this will depend on what happens in China, which has a massive real estate bubble and will probably have to go through a secular recession like the US did in the 30s and Japan did for the last 2 decades. 

Janet Yellen said she will resign her position on the Federal Reserve Board once Jerome Powell is sworn in. “As I prepare to leave the Board, I am gratified that the financial system is much stronger than a decade ago, better able to withstand future bouts of instability and continue supporting the economic aspirations of American families and businesses,” Yellen said in her resignation letter. Her term officially expires in 2024, but it is rare for an ex-chairman to stay on. Donald Trump will have four open positions to fill, leaving him with the ability to make his mark on the Fed.

Morning Report: Inflation adjusted home prices over the years

Vital Statistics:

	Last	Change
S&P Futures	2442.5	7.5
Eurostoxx Index	390.7	3.1
Oil (WTI)	43.1	0.1
US dollar index	88.7	0.1
10 Year Govt Bond Yield	2.15%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.91

Stocks are higher this morning on good economic news overseas. Bonds and MBS are flat. 

Not a lot of important data this week, although we will have a lot of Fed-speak tomorrow. Personal Income and Personal Spending on Friday will be the biggest event. 

Durable Goods orders fell 1.1% last month, as aircraft orders (which are notoriously volatile) fell again. Ex transportation, they were up .1% MOM and 5.5% YOY. Capital Goods orders (which is a proxy for capital expenditures) fell .1% MOM and is up 5% YOY. 

Economic Growth slowed in May, according to the Chicago Fed National Activity Index. This looks like a bit of a reversal from a strong April reading. Production indicators drove the decrease, while employment and housing contributed. 

The recent rally in the markets could provide another justification for rate hikes, according to NY Fed President William Dudley. "When financial conditions ease, as has been the case recently, this can provide additional impetus for the decision to continue to remove monetary policy accommodation."

Note the language "remove monetary policy accommodation." To the Fed, they are still stimulating the economy, and they are dialing back that accommodation, not tightening in the classic sense. 

On an inflation-adjusted basis, home prices have been outstripping inflation for decades. In the 1940s, the median house price (inflation adjusted to 2000 dollars) was $30,600. The median home price in 2000 was almost 200k, inflation adjusted. If you look at non-inflation adjusted numbers, the median home price in 2000 was $2938, and the median income was $956, making the median house price to median income ratio 3.07x. Generally speaking, that ratio is in the 3.1x - 3.6x range historically. It did peak at 4.8x in 2005, and we are back to elevated levels again. 

Speaking of inflation, while things like healthcare, college tuition have outstripped inflation, technology has driven it lower. Check out this Radio Shack Flyer from 1991. Everything on that page cost over $3,200 and all that functionality can now be found on your smartphone. (Yes, even the CB can be monitored via browser). Here is what your phone may be able to do in 10 years. 

Delinquent GSE mortgages are at the lowest level since 2008. DQ GSE loans were 1%, while DQ FHA loans were 4%. DQs overall were 2.8%. 

Morning Report: Neel Kahskari explains his dissent

Vital Statistics:

	Last	Change
S&P Futures	2372.5	-2.8
Eurostoxx Index	377.7	-0.6
Oil (WTI)	48.0	-0.7
US dollar index	90.6
10 Year Govt Bond Yield	2.50%
Current Coupon Fannie Mae TBA	101.53
Current Coupon Ginnie Mae TBA	102.87
30 Year Fixed Rate Mortgage	4.24

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

Should be a relatively quiet week coming up with not a lot of market-moving data. 

Economic growth increased in February, according to the Chicago Fed National Activity Index. The 3 month moving average is the highest since December 2014. Employment-related indicators accounted for most of the growth in the index. 

Chicago Fed's Evans expects GDP to grow 2.3% this year, and says that 3 rate hikes is reasonable. 2 hikes are appropriate even if inflation progress remains uncertain. 

