Morning Report: Self-employed borrowers get some help from Congress

Vital Statistics:

	Last	Change
S&P futures	2911	-3.75
Eurostoxx index	385.16	-1.42
Oil (WTI)	69.93	0.42
10 year government bond yield		2.86%
30 year fixed rate mortgage		4.55%

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

Donald Trump is suggesting that a new NAFTA could be in place by the end of the week. One sticking point is removing a provision that inhibits the US from pursuing anti-dumping and anti-subsidy cases. Mexico has agreed, but Canada is still fighting it. 

Initial Jobless Claims slipped 1K to 213,000 last week. 

Personal incomes rose 0.3%  and personal spending rose 0.4% in July, which was right in line with estimates. The PCE inflation index came in at 0.1% MOM / 2.3% YOY, and the core PCE index rose 0.2% MOM / 2.0% YOY. Inflation is pretty much right at the Fed's target, which means they don't have to move quickly to increase rates and can still just gradually lift off the lower bound. 

A Reuters poll of real estate experts suggests that home prices will rise 6% this year and then begin to taper off the growth. Limited inventory has pushed up home prices well in excess of wage growth and inflation over the past 6 years. That sort of phenomenon can work when interest rates are falling, as the lower mortgage payment offsets the higher prices, but that game is over. 

Congress is entertaining legislation that will make it easier for self-employed borrowers to get a mortgage. The bipartisan "Self-Employed Mortgage Access Act" will address the needs of borrowers who don't have traditional W-2 income. Sponsor Mark Warner said: “An increasing number of Americans make their living through alternative work arrangements, like gig work or self-employment. Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income – paystubs or a W-2 – as someone who works 9-to-5. This bill will allow these workers to supply other forms of paperwork to verify their income while continuing to protect consumers from predatory lending.” The bill will expand the universe of income documentation to allow these borrowers to fall under QM. The bill is supported by the MBA and the Consumer Federation of America. 

The Great Recession left what looks to be a permanent gap between potential GDP and actual GDP, which amounts to something like $70,000 per person. You can see the output gap in the chart below. Interestingly, the word "bubble" appears nowhere in the article - it is as if the financial crisis appeared out of nowhere, which certainly demonstrates a blind spot for the Fed (and central bankers in general). 

They don't take into account that the trajectory of growth (beginning in 1998 through 2006) was artificially boosted due to increasing asset prices. The trajectory begins with the stock market bubble and ends with the real estate bubble. Granted the late 90s growth was also influenced by a boom in productivity, but that ended soon after. I always find it interesting that central bankers believe "too much money chasing too few goods" (i.e. inflation) is a monetary phenomenon, but "too much money chasing too few assets" (i.e. asset bubbles) is not. 

Morning Report: New down payment assistance programs

Vital Statistics:

			Last	Change
S&P futures			2728.75	9.5
Eurostoxx index			379.91	3.04
Oil (WTI)			73.39	-0.06
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.52%

Stocks are higher this morning on end-of-quarter window dressing. Bonds and MBS are flat. 

Personal incomes rose 0.4% in May while personal spending rose 0.2%. Incomes were in line with estimates, while spending was lower. The June FOMC statement said that consumer spending was accelerating - no evidence of that in this report. Services spending drove the decline, and we could be seeing evidence that higher gasoline prices is affecting discretionary expenditures. Inflation was in line with expectations at the MOM level, and a hair above expectations on an annual basis. The core PCE index ex-food and energy came in at 2%, which is right where the Fed wants it. April's income and spending numbers were revised downward. Don't be surprised if strategists take down some of their Q2 GDP forecasts on these numbers. 

The Chicago PMI improved to 64 from 62, which is a 5 month high. New Orders and order backlog drove the increase. We are seeing some signs of inflation brewing, with extended lead times, and a 7 year high on the prices paid index. Businesses were asked about how trade was affecting their operations. About 25% said they were having a significant impact, 40% said there was a minimal impact, and the rest were either unsure or insulated from trade issues. 

KB Home reported strong numbers, with a 170 basis point increase in gross margins, 10% revenue growth, and a 50% increase in operating income. ASPs were up 4% to 401,800, and order growth was 3%. Backlog was the second highest on record. The stock is up 7% pre-open. 

Interesting theory about the lack of construction workers: opiods. Between users and those that have been convicted of crimes related to usage, many workers are shut out of the work force. 80% of homebuilders report shortages in subcontractors. 

The Senate will hold hearings on July 12 and 19th for Kathy Kraninger's nomination to run the CFPB. The conventional wisdom is that she is not intended to be confirmed, but is to be an excuse to keep Mick Mulvaney in charge of the agency. 

Deutsche Bank failed its stress test, while State Street, Goldman and Morgan Stanley got dinged. 

