Morning Report: A tell in the mortgage REITs

Vital Statistics:

	Last	Change
S&P Futures	2346.0	8.8
Eurostoxx Index	377.5	1.1
Oil (WTI)	52.4	0.0
US dollar index	89.7
10 Year Govt Bond Yield	2.20%
Current Coupon Fannie Mae TBA	103.15
Current Coupon Ginnie Mae TBA	104.3
30 Year Fixed Rate Mortgage	3.97

Stocks are rebounding this morning after yesterday's big sell-off. Bonds and MBS are down small. 

Mortgage applications fell 1.8% during a holiday-shortened week. Purchases were down 3% while refis rose .2%. Note that the 10 year yield fell 15 basis points last week, so we should continue to see follow through in refis. 

The 10 year bond yield slipped below 2.2% yesterday, hitting the lowest point since the immediate post-election rate rise. The Trump reflation trade is unwinding as the market reckons that nothing is going to get done in Washington, which is probably a safe bet at this point. 

While the rest of the world frets about what will happen when the Fed starts shrinking its balance sheet (can we call it quantitative tightening?), there is one sector that is surprisingly sanguine: the mortgage REITs. American Capital Agency and Annaly Capital are both up some 18% since rates peaked in December. Yes, some of that is simply the natural correlation between MREITs and bond prices, however this also comes as the Fed discusses unwinding its balance sheet. If REIT investors were worried that decreased demand for mortgage backed securities would affect the value of their portfolios, you would expect to see it in their stock prices. So far, they are shrugging it off. For originators, this means that mortgage spreads to Treasuries should be safe as well, which is good news. Meanwhile, the homebuilders continue to move higher, despite the disappointing housing starts we have been seeing. Building permits are still depressed as well, so there isn't any indication the tight inventory situation is going to change. 

CFPB Chairman Richard Cordray is supposedly pondering a run for the Governor of Ohio. If so, his days at the CFPB could be numbered. 

The digital mortgage is only going to become more and more common. Here is how lenders should approach it. Punch line: the programmers need to focus on the consumer experience as much as the back end functionality. 

Since housing prices bottomed, condo price appreciation has outstripped single family residence appreciation. Historically that has not been the case, as there is generally more demand for SFR. My guess is that condo prices are more volatile than SFR prices, and that they declined more in the sell-off and are now increasing faster in the rebound. There probably isn't any secular change going on, although many are quick to point out that the Millennials (so far at least) prefer living in urban areas. 

Morning Report: Housing starts miss

Vital Statistics:

	Last	Change
S&P Futures	2339.5	-5.5
Eurostoxx Index	377.0	-3.6
Oil (WTI)	52.3	0.4
US dollar index	89.8
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	104.31
30 Year Fixed Rate Mortgage	3.97

Stocks are lower this morning after housing starts disappoint. Bonds and MBS are higher.

Housing starts fell 9% MOM to 1.215 million in March. This was below the 1.26 million estimate. Building Permits rose 1.26 million, which exceeded the 1.25 million estimate. A big drop in single family starts in the Midwest drove the decrease, which may have been weather-related. Multi-fam continues to be volatile, while SFR is slowly creeping upward. 

Industrial Production rose 0.1% in March, however manufacturing production fell 0.4%, which was a big miss from the 0.3% increase that was expected. Capacity Utilization bumped up to 76%. This is another example of the disconnect between the soft data (sentiment surveys) and hard data (actual spending patterns etc) that has been a hallmark of the post-election landscape. 

We had a nice rally in the 10 year bond last week, with the yield falling about 15 basis points to 2.23%. The mortgage rate has lagged the move, falling about 10 basis points. Generally speaking this is typical, as the mortgage rate is less volatile than the 10 year. If the 10 year stabilizes here, we could see a move lower in mortgage rates. 

Part of the post-election rally was due to the Trump reflation trade, which assumed tax cuts and infrastructure spending. Tax cuts really mean tax reform, as the plan is to increase the size of the standard deduction and reduce itemized deductions. While the mortgage interest deduction is too popular to eliminate, the state and local tax deduction is being targeted. This will hit taxpayers in high tax areas like CA and the Northeast the hardest. Democrats are opposing this however, even though the people most likely to be affected are the very rich (90% of the increase will fall on the wealthy), and will raise something like $1.3 trillion over 10 years. 

The Trump Administration has said that health care reform will take precedence over tax reform this year. Note that we are coming up on the period where health insurers will announce whether they are staying on the Obamacare exchanges or not for 2018. That will most likely color the debate. As hard as it is to get anything through Congress right now, it will only get harder in 2018 as midterms loom on the horizon. 