Minneapolis Fed Governor Neel Kashkari was the lone dissenter from last week's Fed decision, preferring to maintain rates at current levels. His rationale: inflation remains below the Fed's target rate and there is still too much slack in the labor market. “I dissented because the key data I look at to assess how close we are to meeting our dual mandate goals haven’t changed much at all since our prior meeting, We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains.” He also supports unwinding the Fed's balance sheet once conditions warrant tightening monetary policy, however he believes the Fed should announce their plan well in advance of taking any action in order to let the markets adjust. 

The internet has disintermediated the middleman in just about every profession - from retail to stockbroking. One area that hasn't been affected: realtors. It turns out people still value the human touch. “Who is going to write a contract? Fill out a disclosure statement? Anticipate what’s coming on the market?” asked association president Bill Brown. “There’s a human element to buying and selling a home that can’t be replaced.” It is amazing that the traditional 5% - 6% commission has been impervious to technology, but it has. 

The Department of Justice is taking PHH's side in the lawsuit over the structure of the CFPB. This is an amicus brief, and the judges may pay close attention, however the DC District Court of appeals is a liberal stronghold and will probably side with the CFBP. However the CFPB would need DOJ on its side if it goes to SCOTUS. 

As we begin the spring selling season, inventories are at record lows and we are seeing bidding wars even in places like the Midwest. In fact, buyers are bidding on contracts. It is truly a strange state of affairs when there is record low inventory, bidding wars, and housing starts remain well below historical averages. 

Here is what the proposed cuts to HUD means for US cities. The biggest cut will be the Community Development Block Grant program, which provides Federal funding for parks and bike paths etc. Unsurprisingly, the biggest beneficiaries are the counties surrounding Washington DC. This program also provides some of the funding for Meals On Wheels, which provides food to senior citizens. Needless to say, the media has focused all of its attention on that piece, which is a tiny fraction of the CDBG program. 

That said, we do have a housing shortage, especially at the lower price points. The Campaign for Housing and Community Development Funding makes its case for continuing public investment in low income housing. 

Supreme Court nominee Neil Gorsuch will start his Senate hearings this week. It will be interesting to see if the left filibusters him, and whether Mitch McConnell goes nuclear (eliminates the filibuster for SCOTUS nominees) in retaliation. 

Morning Report: Markets rally on the Fed

Vital Statistics:

	Last	Change
S&P Futures	2163.0	7.0
Eurostoxx Index	347.6	5.0
Oil (WTI)	46.0	0.7
US dollar index	86.1	-0.2
10 Year Govt Bond Yield	1.65%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.56

Markets are higher after the Fed maintained interest rates yesterday. Bonds and MBS are up.

The Fed kept interest rates unchanged yesterday, and released new economic projections. Most members expect the Fed to hike another 25 basis points this year according to the dot plot. They tweaked their economic projections slightly, taking down their GDP forecast for 2016 and inching up their unemployment forecast. Longer term projections were unchanged. Three members dissented, wanting to hike rates in September. 

In her press conference, Janet Yellen was careful to say the Fed was confident in the economy: "Our decision does not reflect a lack of confidence in the economy, Conditions in the labor market have strengthened and we expect that to continue, and while inflation remains low we expect it to rise to our 2 percent objective over time." She also guided that the default path was for one more rate hike this year, assuming no major changes in the economy: "I would expect to see (a rate increase this year) if we continue on the current course of labor market improvement, and there are no major risks that develop and we stay on the current course."

Bonds rallied on the Fed's announcement, and that is carrying over this morning as markets rally worldwide. 

FWIW, Bill Gross isn't buying that the Fed is "data dependent." He thinks they are "market dependent." 

In other economic news this morning, initial Jobless Claims fell to 252k last week. 

The Chicago Fed National Activity Index fell to -.55 last month, which confirms the slowdown we have seen in other indicators. The 3 month moving average is slightly negative, which means the economy is growing, albeit below trend. 

Delinquencies and foreclosures continued to fall in August, according to Black Knight Financial Services. The rally in bonds from Brexit caused prepayments to spike, with prepayment speeds hitting a 3 year high. 4.24% of all homes are delinquent and just over 1% are in foreclosure. 