Many Millennials are struggling to get a down payment for a home, and now some companies are working to help them get it. One company will supply up to a $50,000 downpayment if the borrower rents out a room on Air B&B and shares the income with the company. These loans are appealing to borrowers who might qualify for a FHA or 3% down Fannie loan but don't want to pay the MI and other costs. While there are fears that we are bringing back the bad old days of the real estate bubble, here is the MBA's mortgage credit availability index. We are a long way away from the days of the pick-a-pay mortgage. 

Morning Report: Personal Incomes and Spending increase

Vital Statistics:

			Last	Change
S&P futures			2679	7.6
Eurostoxx index			385.1	0.46
Oil (WTI)			67.48	-0.62
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.56%

Stocks are higher after a slew of new mergers were announced. Bonds and MBS are up small. 

We have a big week ahead with the FOMC meeting starting tomorrow and the jobs report on Friday. The Street isn't looking for any changes in interest rates at the May meeting, but will focus as usual on the language of the statement. For the jobs report, the expectation is 190k new payrolls and 2.7% annual wage inflation. 

Pending Home Sales were up marginally from February, but were still down on an annual basis, according to NAR's Pending Home Sales Index. Bad weather in the Northeast pushed down pending sales, however all parts of the country were down. Again, blame low inventory and falling affordability. 

Personal Incomes rose 0.3% in March, while personal spending rose 0.4%, in line with expectations. The PCE index was up 2% YOY and the core PCE index was up 1.9%. This is the Fed's preferred measure of inflation and it is right where they are targeting. Income growth was the weakest since last Fall, however. 

The big debate right now is whether there is any slack in the labor market. Anecdotal evidence abounds that companies are struggling to find qualified workers. However, Econ 101 says that we should be seeing higher wage inflation as a result and that isn't happening (at least not yet). Some theories are claiming this is a market failure and that employers are artificially holding down wages (which is then used as an argument for more government intervention in the labor market). I suspect the issue is that there are three big forces holding back wage growth. First, inflation is low - if companies cannot pass along price increases to their customers, they aren't going to be raising wages. Second, lower wage jobs are competing with technology which is only getting better and cheaper. And finally, the long-term unemployed represent a reservoir of slack that companies know they can tap if needed. FWIW, I think the first and third explanations explain it, and find the idea that employers are somehow colluding to keep wages low to be wholly unconvincing. Take a look at the chart below, which shows wage increases versus inflation. You are seeing actual wage growth.

For now it looks like the 3% level in the 10 year has held. What drove the sell-off - it wasn't like there was anything data-wise to support it. JP Morgan blames CTAs using momentum strategies to short the 10-year. Chinese selling has also been rumored to be a factor. We won't be able to confirm or deny that theory for a couple of months. CTA funds have been net short Treasuries since September, however a momentum signal in mid-April caused people to pile into the trade and that apparently drove the late month sell-off. 

Steve Mnuchin is "cautiously optimistic" on trade talks with China. The subject will include intellectual property and joint ventures. 

Defect risk decreased on a MOM basis but was up on a YOY basis, according to the First American Loan Defect Index. The biggest risk was in the sand states, while the lowest risk was in the Rust Belt. 

Morning Report: Incomes and spending rise

Vital Statistics:

			Last	Change
S&P futures			2609	5
Eurostoxx index			370.62	1.36
Oil (WTI)			64.88	-0.37
10 Year Government Bond Yield				2.77%
30 Year fixed rate mortgage				4.45%

Stocks are higher this morning on end of month / quarter window dressing. Bonds and MBS are up.

Stocks are set to break a 9 quarter winning streak. The market leaders - the FAANG stocks - have been taking a beating as Facebook gets hit on data issues, and Amazon finds itself in the Administration's doghouse. 

The bond market will close early today, at 2:00 pm EST. Get your locks in early, as secondary marketing types will probably build in a margin cushion to protect themselves over the long weekend. 

Personal Income rose 0.4% in February, while personal spending rose 0.2%. The Personal Consumption Expenditure Index rose 0.2% MOM and 1.8% YOY. The core PCE index (the Fed's preferred measure of inflation) was up 0.2% MOM and 1.6% YOY. The core PCE numbers were a touch higher than the Street was looking for, and everything else was in line. The savings rate rose. Bonds are rallying a bit on the report. 

Initial Jobless Claims fell to 215,000 last week, barely missing the late February number of 210,000. We haven't seen these levels since the early Carly Simon's "Your'e So Vain" topped the charts. When you take into account population growth the number is even more dramatic. 

