Morning Report - GDP better than expected, but Q1 revised down

Vital Statistics:

	Last	Change	Percent
S&P Futures	1683.3	-1.4	-0.08%
Eurostoxx Index	2755.1	-4.1	-0.15%
Oil (WTI)	103.6	0.5	0.46%
LIBOR	0.266	0.001	0.23%
US Dollar Index (DXY)	82.12	0.290	0.35%
10 Year Govt Bond Yield	2.68%	0.07%
Current Coupon Ginnie Mae TBA	103.8	-0.4
Current Coupon Fannie Mae TBA	103.3	-0.4
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.36

Markets are slightly better after some good economic data. At 2:00 pm we will get the FOMC decision. Mortgage Applications fell. Bonds and MBS are getting beaten up on the good data.

The ADP jobs report showed the private sector added 200k jobs in July, and June was revised upward to 198k. The ADP report is supposed to mimic the final jobs number, not the advance estimate we will get on Friday. 

The advance estimate of second quarter GDP growth came in at + 1.7% This was higher than the 1% estimate. First quarter GDP was revised down by a lot... from + 1.8% to + 1.1%. That said, it looks like the growth came from inventory build as consumer spending cooled. If spending doesn't rebound, that will depress growth in the future. 

Count Richmond California as the next locality threatening to use eminent domain to seize mortgages. Unsurprisingly, SIFMA (the Securities Industry Financial Markets Association) which runs the TBA market condemned the idea. SIFMA told San Bernardino that if they proceeded down the eminent domain path, that mortgages originated in that jurisdiction would become ineligible for TBA trading. This would effectively cut off the locality from Ginnie Mae and Fannie / Freddie loans. Which is 90% of the mortgage market. FHFA nominee Mel Watt has taken a pass on the whole eminent domain issue, which is yet another reason why he faces an uphill battle for confirmation. 

Morning Report - REIT TBA selling could be over

Vital Statistics:

	Last	Change	Percent
S&P Futures	1686.8	4.3	0.26%
Eurostoxx Index	2760.1	18.3	0.67%
Oil (WTI)	103.9	-0.6	-0.60%
LIBOR	0.265	-0.001	-0.38%
US Dollar Index (DXY)	81.66	0.000	0.00%
10 Year Govt Bond Yield	2.58%	-0.02%
Current Coupon Ginnie Mae TBA	104.3	-0.1
Current Coupon Fannie Mae TBA	103.9	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.36

Markets are higher this morning on no real news. Bonds and MBS are up

The S&P / Case-Shiller home price index rose 1.05% month over month and 12.2% year over year in May. The usual suspects (Phoenix, Lost Wages, and San Francisco) showed 20%+ gains while the Midwest and East Coast showed low / mid single digit increases. New York brought up the rear with a 3.3% increase. This has been borne out by the homebuilders, where the ones with a heavy West Coast focus have outperformed the ones that are East Coast / diversified. 

Mortgage REIT American Capital Agency (AGNC) reported second quarter earnings last night. Book value got hit by 12%, but the interesting data point is the state of their TBA portfolio. The To-Be-Announced (or TBA) market is what sets mortgage rates. Over the second quarter, their TBA portfolio fell from 27.5 billion to 14.5 billion. That is a lot of paper they just dumped. They consider themselves to be positioned where they want to be at this point from a duration hedging standpoint. The key takeaway - we'll have to see what Annaly (NLY) has to say, but so far, it appears that a substantial chunk of the selling in the TBA market is done. That is good news for mortgage rates, and I wouldn't fall out of my chair with shock to see lower mortgage rates in the context of a stable 10-year.

Completed foreclosures were 55,000 in June, down 20% year over year and up 2.5% from May, according to CoreLogic. Approximately 1 million homes in the U.S. were in some stage of the foreclosure process, compared to 1.4 million a year ago. This represents 2.5% of all homes with a mortgage. The states with the most work left to do are Florida (8.6%), New Jersey (6%), New York (4.8%), Connecticut (4.2%) and Maine (4.1%). 

