Morning Report: FOMC meeting begins today

Vital Statistics:

			Last	Change
S&P futures			2725.25	3
Eurostoxx index			375.23	1.54
Oil (WTI)			62.97	0.91
10 Year Government Bond Yield				2.88%
30 Year fixed rate mortgage				4.43%

Stocks are higher this morning after yesterday's bloodbath in tech. Bonds and MBS are down small. 

Current funding for the government is set to expire on Friday, and Congress is still working on a plan to keep the lights on. Sticking points include funding for the military, the border wall, and the NY-NJ Hudson River Tunnel. Votes are looking likely for Thursday and Friday, so there isn't a lot of margin for error. Making matters worse is a major snowstorm which is set to hit the East Coast tomorrow. Washington is set to get 4-8 inches which could shut down government for the day. New York is set to get a foot. 

We could see some movements in interest rates over the next couple of days with the FOMC decision tomorrow and the Bank of England decision on Thursday. A 25 basis point hike is more or less assured, but the markets will be focused on the projection materials, particularly the dot plot. This will be Jerome Powell's first rate hike, so every word in the statement and everything he says in the press conference will be parsed even more closely that usual. 

The government is mulling a change in the bankruptcy laws that would allow more students to reduce or eliminate student loan debt in bankruptcy. High levels of student loan debt are one reason why the first time homebuyer has been missing in action in this housing recovery. As of now, tax debt and student loan debt are more or less permanent - bankruptcy doesn't eliminate them. Student loan servicers are required by Department of Education regulations to oppose bankruptcies, even if they know there is little chance of recovery. The servicers realize this is often throwing good money after bad. 

Freddie Mac crunched the numbers on how rising interest rates affect the housing market and the mortgage industry. Since 1990, increases in interest rates have dropped home sales by 5%, cut housing starts by 11% and cut mortgage origination by 30%. Of course the rate hikes since 1990 were in the context of a secular bull market in bonds that started around 1981 and ended around 2016 or so. In other words, these rate hikes were short-lived. This time around, that probably isn't happening. That said, starts are so depressed relative to demand to begin with that we probably won't see an 11% drop. Unless inflation picks up massively, the Fed will continue to go slow and will be loath to knock the economy back into a recession. 

As I mentioned yesterday, I have left iServe and am seeking a new opportunity. I will be contacting many of you over the next few days / weeks. 

Morning Report: Uncle Sam is the creditor for 28% of the consumer loan market

Vital Statistics:

	Last	Change	Percent
S&P Futures	2081.4	-5.9	-0.28%
Eurostoxx Index	2868.3	-42.8	-1.47%
Oil (WTI)	48.5	-0.6	-1.16%
LIBOR	0.656	0.000	-0.07%
US Dollar Index (DXY)	94.55	-0.021	-0.02%
10 Year Govt Bond Yield	1.63%	-0.02%
Current Coupon Ginnie Mae TBA	105.7
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.7

Stocks are lower this morning on fears over Brexit (The 6/23 vote to decide whether the UK leaves the EU). Bonds and MBS are up small.

No economic data today. The big event this week will be the FOMC meeting Tuesday and Wednesday. The markets are expecting no changes to interest rates, so any bond rally on the news of no changes will probably be limited. 

Interesting chart about the Federal government's percent of ownership of consumer debt. This is money that US citizens owe Uncle Sam. Ever since Obama nationalized the student loan sector, they have taken their percentage of consumer debt from 5% to 28%. The student loan market is a $1.3 trillion market - not exactly chump change. Expect some sort of write-down of student loan debt in the future: many graduates have degrees that will never pay enough to work this down. As a side note, more young adults aged 18-34 live at home with Mom and Dad than in any other arrangement. 

Speaking of Millennials, the high student loan debt is causing lower credit scores. The average credit score for the 18-34 age cohort is 625, compared to the national average of 667. Almost a third of that age cohort have sub-600 scores. Good luck getting a loan with that. Finally, all of the new post-2008 regulations have added anywhere form 50k-100k to the cost of building a starter home, making it difficult for builders to make homes that are affordable for the first-time homebuyer. 

There is now $10 trillion worth of global sovereign debt trading at negative yields. Bill Gross of Janus Capital calls that a "supernova" that will explode one day. All of the worlds' central banks are on a mission to create inflation: one day they will succeed. What has been the best trade for bond investors lately? The Japanese 30 year bond, which now yields 28 basis points. Bill says that bond yields today are the lowest in 500 years. Not sure where he comes up with that number.

Speaking of Central Bank jiggery-pokery, ECB corporate bond buying now makes up for 1 in 5 trades. We are truly in uncharted waters with global central banking. 

As a general rule, buy stocks in an election year. Election years tend to be optimistic times, and the Fed is usually on your side. That might not be the case this year. 

Morning Report - ADP employment report misses

Vital Statistics:

	Last	Change	Percent
S&P Futures	2052.1	-9.4	-0.47%
Eurostoxx Index	3738.4	33.4	1.04%
Oil (WTI)	47.28	0.28	0.73%
LIBOR	0.269	-0.001	-0.30%
US Dollar Index (DXY)	98.135	-0.252	-0.26%
10 Year Govt Bond Yield	1.88%	-0.05%
Current Coupon Ginnie Mae TBA	102.5	0.0
Current Coupon Fannie Mae TBA	101.9	0.2
BankRate 30 Year Fixed Rate Mortgage	3.79

Stocks are lower this morning after the ADP jobs data came in light. Bonds and MBS are up.

Construction spending fell by .1% in February and January was revised down by 1.7%. Residential construction continues to lag the economy, however office construction is picking up. This is somewhat surprising given vacancy rates are still elevated.

The ISM Manufacturing Index fell to 51.5 in March. This is the first look at March data, and you can't blame the weather this time.

Payrolls increased by 189k in March, according to ADP. The Street is currently predicting that Friday's jobs report will show an increase of 245k. Note that the government will be open on Good Friday however the stock markets will be closed and bonds will have an early close. We could see some volatility in bonds if the payroll data is unusually weak or wage inflation in unusually high.

It looks like the dumb money is piling into the Chinese stock market, and much of it is leveraged. This was after the government started telling people that stocks were cheap. The government already has problems with an over-built real estate market and is pulling policy levers to support prices. Historically governments have never been able to manage the deflation of asset prices in an orderly manner, and it is unlikely the Chinese government will be able to either. Their banking system is already on shaky ground. What that means for the US is unclear. We should see Chinese money exit the luxury real estate market in the US, but what happens to Treasuries is anyone's guess.

Student loan debt is a big problem for the first time homebuyer, as everyone knows. At the same time, there is a movement to begin debt strikes, where students refuse to pay back their loans. At the moment, it is limited to the failing private for-profit universities, however if this gains traction, it could spread. The left, led by Elizabeth Warren, has been egging this on a bit, but they are playing with fire. The government backs these loans and will have to eat the losses if this movement grows.