The FHFA announced that Fannie and Freddie will be issuing a new uniform mortgage backed security beginning in June of 2019. "The transition to the new, common security requires planning, investment, and preparation by a wide variety of market participants," said FHFA Director Melvin L. Watt. "We have now set the specific date that the Enterprises will start issuing the UMBS and I urge the industry to get ready now to ensure smooth, successful implementation." This will help bring Fannie and Freddie pricing more in line with each other. 

Is fintech reaching parts of the market that have not been fully served by traditional banks and lenders? The Philly Fed finds some evidence that it does, particularly in areas where there is high lender concentration (i.e. only a few banks) and areas that don't have much in the way of banks. 

Barclay's Bank agreed to pay $2 billion in civil penalties to settle an investigation concerning RMBS issued during the bubble years. “In general, the borrowers whose loans backed these deals were significantly less credit-worthy than Barclays represented,” the Justice Department said in a statement Thursday. Barclay's had committed to keep the settlement under $2 billion in 2016, but the Obama Justice Department balked. 

A Reuters poll of 75 bond strategists suggests that fears of oversupply in the Treasury market are overblown. They are looking for an increase of 40-50 basis points in the 10 year bond yield in 2018. Considering that we are already up 30 basis points this year, we probably aren't looking at major increases from here - maybe we will find a range of 2.8% to 3% and bounce around. 

Morning Report: Fed and Jobs report highlights of the week

Vital Statistics:

	Last	Change
S&P Futures	2867.8	-6.8
Eurostoxx Index	400.4	-0.2
Oil (WTI)	54.7	-0.4
US dollar index	83.4	0.3
10 Year Govt Bond Yield	2.71%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.19

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

This should be a big week for the bond market, with the FOMC meeting in the middle of the week and the jobs report on Friday. No move is expected at the FOMC meeting, but people will focus on the language of the statement. Since this is Janet Yellen's last meeting most of the attention will probably be on her and not the statement.

Aside from the Fed meeting this week, Treasury will announce 10 and 30 year bond issues, and the expectation is that it will be the first increase since 2009. With Treasury selling more paper, while the Fed cuts its purchases, it could be a rough week for bonds. 

Personal Incomes and Personal Spending rose 0.4% in December. The PCE price index was up .1% MOM / 1.7% YOY and the core PCE price index was up .2% MOM and 1.5% YOY. This puts the core PCE index at an increase of 1.5% for the year, and marks the 6th year in a row inflation has undershot the Fed's target. The savings rate is the lowest since 2005.

Freddie Mac's total loan portfolio increased 9% on an annualized basis in December. Their DQ rate slipped from 1.08% to .97%. 

Home prices rose annually for the 67th consecutive month to $283,000 according to the Black Knight Financial Services Home Price Index. The MOM gain was .27%. As of November, home prices were up 6.5% for the year. 

Morning Report: Incomes and spending rise

Vital Statistics:

	Last	Change
S&P Futures	2689.8	2.0
Eurostoxx Index	390.0	-0.7
Oil (WTI)	58.0	-0.4
US dollar index	86.8	0.0
10 Year Govt Bond Yield	2.49%
Current Coupon Fannie Mae TBA	102.531
Current Coupon Ginnie Mae TBA	103.375
30 Year Fixed Rate Mortgage	3.88

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

This should be a relatively quiet day as bonds close early heading into the long holiday weekend. 

Durable Goods orders increase 1.3% MOM / 8.2% YOY in November, coming in below analyst estimates. A surge in aircraft orders drove the increase. Core capital goods orders (a good proxy for business capital expenditures) rose 8.1% YOY. 

Personal incomes rose 0.3% in October, slightly below the Street estimate of 0.4%. Consumer spending was better than expected, rising smartly at 0.6%. Inflation remains nowhere to be found, with the core PCE up 0.1% MOM and 1.5% YOY. The low inflation numbers certainly give the Fed some breathing room, although tax reform will probably push them to be more aggressive. Especially since 9 companies so far have announced wage increases based on tax reform. 

The Fed Funds futures are currently handicapping a 5% probability of no hikes in 2018, a 21% probability of a single 25 basis point hike, a 35% chance of 50, a 27% chance of 75, and a 10% chance of 100. 

Bitcoin is crashing right now, down 25% from yesterday. I was asked how Bitcoin would affect the real estate market.  My view was that Bitcoin is simply so volatile that I cannot imagine both a buyer and seller being comfortable quoting a house in bitcoin. I just don't see someone trying to sell their house for 25 bitcoin. Second, the financing has to be in dollars as no banks lend in bitcoin yet, and I cannot imagine what the interest rate for a bitcoin loan would be. So no, it may be accepted by your local store, however it is more of a novelty at this point. Will that change? Who knows? Will Bitcoin be dominant cryptocurrency or will it be like Classmates.com or MySpace - early adopters that got crushed later on by Facebook? 