The punch line is that bonds and stocks are telling you different things, and when that happens the bond market is usually correct. If the Trump reflation trade is indeed dead, and we don't see a big increase in growth, we should start thinking about the possibility of the 10 year trading below 2%. The pre-election yield on the 10 year was 1.78%. 

Note that the IMF may be catching on as well. They are taking up their global GDP growth numbers, probably on the bet that protectionist policies in the US aren't going to happen. 

Both the Atlanta Fed and the NY Fed took down their Q1 GDP estimates after the lousy retail sales numbers last week. A CNBC survey of economists is pegging Q1 GDP at about 90 basis points. The Fed Funds futures are now pricing in an under-50% probability of a rate hike in June. You can see that the Fed Funds futures have been cheating down their estimates for hikes over the past month or so:

Treasury Secretary Steve Mnuchin said that the Administration prefers a strong dollar "over time." There had been some confusion in the markets over the Administration's exact policy on the dollar, since Trump had said early on it was too strong, in reference to China. Note that there is some horsetrading going on between the US and China over currencies, trade, and North Korea. Trump is willing to tone down his comments on Chinese currency manipulation in exchange for action from China in reining in NK. A strong dollar policy out of the Admin will generally make for lower interest rates. 

The CFPB is soliciting input for possible changes the Home Mortgage Disclosure Act. 

Morning Report: Regulatory relief proposals

Vital Statistics:

	Last	Change
S&P Futures	2329.3	-1.8
Eurostoxx Index	380.6	-1.3
Oil (WTI)	52.8	-0.3
US dollar index	89.9
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	102.78
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.98

Stock futures are largely flat this morning as many overseas investors are on holiday. Bonds and MBS are flat as well. 

Bond yields have broken decisively to the downside over the past week as international tensions escalate. North Korea's failed missile launch, combined with developments in Syria have sent bonds and gold higher. The 10 year yield is at the lowest level since mid-November. 

While international tensions have certainly played a part in the bond rally, weak retail sales and inflation data have as well. The Fed Funds futures are now factoring a less-than-50% probability of a June rate hike, down from a 2/3 probability only a week ago. 

Business conditions softened in New York State last month after the Empire State Manufacturing Survey fell after two unusually strong months. We are starting to see bottlenecks in the supply chain. Employment rose.

Homebuilder sentiment slipped slightly in April, however sentiment remains strong. 

Jamie Dimon of JP Morgan took aim at regulations in his annual letter to stockholders. He was especially critical of the FHA's use of the False Claims Act to hammer lenders who commit unintentional clerical errors but had no intention of committing fraud. This has caused FHA lending (which is the only game in town for subprime borrowers) to become restricted, especially at the big banks. He also called for new uniform standards for mortgage servicing. The cost of servicing delinquent loans has skyrocketed, and this has caused lenders to further restrict credit. JPM estimates that $1 trillion in additional lending could have increased GDP by half a percentage point. 

Rep David Kustoff penned an editorial at CNBC calling for a reform of Dodd-Frank, especially in how it affects smaller community banks. The regulatory burden that was imposed on the system is more easily borne by the JP Morgans and the Wells Fargos of the world than it is by the smaller banks who are the lenders to small business. There is a general bipartisan consensus in DC that something needs to be done to give the smaller lenders some relief, however the political environment is so entrenched and partisan that it is hard to imagine much getting done legislatively. 

The MBA sent its proposals to the Senate. The first one includes a request for more clarity from the CFPB, while the second includes a suggestion to widen the QM safe harbor to all loans that satisfy the QM rule and to increase the ceiling for small loan status under QM to $200k from just over $100k now. The remainder of the suggestions largely concern capital requirements for banks and servicing.

Median house prices rose 7.5% to $273,000 according to RedFin. Sales growth was also up a strong 8.9%. Inventories were down 13%, however. The typical home went under contract within 49 days, which is pretty fast for a March. The average sale to list price was 93.7%, which was a decrease. Perhaps the bidding wars in the hottest markets are cooling off a bit. Note this statement by a real estate agent: 

“As a seller’s agent, the first thing I do when I receive an offer is ask who the lender is. The best offers come from buyers who are pre-approved by a local lender with a strong reputation for speed and reliability. If I’ve worked with the lender before and know they can fund the loan and close on time, I am sure to highlight that for my client.” — Tiffany Aquino, Redfin Agent in Woodbridge, VA

The Fed is assembling its plan to shrink its portfolio of Treasuries and mortgage backed securities, and may actually begin the process this year. The Fed currently owns just under $2 trillion in mortgage backed securities, and we could see that number cut in half over the next decade, according to a paper released in January. The big question for MBS holders is whether they will stop reinvesting maturing proceeds all at once or whether they will phase that in. Given that QE didn't materially affect MBS spreads when it was implemented, it is hard to imaging tapering re-investments will make much of a difference either. 