Morning Report - Busy week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	1683.4	-3.2	-0.19%
Eurostoxx Index	2748.6	6.6	0.24%
Oil (WTI)	105.1	0.4	0.37%
LIBOR	0.266	0.001	0.38%
US Dollar Index (DXY)	81.71	0.050	0.06%
10 Year Govt Bond Yield	2.58%	0.02%
Current Coupon Ginnie Mae TBA	104.4	0.1
Current Coupon Fannie Mae TBA	103.8	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.35

Markets are down this morning as we head into a data-intensive week. Merger Mondays are back with a few big transactions. Bonds and MBS are down small.

We have 3 big events in bonds this week - first we have the FOMC meeting on Tues and Wed. The FOMC statement will undoubtedly be parsed very closely. We will also get the advance estimate of 2Q GDP on Wed. Finally, on Friday we get the jobs report. So lots of potential market-moving stuff towards the back end of the week. 

There is a lot of discussion over who will be the next Fed Chairman after Bernanke's term is finished in January. Bernanke has said he doesn't want the job anymore. The two names mentioned are Janet Yellen and Larry Summers. Given that Summers hasn't even done a stint as a Fed governor, he would be a surprising pick. This looks like so much theater. The next Fed Head will be Yellen. Yellen is an even bigger dove than Bernanke, so keep that in the back of your mind when you think about taper timing.

This week we will have a lot of earnings reports from the mortgage REITs. While we expect to see declining book values, the more interesting data will involve how much the REITs have de-leveraged. Some have done nothing (Capstead). Others have sold paper and still have increased leverage ratios because the value of their portfolio has dropped. What we hear from the REITs will tell us a lot about how much selling remains to be done in the MBS market, and that will tell us which way we want to lean with rates.

Morning Report - what homebuilders are saying about the market

Vital Statistics:

	Last	Change	Percent
S&P Futures	1675.5	-8.5	-0.50%
Eurostoxx Index	2744.8	4.5	0.16%
Oil (WTI)	104.4	-1.1	-1.03%
LIBOR	0.265	0.001	0.45%
US Dollar Index (DXY)	81.77	-0.203	-0.25%
10 Year Govt Bond Yield	2.55%	-0.02%
Current Coupon Ginnie Mae TBA	104.5	0.2
Current Coupon Fannie Mae TBA	104	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.38

Markets are lower on no real news. Bonds and MBS are up small. 

There isn't much in the way of economic data this morning. I would expect activity to dwindle as most of the Street will be on the L.I.E. by noon.

Yesterday was a big day for real estate-related earnings - we heard from four homebuilders - Meritage, D.R. Horton, Standard Pacific, and Pulte. As far as the question "Has higher mortgage rates affected traffic and purchase activity?" goes, the answer is yes, at least in some areas. Meritage (who is primarily in the West / Southwest) noted an increase in orders, as did Pulte and SPF. Pulte noted that buyers still have a "sense of urgency." On the other hand, D.R. Horton, which is more geographically diversified reported a decrease in orders. That was huge. D.R. Horton said that buyers are "alarmed" at the rapid rise in rates and it has affected sales. I guess it makes sense when you think about it - on the West Coast, inventory is depleted and prices are rising at double digit rates. So it would make sense that buyers would feel a sense of  urgency - the fear is not being able to find a house. Elsewhere in the country, with prices flat / up small, that doesn't exist. Horton is at the lower price points as well, so maybe you are starting to get into DTI issues with first time homebuyers. Anyway, the increase in rates is starting to bite as far as purchase activity goes.

Morning Report - HARP 3.0 may have a steep climb

Vital Statistics:

	Last	Change	Percent
S&P Futures	1678.3	-5.5	-0.33%
Eurostoxx Index	2728.3	-24.0	-0.87%
Oil (WTI)	104.6	-0.8	-0.77%
LIBOR	0.264	-0.001	-0.19%
US Dollar Index (DXY)	82.06	-0.230	-0.28%
10 Year Govt Bond Yield	2.59%	0.01%
Current Coupon Ginnie Mae TBA	104.2	-0.2
Current Coupon Fannie Mae TBA	103.7	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.39

Markets are lower in spite of some strong earnings reports and a decent durable goods report. Initial Jobless claims were 343k. Bonds and MBS are down small / flat.