Bloomberg takes a look at the state of housing entering 2018. Tight inventory, builder confidence, and a growing economy point to a strong housing market next year. On the other side of the coin, the drop in the mortgage interest deduction could hurt homes at the top end, while the larger standard deduction may lower the incentive to buy versus rent for many at the lower end of the income scale. IMO, the negatives are marginal compared to the positives. 

Don't forget, housing's contribution to GDP is way, way below historical levels. If 2018 is the year homebuilding finally breaks out, it will have an ousized effect on GDP growth. Labor shortages might be the bottleneck, but as wages rise, they attract new workers so that state of affairs doesn't last long. Swinging a hammer pays a lot more than slinging burgers.

90 day delinquencies spiked in November, according to Black Knight Financial Services. 85% of the spike is attributed to the hurricanes, so it doesn't really tell us anything about the state of the economy.

Finally, happy holidays to all!

Morning Report: Personal Spending rises smartly on vehicle sales

Vital Statistics:

	Last	Change
S&P Futures	2572.3	-6.3
Eurostoxx Index	393.6	0.2
Oil (WTI)	54.1	0.2
US dollar index	87.7	0.4
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	4

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

This week will have a lot of market-moving potential, between the FOMC meeting and the jobs report. We will also get productivity and employment costs, two numbers the Fed monitors closely. 

Personal incomes rose 0.4%, while spending rose 1%. Wages and salaries increased 0.4%. Inflation remains under the Fed's target, but it did pick up in September to 1.6% on higher food and energy prices. The core rate increased 1.3%. A bump up in motor vehicle spending was behind the strong spending number, however that could be replacement activity for areas affected by the hurricanes in September. Regardless, it was the strongest jump in vehicle sales since "Cash for Clunkers" in early 2009. 

Donald Trump is leaning towards Jerome Powell to run the Fed after Janet Yellen's term expires in February. Jerome Powell is the economists' choice and will probably continue on the same path that has already been established: gradual rate increases and a gradual tapering of QE. “People are anxiously awaiting my decision as to who the next head of the Fed will be,” Trump said an Instagram video Friday. Historically, nobody pays too much attention to who runs the Fed aside from bankers and financial economists. Reagan jammed Paul Volcker's re-appointment in an unrelated radio address from Camp David. He even joked before the big announcement that "I have a story that will crack this town wide open" 

Home price appreciation continues, as the Black Knight Home Price Index rose .2% in August and is up 6.2% YOY. New York (!) was one of the fast growing states, rising 1.6%. Georgia, Maryland and Virginia saw slight declines. Seattle continues to astound, with prices up 12% YTD and up 14% YOY. 

We should get more details on tax reform this week, and we have been getting a lot of mixed signals and trial balloons. After talk about limiting 401k contributions, now the talk is of increasing the deduction to $20k. On the state and local tax deduction, it looks like property taxes may still be deductible, but state taxes will not be. Stay tuned. 

There is a big merger in the homebuilder space this morning: Lennar and CalAtlantic will merge which will create the US's biggest homebuilder by revenue. 

Morning Report: Incomes rise, but wages flat

Vital Statistics:

	Last	Change
S&P Futures	2506.8	-1.0
Eurostoxx Index	386.5	0.1
Oil (WTI)	51.6	0.1
US dollar index	86.3	0.0
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	103.05
Current Coupon Ginnie Mae TBA	103.98
30 Year Fixed Rate Mortgage	3.88

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

Personal Incomes rose 0.2%, right in line with estimates. The prior month was revised downward to 0.2%. The increase in personal incomes largely came from increased rental income, transfer payments, and interest income, not wages and salaries. Consumer spending rose 0.1%, while all of the inflation numbers came in a touch light. Weak auto sales drove the low consumer spending number. The personal savings rate was 3.6%. It probably won't affect any of the Fed's thinking with respect to a December hike, however the declining annual PCE inflation will concern some of the doves at the FOMC, as will the lack of wage growth. Note that these numbers will have some effects of the TX and FL hurricanes, and BEA is unable to separate them out. 

The Chicago Purchasing Manager Index bounced back in September, hitting 65.2, way above expectations. While several regions have been reporting strength, Chicago has been an outlier. 

Consumer sentiment slipped slightly in September, showing only a modest impact of the hurricanes, according to the University of Michigan survey. 

Donald Trump reportedly met with Kevin Warsh to discuss the Federal Reserve Chairman position. The choice will probably end up either Warsh or Yellen. 

Tax reform could be a big boost for the financial sector, especially banks. Since banks generally have fewer deductions than other businesses, a drop in the tax rate disproportionately benefits them. Note that lowering rates will create issues with pass-through small businesses, and could be subject to abuse. Note that the Admin is already softening its stance on state and local tax deductions, which has always been a tough one politically. Given the probability that no Democrats will support tax reform (at least at the individual level), a few blue state Republicans could sink it. 