Morning Report: Goldman predicting a March hike

Vital Statistics:

	Last	Change	Percent
S&P Futures	2008.9	17.0	0.85%
Eurostoxx Index	3269.0	8.3	0.25%
Oil (WTI)	34.44	-0.3	-0.84%
LIBOR	0.586	0.016	2.81%
US Dollar Index (DXY)	98.64	-0.063	-0.06%
10 Year Govt Bond Yield	2.19%	-0.01%
Current Coupon Ginnie Mae TBA	104.3
Current Coupon Fannie Mae TBA	103.3
BankRate 30 Year Fixed Rate Mortgage	3.82

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

We have a holiday shortened week, with markets closing early on Thursday. We do get some important data with the final revision to Q3 GDP, Existing Home Sales, New Home Sales, the FHFA House Price Index, personal spending and income, and inflation. Basically a week's worth of data crammed into 3 days. 

Oil continues to fall, hitting $34.23 a barrel for WTI. 

The Chicago Fed National Activity Index fell to -.3 from - .17. 

Goldman is predicting a March rate hike - a "fairly easy path."  They anticipate growth will remain above trend and employment growth to be well above breakeven. Inflation will pick up as the the big swoon in oil from $100 to $50 will be a year old and won't be pushing down the inflation numbers. 

What deleveraging? Household debt rose to $14.1 trillion in Q3, according to the NY Fed. This is just off the high of $14.3 trillion in the third quarter of 2008. Auto debt and mortgages drove the increase. 

Morning Report - G fee review - much ado about nothing

Vital Statistics:

	Last	Change	Percent
S&P Futures	2086.9	11.4	0.55%
Eurostoxx Index	3696.2	22.2	0.60%
Oil (WTI)	55.28	-0.5	-0.83%
LIBOR	0.276	0.001	0.24%
US Dollar Index (DXY)	97.88	0.363	0.37%
10 Year Govt Bond Yield	1.86%	-0.01%
Current Coupon Ginnie Mae TBA	103.7	0.3
Current Coupon Fannie Mae TBA	102.6	0.1
BankRate 30 Year Fixed Rate Mortgage	3.79

Markets are higher this morning on overseas strength. Bonds and MBS are flattish.

This week doesn't have any data which will move the bond market, but we do have some important numbers nonetheless. On Wednesday, we will get existing home sales and the FHFA House Price Index. On Thursday, we will get New Home Sales. Finally, we will get earnings from Pulte an D.R. Horton. Hopefully their comments will help reconcile the strong builder sentiment with the lousy housing starts numbers. 

Note that Pulte is saying that the housing market remains strong, despite the "volatile" numbers. They see high single digit growth in housing. M&A is hot: buy building product stocks. 

The Chicago Fed National Activity Index fell to -.42 in March, giving further ammo to the argument that the deceleration that started in January and February was not simply weather driven. The 3 month moving average, which is a more stable, indicates that the economy is operating below its historical trend. 

William Dudley is speaking at the Bloomberg Americas Monetary Summit this morning. His main points - the Fed will be data-dependent (boilerplate), and the Fed is cognizant of the risks or liftoff on emerging markets. Even if rates do go up, monetary policy will still be easy. That said, ECB and BOJ easing does make credit conditions more supportive. The stock market is blithely assuming that the economy will handle rate hikes as easily as it handled the end of QE and is therefore vulnerable, IMO. 

The Fannie Mae and Freddie Mac guarantee fee review is finished, and it looks like not much is going to change. The 25 basis point adverse delivery fee is gone, but there are new fees imposed, so it looks to be more or less a wash. Borrowers with lower credit are going to pay slightly less, while high bal, investment properties, and cash out refis will become slightly more expensive. 

Jon Corzine (of MF Global fame) is considering starting a hedge fund. Proving you can get away with anything in this country if you are politically connected. 