Mortgage REIT Hatteras Financial released earnings yesterday, and reported a 20% drop in book value. Hatteras invests in agency ARM product, so it is on the slightly more esoteric side, but they made one interesting observation: The MBS market (and the 7/1 ARM market in particular) suffered a powerful sell-off in the last two weeks of June, and has yet to bounce back. So it wasn't simply end-of-quarter liquidation. What does this mean for us? That non-QE supported MBS spreads are finding new levels. What does that mean in English? That once QE ends, we may find the TBA market experiencing the same thing - a permanent increase in spreads, which means higher rates, even if the 10 year bond doesn't move. Make hay now....

More than half the mortgage modified in 2009 under the Home Affordability Modification Program (HAMP) have defaulted, according to a report from the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). This report will certainly make a push for HARP 3.0 even more difficult. Interesting fact: of the $38.5 billion allocated to housing support programs in 2009, only 22% (or about $8.6 billion) has even been spent. 

The Detroit bankruptcy is going to be interesting for municipal bonds, especially GOs (general obligations). There are two types of muni bonds - revenue bonds, where the principal and interest is paid for by some project (like a bridge) and general obligation bonds, where interest is paid for out of general revenues. Liquidity in munis is terrible to begin with - banks won't hold them as inventory because they aren't allowed to take the tax deduction on the interest payments, so nobody will make a market in them. Retail holders of these bonds may find themselves unable to sell. If banks won't buy them, then who will buy these things? Hedge funds, who are buying them with an eye towards going to the mat in bankruptcy court. And they aren't paying par. They probably care in the 40s.

Morning Report - Washington has a "eureka" moment

Vital Statistics:

	Last	Change	Percent
S&P Futures	1693.5	5.2	0.31%
Eurostoxx Index	2756.0	33.1	1.22%
Oil (WTI)	106.8	-0.4	-0.36%
LIBOR	0.264	-0.002	-0.60%
US Dollar Index (DXY)	81.99	0.043	0.05%
10 Year Govt Bond Yield	2.57%	0.07%
Current Coupon Ginnie Mae TBA	104.4	0.0
Current Coupon Fannie Mae TBA	103.8	-0.3
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.3

Markets are higher this morning after a good earnings report out of Apple. Bonds are again victims of the risk-on trade.

Michael Dell and Silver Lake boosted their buyout offer for Dell by ten cents to $13.75. It is their best and final offer. Dude, you're getting a dime.

Mortgage Applications fell 1.2% last week. Purchase apps were down 2.1%, while refis were more or less flat. Refi volume has dropped to 63% of total applications. The conventional index rose about 60 bps, while the govvie index dropped 7%.

The U.S. taxpayer bears the credit risk of roughly half the U.S. mortgage market and 90% of all new origination. In a true "eureka" moment, the braintrust in Washington may have finally figured out that the problem is not that they haven't slugged the banks hard enough. There is a proposal to relax the "skin in the game" rules for private label securitizations in the hopes that something other than 60% LTV / 740 FICO jumbos can be securitized in the future. The original rule was that banks would have to maintain 5% of all MBS they securitize, unless the LTV was lower than 80%. Now, they propose to require a 5% holding only for IO and stated income products. Never mind that IO and stated income are outside of the QM rules and very few market participants are willing to take non-QM risk.

The ARM is coming back. 

Morning Report - FHFA House Price Index rises 7.3% YOY

Vital Statistics:

	Last	Change	Percent
S&P Futures	1692.7	2.4	0.14%
Eurostoxx Index	2739.6	14.2	0.52%
Oil (WTI)	105.8	-1.1	-1.06%
LIBOR	0.266	0.001	0.45%
US Dollar Index (DXY)	82.28	0.058	0.07%
10 Year Govt Bond Yield	2.52%	0.04%
Current Coupon Ginnie Mae TBA	104.6	-0.2
Current Coupon Fannie Mae TBA	104.1	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.3

Markets are slightly higher on a mixed bag of earnings and emerging Asia strength. Bonds and MBS are victims of the risk on trade.