Most renters would like to own a home someday, however the up-front costs are the biggest obstacle. Renters need to be educated more on FHA loans, which are designed specifically to get the first time homebuyer into a home with a minimum down payment. 

An improving economy means less payday loans. I wonder how much of this has been due to the CFPB too. 

Morning Report: Spending and Incomes rise smartly

Vital Statistics:

	Last	Change
S&P Futures	2462.3	6.5
Eurostoxx Index	374.1	3.1
Oil (WTI)	46.3	0.3
US dollar index	86.1	0.2
10 Year Govt Bond Yield	2.14%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.86

Stocks are up this morning on end-of-month window dressing. Bonds and MBS are flat. 

Personal incomes rose 0.4% in July, while personal spending rose 0.3%. The PCE index (the Fed's preferred measure for inflation) rose 0.1% MOM and 1.4% YOY. Good report for stock bulls in that incomes and spending are rising smartly while low inflation keeps the Fed at bay. The December Fed Funds futures are currently predicting a 36% chance of a rate hike at the December meeting and virtually no chance of a hike at the September meeting. 

Pending Home sales fell again in July, for the fourth time in five months as tight inventory reduced contract activity. Since bottoming 5 years ago, home prices are up 38% while incomes are only up about a third of that. While that would imply home affordability is getting worse, we are still quite affordable (as far as mortgage payment to income ratios) than we have been historically. It turns out that interest rates matter more than prices when it comes to affordability. 

Job cuts rose to 33,825 in August according to the Challenger and Gray Job Cuts report. This is an uptick from July, and a slight uptick on a YOY basis. Retail and construction (surprisingly) were the areas hit. A number in the low 30ks is generally a pretty strong number historically. Don't forget, these are job cut announcements based on press releases. They may never actually happen. 

Initial Jobless Claims were flat at 236,000 last week, which is still an exceptionally strong number. 

The Chicago PMI was unchanged at a strong 58.9 last month. New orders and production rose, while employment contracted. Another possible sign of a slowdown in the labor market? 

Congress may tie Harvey funding to a debt ceiling increase to make it palatable for all parties to vote for it. If there is going to be a fight over spending increases, the wall, and the debt ceiling, it will happen at the end of the year, not now. Note that Harvey's costs will also complicate tax reform. 

Fannie, Fred, and FHA have announced they will offer forbearance for at least 90 days for homeowners in Houston who were affected by Harvey. 

The CFPB has released its planned changes to TRID. These changes go into the Federal Register on October 10, however they are not mandatory until 10/1/18. 

The hits keep coming for Wells. An expanded review of fake accounts increased the estimate to 3.5 million. They are also being sued for charging improper lock extension fees. This will certainly be an obstacle for Republicans who want to argue for loosened financial regulation. For the most part, it seems that any regulatory relief will be directed towards the smaller community banks who have been hit the hardest with increased compliance costs. There is still very little sympathy in Washington for the big money center banks. 

Morning Report: Irrational exuberance in the bond market?

Vital Statistics:

	Last	Change
S&P Futures	2475.5	7.5
Eurostoxx Index	380.1	2.2
Oil (WTI)	49.9	-0.3
US dollar index	85.9	0.1
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

Stocks are higher this morning on overseas strength. Bonds and MBS are down a touch.

Personal income was flat in June, as a drop in interest / dividend income offset an increase in compensation. Inflation remains nowhere to be found as the PCE price index (the Fed's preferred measure of inflation) was flat MOM and up 1.4% YOY. Ex-food and energy, the numbers ticked up 0.1%.

Home prices rose 1.1% in June and are up 6.7% YOY, according to the CoreLogic Home Price Index. Want to know how tight inventory is? Unsold inventory as a percentage of households stands at 1.9%, which is the lowest in 30 years.

Manufacturing strengthened slightly in June, according to the ISM and PMI manufacturing indices. Construction spending fell 1.3% in June as public construction spending fell. Residential construction was down 0.3% MOM, but is up 9% YOY.

Remember "irrational exhuberance?" That was Alan Greenspan's warning to investors that there was a stock market bubble. Unfortunately for him, he issued the warning on 12/5/96, about 39 months before the stock market actually peaked. Well, he is back, warning of a bond market bubble. He is warning of an abrupt pop in the bond market, and a return to 1970s stagflation. Color me somewhat skeptical of the abrupt pop in the bond market argument. Below is a chart of interest rates going back to World War 1. As you can see, interest rate cycles are long. Aside from the disastrous Fed hike after the crash of 1929, rates stayed below 4% from 1924 to 1959.