Morning Report - Blackstone vs the first time home buyer

Vital Statistics:

	Last	Change	Percent
S&P Futures	1557.4	5.4	0.35%
Eurostoxx Index	2711.9	30.2	1.13%
Oil (WTI)	94.42	0.7	0.76%
LIBOR	0.283	-0.002	-0.53%
US Dollar Index (DXY)	82.52	0.147	0.18%
10 Year Govt Bond Yield	1.96%	0.04%
RPX Composite Real Estate Index	190.7	-0.5

Markets are higher after Cyprus agreed to shut its second-largest bank in exchange for a 10 billion euro bailout. Of course Russian money will flee the country, and Russian banking was the only thing keeping that economy afloat. So, I am sure we will be revisiting this issue in the near future. Bonds and MBS are down on the "risk-on" trade.

This is a short week, so expect activity to wind down as traders square their books for quarter end, and many take Thursday off.  In economic data, we have durable goods, new home sales, and Case-Schiller tomorrow. We will get the final revision to 4Q GDP on Thursday.

The Chicago Fed National Activity Index came in at +44 in February from -.49 in January.  This is a broad-based index that focuses on 85 different indicators of economic activity. Since the individual monthly indices can be volatile, you want to focus on the 3 month moving average, which has been above zero (absolute historical trend) for the past 4 months. The main takeaway from the index is that we are performing slightly above trend, and that inflation is well-contained.

The Wall Street Journal has an article this morning talking about how professional investors are impacting the real estate market. In hot markets like Orange County, professional investors make up about 22% of all sales. During the bubble years, they were about 10%.  They are having the effect of taking affordable housing off the market. This has had the added effect of improving the quality of neighborhoods as they have taken the abandoned homes off the market and maintaining them. Blackstone has bought $3.5 billion worth of homes so far and is buying more than $100 million a week. Of course the loser in all of this is the first time homebuyer, who already has to deal with a lousy job market and a tight credit market, and now faces bidding wars for a starter home from firms like Colony and Blackstone. These investors may find that being in the rental business is a lot harder than it looks and could turn net sellers are rental yields fall and home prices increase. 

Morning Report - Life after Fan and Fred.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1521.4	6.8	0.45%
Eurostoxx Index	2688.7	58.6	2.23%
Oil (WTI)	94.04	0.9	0.98%
LIBOR	0.287	-0.002	-0.52%
US Dollar Index (DXY)	81.11	-0.368	-0.45%
10 Year Govt Bond Yield	1.98%	0.02%
RPX Composite Real Estate Index	194.5	0.2

Markets have a risk on feel this morning on no real news.  Elections are being held in Italy, with Bersani on track to win. Italian sovereign yields have tightened 20 basis points in response. Bonds and MBS are down.

Sequester week. Bob Woodward had a column over the weekend that said, WH protestations aside, that the sequester was Obama and Lew's idea in the first place. The WH is releasing all sorts of gloom and doom scenarios about what will happen if sequestration happens. Republicans seem to be content to allow the cuts to happen. FWIW, I do not believe the markets care one way or the other about the impending sequester.

The Chicago Fed National Activity Index showed growth moderated in January, falling to -.32 from a revised +.25 the previous month. Production related indicators explain most of the weakness, although employment and consumption also were negative contributors. The 3 month moving average is still in positive territory, indicating that economic growth continues to be moderately above trend.

The Bernank will be testifying in front of Congress this week. These things tend to be partisan dog-and-pony shows where the questioners are more interested in getting the Fed Chairman to validate their worldview than they are in seeking actual answers.  Democrats will undoubtedly be pushing for Bernake to say that sequestration will be an economic nightmare, while Republicans will be pushing for him to say that spending and the debt pose a problem. Democrats will also be looking for support for raising the minimum wage. Republicans will probably want to drill down a bit on the end of QE.

The Bipartisan Policy Center has released a report on the future of housing and the GSEs. With the government guaranteeing 90% of all mortgages these days, there is a push in Washington to get the private sector more involved. They envision phasing out Fan and Fred and replacing them with a "public guarantor," who has a re-insurance role, stepping in only when private insurers are unable to make good on the loan. They also propose that the government get involved with providing affordable rental housing.