The FHFA House Price Index rose .7% in May, and about 7.3% year-over-year. The FHFA House Price index is based on houses that have a conforming mortgage attached to it, so it eliminates the highly distressed sales and the high end of the market. This makes it more of a "central tendency" index than Case-Schiller. We are still seeing a wide geographical dispersion of increases, with the East Coast lagging while the West Coast is hitting big numbers.

Fannie Mae is predicting that mortgage rate will average 4.7% in Q4, about 40 basis points higher than their June forecast. They are predicting 2013 GDP will come in around 2% and will hit 2.6% in 2015. Home Sales are forecast to increase 8% in 2013. While they have yet to adjust sales forecasts to the new interest rate regime, they are watching it closely.

Professional (read cash) investors are stepping away from the real estate market as prices continue to rise. Investor traffic fell in June for the fourth straight month. Perhaps rising prices are to blame, but perhaps private equity and hedge funds are realizing that achieving high single-digit rental yields is harder than it looks and takes more than a couple smart guys out of New York to make it happen.

Morning Report - NVR earnings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1690.5	1.0	0.06%
Eurostoxx Index	2718.7	2.5	0.09%
Oil (WTI)	108.5	0.4	0.37%
LIBOR	0.265	0.000	0.00%
US Dollar Index (DXY)	82.35	-0.254	-0.31%
10 Year Govt Bond Yield	2.47%	-0.01%
Current Coupon Ginnie Mae TBA	104.6	0.0
Current Coupon Fannie Mae TBA	104.2	-0.3
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.35

Markets are flat on no real news. Earnings season swings into full gear this week with an assortment of heavyweights. Bonds and MBS are flat.

Homebuilder NVR has released earnings. Looks like they were light on the bottom line, but there was a special charge. New orders increased 25%. Revenues increased 31%. NVR is east-coast focused, so it is lagging some of the West-Coast builders. Later this week, we will hear from Pulte, Standard Pacific, and D.R. Horton. It will be interesting to hear how traffic has been affected by the increase in rates.

Bill Gross thinks the Fed won't raise the Fed funds rate until 2016 at the earliest.. Of course he is talking his book, but still... Interest rate cycles are very long.. This chart comes courtesy of Barry Ritholz, with long term interest rates going back to 1790. Note that from 1930 through 1960 we also had a period of exceptionally low interest rates. 

While it is probably a very nichey product, you can buy a house for your elderly parents or college student and not have it treated as a garden-variety investment property. Fannie Mae has a program for people who want to purchase a home for a family member and don't have the money for a downpayment. Just another arrow in your quiver, LOs.

Morning Report - liquidity is drying up in the TBAs

Vital Statistics:

	Last	Change	Percent
S&P Futures	1679.7	-0.9	-0.05%
Eurostoxx Index	2716.0	-2.0	-0.07%
Oil (WTI)	109	1.0	0.90%
LIBOR	0.265	-0.002	-0.56%
US Dollar Index (DXY)	82.68	-0.140	-0.17%
10 Year Govt Bond Yield	2.52%	-0.01%
Current Coupon Ginnie Mae TBA	104.2	-0.2
Current Coupon Fannie Mae TBA	103.9	0.0
RPX Composite Real Estate Index	200.8	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.37

Markets are weaker this morning after a mixed bag of earnings. GE beat, while Mr Softee missed by a country mile. There is no economic data this morning. Bonds and MBS are flat / down small.

Liquidity has been drying up in the TBA market, with bid / ask spreads increasing to 7 ticks on the higher coupons. Yesterday, just over $3.2 billion worth of TBA traded, which made it the second lowest volume day of 2013. What does this mean for you? Thin markets can be volatile. We will likely see more re-prices during the day, and aggregators will fade their bids to account for lousier execution on their hedges. 

Ever wonder how the government sets G-fees? Well, here ya go..

Wonkish piece, but sheds light on the labor force participation rate and why it isn't coming back to previous levels. This has implications for the Fed, in that it won't take much in the way of job growth to keep moving unemployment levels to where the Fed will start thinking about tightening. While the Fed pledges to use a holistic approach, we could be getting to 6.5% unemployment the hard way. Which means, don't expect super robust recovery - the population is aging and that is a drag on growth and spending.