FWIW, the 1970s stagflation was largely due to the oil shocks combined with the guns and butter policies of the Johnson administration coming home to roost. The 1970s came after decades of economic strength, while today we are coming out of a decade of economic weakness. Housing starts averaged 1.75 million units per year for the entire 1970s. Since 2010, we have averaged about half that. During the 1970s, capacity utilization was running close to 83%. Since 2010, it has been 76%. Wage growth is stuck stubbornly at 2.5% growth, and there is still slack in the labor market. I just don't see the conditions in place for a return to 1970s stagflation.

Financial regulators are working on a rewrite of the Volcker rule, which prohibits FDIC insured banks from proprietary trading. No one is sure what is actually being proposed - it may turn out that the re-write will merely provide some bright lines to separate prop trading from market-making. Between a drop in commissions and cloudy guidance over prop trading, market making has dried up, and liquidity is suffering in many markets as a result. Any changes will have to pass muster with a panoply of regulatory agencies, so this is going to take some time.

Morning Report: Blue Apron IPO demonstrates shift on Wall Street

Vital Statistics:

	Last	Change
S&P Futures	2423.5	3.8
Eurostoxx Index	382.0	1.3
Oil (WTI)	45.2	0.2
US dollar index	87.8	0.1
10 Year Govt Bond Yield	2.28%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4

Stocks are higher this morning after yesterday's bloodbath. Bonds and MBS are down as well.

Should be a relatively quiet day ahead of the July 4 weekend. Expect liquidity to dry up in the bond market as most of the Street will be on the LIE by noon.

Consumer sentiment increased in June, according to the University of Michigan survey, while the Chicago PMI also jumped. 

Personal incomes rose 0.4% in May, while spending rose 0.1%. Inflation remained muted as the core PCE index (the preferred inflation measurement for the Fed) rose 0.1% MOM and 1.4% YOY. The increased spending was driven primarily by utility spending, so it isn't that great of an indicator for the economy going forward. The savings rate increased to 5.5%, and has rebounded from the lows of the bubble years. The increase in the savings rate represents the de-leveraging of the American consumer, which does depress GDP in the near term.

Regulatory issues are restricting mortgage credit, according to Treasury. This is causing people at the lower end of the credit spectrum to be shut out of the mortgage market. The recommendations largely involve clarifying QM and TRID rules to make them less uncertain, which drives risk-averse behavior out of lenders. They also propose a moratorium on new servicing rules. They also recommend revising or repealing the residential mortgage risk retention requirement, which has more or less shut down the private label MBS market. The goal of this is to (a) increase credit, and (b) draw private capital into the market. As of now, the US taxpayer bears pretty much all of the credit risk of new origination. 

Unicredito Bank's Chief Economists sees the US unemployment rate falling to 3%. If you believe the Phillips Curve, that level should trigger inflation, however we have so much slack in the labor market with the long-term unemployed we still might not see much wage inflation. Janet Yellen has already said the Fed is willing to let the employment market "run hot." At any rate, the Fed is just moving from "ultra-accommodative" to simply "accommodative."

Blue Apron priced its IPO at the lower end of its reduced range and broke price (i.e traded lower than the IPO price) in the aftermarket. Old-timers might remember the days when something like that was a huge embarrassment for the issuing bank. For the most part, getting in on a IPO typically meant at least a 20% pop on the first day of trading. The behavior of APRN represents the change in the landscape in investment banking over the past 20 years. 20 years ago, IPOs were priced that way in order to reward the buy side for their trading business. Since issuers used investment banking services only sporadically, and the investment banks dealt with the big mutual funds every day, the banks were more concerned with making sure that the buy side was happy and therefore under-priced IPOs (which means the issuer was leaving money on the table). Fast forward 20 years, and trading commissions are now 5% - 10% of what they used to be. Nowadays the banks are more worried about keeping the issuers happy, which means IPOs are no longer underpriced. Which is why IPOs are no longer the free money trade they used to be. 

Morning Report: Incomes and spending rise

Vital Statistics:

	Last	Change
S&P Futures	2362.3	-2.3
Eurostoxx Index	380.3	-0.2
Oil (WTI)	50.3	-0.1
US dollar index	90.5
10 Year Govt Bond Yield	2.42%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.36
30 Year Fixed Rate Mortgage	4.13

Stocks are lower this morning as investors take some profits after a good quarter. Bonds and MBS are flat.

Personal Incomes rose 0.4% MOM while consumer spending rose 0.2%. The savings rate increased 0.2% to 5.6%. The PCE Index (the Fed's preferred measure of inflation) rose 2.1% YOY, while the core index, which strips out some volatile commodity prices rose 1.8%. 