Morning Report: Jobs report surprises to the downside

Vital Statistics:

	Last	Change
S&P Futures	2352.5	-1.3
Eurostoxx Index	379.9	-0.8
Oil (WTI)	52.1	0.4
US dollar index	90.7
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.78
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.06

Stocks are lower this morning after a surprisingly weak jobs report. Bonds and MBS are up.

Jobs report data dump:

• Nonfarm payrolls up 98,000. Expectations were for 175k so this is a huge miss
• Unemployment rate down to 4.5%
• Employment to population ratio increased to 60.1%
• Average hourly earnings up 0.2% MOM and 2.7% YOY
• Labor force participation rate flat at 63%

Part of the payroll miss could be explained by bad weather in the Northeast and the Midwest in March. We saw jobs increase in professional and business services while payrolls contracted in retail. The labor force increased by 145k, while the number of employed people increased by 472k and the number of unemployed fell by 326k. The number of involuntary part time employees (people who would like a full time job but can only get a part time one) fell, as did the number of long term unemployed and discouraged workers. While the payroll number will garner all the attention, the internals of the jobs report show the slack is being used up in the labor market, so it isn't as bad as it initially appears. 

The Fed Funds futures took down their probability of a June hike from 71% to 66% on the jobs report. 

Two things happened yesterday which could push bond yields lower. First the US attacked air bases in Syria in retaliation for using chemical weapons. International tension is almost invariably bond bullish as investors put on the flight to safety trade. The other is the Democratic filibuster of Neil Gorsuch. This probably forecloses any sort of possibility for bipartisan legislation, particularly stimulus plans or tax cuts. In fact, the debt ceiling battle could become an epic game of chicken as the government is rapidly running out of borrowing capacity. While the second scenario is not necessarily bond bullish the first one definitely is. 

Fannie Mae's Home Purchase Sentiment index fell last month as high prices and low inventories take their toll. The number of people who think it is a good time to buy fell by 10 percentage points while the number tho think it is a good time to sell rose by 9 percentage points. People are less bullish on their economic future as well. 

Neel Kashkari disputes Jamie Dimon's assessment of the regulatory environment for banks, citing the Fed statistic that there is a 70% chance of a bailout in the next century.  Jamie Dimon declared the era of too big to fail is over, while Kashkari disagrees. Forecasting banking scenarios over a 100 year time period is probably a fool's errand. I wonder what banking regulators thought in 1917 (The Fed had only been established a few years earlier). Kashkari is a bit of a regulatory hawk and thinks the capital standards should be doubled.

San Francisco Fed President John Williams says it should take about 5 years for the Fed's balance sheet to shrink to a normal level once they start reducing it. Of course the open question is "what constitutes normal?" Prior to the financial crisis, the Fed's balance sheet was under $1 trillion. It is now pegged at $4.5 trillion. 

Morning Report: FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2348.0	1.5
Eurostoxx Index	379.8	-0.3
Oil (WTI)	51.4	0.2
US dollar index	90.5
10 Year Govt Bond Yield	2.35%
Current Coupon Fannie Mae TBA	102.53
Current Coupon Ginnie Mae TBA	103.813
30 Year Fixed Rate Mortgage	4.07

Stocks are lower this morning after the FOMC worried about stock prices. Bonds and MBS are down small. 

Job cuts rose 17% in March, according to outplacement firm Challenger, Gray and Christmas. Telecom and retail were the two main sectors to trim staff. Note that this report only measures announced job cuts (in press releases), not actual job cuts. We are still seeing losses in the energy patch, however it is much slower than the past two years when we lost over 200k jobs. 

On the other side of the coin, hiring announcements continue to hit records, with the Home Despot announcing 80,000 seasonal hires in March. 

Initial Jobless Claims fell to 234k last week, while the Gallup Good Jobs index improved. The drop in initial jobless claims was the most in 2 years. 

The FOMC minutes showed the Fed is beginning to discount the possibility of a big Trump fiscal expansion. The failure of health care reform means that the available resources for a big infrastructure spend or tax cuts is much less. The Fed also discussed what to do with their $4.5 trillion balance sheet, and how to go about shrinking it. The terms "gradual" and "phase out" were used, which means they probably aren't going to stop reinvesting maturing principal all at once and will perhaps take a couple of meetings to see how it goes. The Fed's fear is that the additional contractionary effects of reducing the balance sheet along with rate hikes will be too much and push the economy into a recession. 