The Chicago PMI Index rose slightly in March as new orders rose and employment fell. 

Consumer sentiment retreated slightly in March, according to the University of Michigan Consumer Sentiment survey. Note that the spread between the "soft" economic data (like sentiment indices) and the "hard" economic data (like actual spending numbers) has never been higher. This is probably being driven by expectations of regulatory relief.

Dallas Fed President Robert Kaplan is worried about Washington and the effect policy will have on consumer spending. The fear is that any sort of protectionism via a cross-border tax or policies that could increase health care inflation would crimp spending, especially for older folks. Of course there is a demographic effect happening as well - older people tend to spend less. Their kids are still just starting out, but they will hit their peak spending years soon enough. And before everyone starts wringing their hands over the savings rate, it is still pretty low by historical standards:

Want a good statistic to demonstrate how tight the housing market is? 57% of all realtors have been involved in a sale with at least 10 offers on a single property in the past year. In fact, only 2% have not experienced a bidding war in the last year. We are starting to see home sales contingent on the seller finding a place to buy.  This is part of the problem for the first time homebuyer: The move-up buyer can't find (or afford) a better place so they are staying put. 

William Dudley of the NY Fed prefers the Fed go slowly in reducing the size of its balance sheet. So far, the consensus is that the Fed will just let maturing bonds roll off and not re-invest those proceeds back into the market. Dudley wants to be even more cautious than that, and taper the re-investment, which would mean they would start by reinvesting only half of maturing proceeds back into the market, and then stop altogether later. Regardless of how the Fed handles it, any sort of balance sheet change should have a minimal effect on MBS spreads. If QE had a de minimus effect on spreads then ending the reinvestment policy should have little to no effect. Note Dudley is also concerned about the effect this will have on long term rates, which could restrict credit. 

Morning Report: Incomes and spending rise

Vital Statistics:

	Last	Change
S&P Futures	2281.5	-7.5
Eurostoxx Index	364.2	-2.2
Oil (WTI)	53.1	0.0
US dollar index	91.4	0.0
10 Year Govt Bond Yield	2.48%
Current Coupon Fannie Mae TBA	102.1
Current Coupon Ginnie Mae TBA	103.2
30 Year Fixed Rate Mortgage	4.16

Dow 20,000 hats are off this morning as corporate earnings continue to come in. Bonds and MBS are up.

Donald Trump temporarily restricted immigration from 7 countries over the weekend until new vetting procedures are put in place. This story dominated the news cycle. 

Personal Incomes rose in December by 0.3% while spending rose 0.5%. The core PCE index (the Fed's preferred measure of inflation) is up 1.7% YOY. 

Pending Home Sales increased in December, according to NAR. The challenge for 2017 will be increasing inventory enough to offset higher borrowing costs. NAR is forecasting housing starts to increase 8% this year to 1.26 million. Normalcy is closer to 1.5 million, so we have a ways to go there. 

We have a big week for data, with the FOMC meeting and the jobs report on Friday. We also get productivity and employment costs, which is another huge number. We are also in the middle of earnings season with several heavyweights reporting this week. 

Steve Mnuchin doesn't appear to be interested in removing the Volcker Rule, which prohibits banks with FDIC backing to conduct proprietary trading. He does believe that it has restricted market liquidity in its implementation however and he is interested in tweaking it. Overall, it looks like Dodd-Frank will be fixed but not repealed. 

A war is brewing over the state of the CFPB. Donald Trump has yet to weigh in on the agency or the fate of Richard Cordray. Also, it is looking like the CFPB will be remade into a bipartisan board as well. 

80% of all mortgage borrowers are completely honest on their loan applications, according to a study by UBS. The inaccuracies generally fall into four buckets: overstated income, underreported debt, underreported expenses, and overstated assets. 

The NAR's quarterly survey of mortgage lenders is out, and problems with appraisers (or lack thereof) dominate the headaches. Over half of all respondents reported issues in this area, with 11% characterizing them as significant. One problem is the lack of new entrants, however 28% of lenders won't accept an appraisal done by a trainee, and 44% require direct supervision of all aspects performed by a trainee. Non-QM lending fell slightly during the quarter, however investor demand for the product is rising. Rising rates are expected to have some effect on purchase demand, however there is such tight supply that it shouldn't affect volumes overall. 

Home prices are now within 0.3% of their peaks on a national level according to Black Knight Financial Services. 

Morning Report: Incomes up, spending flat

Vital Statistics:

	Last	Change
S&P Futures	2150.0	1.0
Eurostoxx Index	340.9	-2.0
Oil (WTI)	47.9	0.0
US dollar index	86.6	0.4
10 Year Govt Bond Yield	1.55%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.47

Stocks are lower this morning as the markets fret about Deutsche Bank. Bonds and MBS are up on the risk-off trade.