The staff also noted that stock values are above historical norms, which is undoubtedly another reason for them to go slowly. The worst-kept secret in financial markets is that the Fed targets asset prices and uses them to guide policy. 

Goldman Chief Economist Jan Hatzius says that reducing the Fed's balance sheet is probably a good step to clear the decks for whoever will be the new Fed President ahead of the end of Janet Yellen's term in early 2018. 

The left has set up a new website to keep track of HUD and what they are doing. They want to ensure that affordable housing targets don't fall by the wayside as HUD works on housing reform. Given the tight housing inventory these days, affordable housing is a huge need. 

Donald Trump economic adviser Gary Cohn supports some sort of return to the Glass-Steagall days, where consumer banking is separated from the underwriting and trading functions of investment banks. Some Senators and policy types were surprised to hear a Wall Street type advising that. The conversation regarding deposits will be further complicated by the emerging fintech sector which wants access to those deposits as well. 

The Senate is expected to exercise the nuclear option today and eliminate the filibuster for Supreme Court nominees. Neil Gorsuch will probably be confirmed on Friday. 

Morning Report: Awaiting the FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2361.0	4.5
Eurostoxx Index	380.8	0.7
Oil (WTI)	51.7	0.7
US dollar index	90.5
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.53
Current Coupon Ginnie Mae TBA	103.813
30 Year Fixed Rate Mortgage	4.07

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

The minutes from the FOMC meeting are coming out at 2:00 pm EST today. Investors will be focused on plans to shrink the balance sheet and also any sort of discussion about DC. Be careful locking around that time - we could see some volatility. 

Richmond Fed President Jeffrey Lacker resigned yesterday for making unauthorized disclosures to a consulting firm owned by the Financial Times. Lacker was a non-voter, so it should make no difference to monetary policy. 

Mortgage applications fell 1.6% last week as purchases rose 1% and refis fell 4%. Refis fell to 42.8%, the lowest since October 2008.

The ADP jobs number came in at 263,000 which means we should expect a strong employment situation report this Friday. The Street is predicting 178,000 jobs were added in March. Construction added 49k jobs while IT lost 10k. This is the third month in a row with more than 240k jobs added:

The Gallup US Job Creation index also hit a new high. The US PMI Services index fell however. The ISM Services index fell as well. 

Don't forget, we are exiting Q1, which for some reason has been a weak quarter for over a decade. If past trends hold, we should be seeing a pickup during the spring and summer. 

Jamie Dimon weighed in on banking regulation in JP Morgan's annual letter to shareholders. The system is much safer today than it was in 2008, however he argues that many of the regulations put in place were hastily drawn up and should be reviewed. He mentioned that new regulations surrounding mortgage lending have raised costs to consumers and restricted lending to people with low credit scores needlessly. Interesting comment since JP Morgan pretty much got out of the FHA business years ago. 

Morning report: Hard vs soft data

Vital Statistics:

	Last	Change
S&P Futures	2345.5	-10.5
Eurostoxx Index	378.7	-0.6
Oil (WTI)	50.5	0.3
US dollar index	90.5
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	103.41
Current Coupon Ginnie Mae TBA	103.7
30 Year Fixed Rate Mortgage	4.09

Stocks are lower this morning after auto sales disappointed. Bonds and MBS are up. 

Factory orders rose 1% last month, in line with expectations.

US economic confidence decreased last week, according to Gallup, however confidence is still strong. Meanwhile, consumer spending was flat. 

These data points (economic confidence, consumer spending, and auto sales) illustrate the conundrum we have been seeing for the past few months: soft data like confidence and ISM reports show a strong economy, while the hard data like sales have been showing a mediocre economy. Much of this is Washington-driven as investors realize that Trump will have a difficult time pushing through his agenda in the face of unified Democratic opposition and a Freedom Caucus that wants less government, period. Unrealistic expectations are being brought back to Earth. Despite gridlock, much is being done on the regulatory front and with executive orders which don't require Congressional approval. That will help. But there seems to be a shift in the psychology of investors: the markets seem to be worrying less about the Fed and worrying more about tepid growth. Bonds have noticed as well, with the 10 bond yield down about 30 basis points over the past 3 weeks. 

Home prices rose 7% YOY in February, according to CoreLogic. We are seeing the highest price appreciation at the lower price points. The first time homebuyer is getting hit with a double-whammy of higher prices and borrowing costs. 

Housing's share of GDP came in 15.6% in the fourth quarter. Historically, that number has been around 18%. Housing continues to punch below its weight, as evidenced by tight inventory. It is hard to know exactly why homebuilding continues to be weak - credit is an issue, as is the general post-bubble caution, along with local land use regulations.