Deutsche Bank, which is being fined by the US government for $14 billion is starting to see some hedge fund clients back away from it. While it probably doesn't really pose any systemic risk (the US government isn't about to bankrupt German's biggest bank) it will cause a flight to safety, which will push down Treasury yields. If this snowballs, look for more easing out of the ECB, and potentially another excuse for the Fed to stand pat. 

Personal Incomes rose 0.2% last month while personal spending was flat. The core personal consumption expenditure index (the Fed's preferred inflation measure) rose 1.7% YOY, which is below the Fed's 2% inflation target. Larry Summers says income inequality is depressing spending by about 3%. 

The Chicago Purchasing Manager Index rose in September. 

Consumer confidence improved in September.

Janet Yellen mused about the Fed buying corporate bonds and stocks in order to respond to a downturn after they have hoovered up all the government debt out there. 

Seriously delinquent loans fell to 1.24% in August, the lowest level since April 2008. Pre-crisis it was below 1%. 

Morning Report: Spending and incomes rise

Vital Statistics:

	Last	Change	Percent
S&P Futures	2099.8	2.5	0.12%
Eurostoxx Index	3079.7	-10.3	-0.33%
Oil (WTI)	49.59	0.3	0.53%
LIBOR	0.673	-0.001	-0.15%
US Dollar Index (DXY)	95.65	0.126	0.13%
10 Year Govt Bond Yield	1.89%	0.04%
Current Coupon Ginnie Mae TBA	105.5
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.65

Markets are up this morning after Chinese stocks rallied overnight. Bonds and MBS are down.

The second revision to first quarter GDP came in at 0.8%, slightly below the Street estimate of 0.9%. This was an upward revision from the initial 0.5% estimate. 

Personal incomes rose 0.4% in April, in line with expectations. Personal spending rose 1%, which topped the 0.7% estimate. The personal consumption expenditures index (which is the inflation measure preferred by the Fed) rose 0.2% month-over-month and is up 1.6% annualized. We are seeing some sell-side firms take up their second quarter GDP estimates on this number. 

Home prices rose 0.9% MOM and 5.4% YOY, according to the Case-Shiller Home Price Index. This was slightly ahead of estimates. An improving labor market along with tight inventory is driving prices higher. 

In other economic data, both the Chicago Purchasing manager index and the consumer confidence index fell. 

The highlight of this short week will be the jobs report on Friday, which will be the last big data point before the FOMC meeting in a couple of weeks. The number to watch: average hourly earnings. Average hourly earnings growth has been accelerating over the past 6 months or so, to around 2.5%. You can see the trend in average hourly earnings growth in the chart below: 

On Friday, Janet Yellen hinted that the next rate hike is probably at the June or July FOMC meetings. 

Morning Report: The homeownership rate falls again

Vital Statistics:

	Last	Change	Percent
S&P Futures	2066.5	-5.9	-0.28%
Eurostoxx Index	3055.8	-69.6	-2.23%
Oil (WTI)	46.51	0.5	1.04%
LIBOR	0.638	0.004	0.63%
US Dollar Index (DXY)	93.18	-0.583	-0.62%
10 Year Govt Bond Yield	1.86%	0.03%
Current Coupon Ginnie Mae TBA	105.4
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.65

Markets are lower after yesterday's bloodbath. Bonds and MBS are down.

Personal incomes rose 0.4% in March, while spending rose 0.1%. The savings rate rose to 5.4%, this highest since late 2012. The Great American De-Leveraging continues..

The PCE Core Index (which is the inflation measure preferred by the Fed) rose 0.1% in march and is up 1.6% YOY. This is still below the Fed's 2% target rate. We simply aren't going to see much in the way of inflation until we see wage growth. 

Speaking of wage growth, the employment cost index rose 0.6% in the first quarter as wages and salaries increased by 0.7% and benefits increased by 0.5%. On an unadjusted YOY basis, compensation increased 1.9% as salaries increased 2% and benefits increased 1.7%. 

Consumer sentiment fell in April, according to the University of Michigan Consumer Sentiment Survey. 

The homeownership rate fell to 63.5% in the first quarter, which is back below the levels of the mid 80s through the mid 90s. The gains in homeownership that started with the Clinton Administration's social engineering via the housing market in 1995 have been given back. 

As the Millennial generation ages, that number should increase, and does represent pent-up demand for housing. Affordability remains a big issue, along with high DTI ratios due to student debt. The homeownership rate for Gen Xers was 59%. 

Worried about the increase in the price of oil? Don't be. It is due to a massive short squeeze. For every barrel of oil being bought by a long speculator, there are 9 shorts exiting their position.