Morning Report: Day 2 of testimony

Vital Statistics:

	Last	Change	Percent
S&P Futures	1677.3	1.7	0.10%
Eurostoxx Index	2685.2	3.3	0.12%
Oil (WTI)	106.7	0.3	0.23%
LIBOR	0.266	0.000	0.00%
US Dollar Index (DXY)	82.87	0.160	0.19%
10 Year Govt Bond Yield	2.49%	0.00%
Current Coupon Ginnie Mae TBA	104.6	4.8
Current Coupon Fannie Mae TBA	104	0.3
RPX Composite Real Estate Index	201.1	-0.5
BankRate 30 Year Fixed Rate Mortgage	4.35

Markets are flattish ahead of Day 2 of Ben Bernanke's testimony. Initial Jobless Claims dropped back to 334k after spiking to 358k the weak before. Bonds and MBS are flat. In earnings, Intel and Ebay missed, while Morgan Stanley beat.

The Bernank goes in front of the Senate this morning at 10:30. Most of the newsworthy tidbits should have been released yesterday, but be aware - rates could get volatile. 

The Senate Banking Committee is expected to vote on Mel Watt to head FHFA. If he gets nominated, expect the government to start forgiving principal on underwater conforming loans and probably HARP 3.0. Watt is an affordable housing guy who will push for loan forgiveness and easier access to credit for low-income borrowers. Maybe the refi boom will have one last gasp.

Most of Bernanke's testimony was old news, but there were some new revelations. The biggest one is that the Fed intends to roll over maturing MBS into new MBS even after QE ends. There was a fear that the Fed would sell their holdings. So that should put downward pressure on mortgage rates. Second, Bernanke said that as long as inflation is below their target rate, the Fed Funds rate is going nowhere. Finally, he mentioned de-leveraging as one of the main reasons why rates shot up so much. There has been a suspicion in the market that the carry trade was the real target. 

Morning Report - A softening of the tapering stance on QE?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1677.5	6.3	0.38%
Eurostoxx Index	2685.7	20.0	0.75%
Oil (WTI)	106	0.0	-0.04%
LIBOR	0.266	0.000	0.00%
US Dollar Index (DXY)	82.5	-0.002	0.00%
10 Year Govt Bond Yield	2.47%	-0.06%
Current Coupon Ginnie Mae TBA	104.4	-1.1
Current Coupon Fannie Mae TBA	104.2	0.4
RPX Composite Real Estate Index	201.6	-0.9
BankRate 30 Year Fixed Rate Mortgage	4.48

Markets are higher this morning after good earnings out of Bank of America. Mortgage Applications fell 2.6% last week, a surprise given that rates fell. Bonds and MBS are up. The initial reaction to the prepared remarks is positive.

Today is Bernanke's semiannual Humphrey-Hawkins testimony in front of Congress, which begins at 10:00. The first thing to note is that this can be market moving, so don't be surprised if we get some volatility around rates. The burning questions concern the end of QE, although expect a lot of Congressional questions on banking regulation and Too Big To Fail. The prepared remarks are here.

The comment that seems to have everyone buying bonds is the statement that ending quantitative easing is "not on a preset course." Remember that was what hit the markets so hard the last time Bernanke spoke in front of Congress - he implied that the Fed expects unemployment to fall to 7% by the end of the year, and if the economy performs as expected, they will begin tapering QE this year. This statement seems to be a softening of that stance. This has pushed the 10 year to 2.47%.

Housing starts came in at a disappointing 836,000 annual pace. Building Permits fell as well. When you look at the internals, it was multi-fam which drove the decrease. Single family starts dropped by 5k, while 5+ units fell from 322k to 236k. Multi-fam in the South took the biggest hit. May was revised upward. I wouldn't read too much into this as far as purchase business goes - the weekly MBA purchase application index rose last week, and the homebuilders have been optimistic so far. Also note that homebuilder sentiment hit the highest levels since Jan 2006. 

The Senate reached a filibuster deal yesterday, and Richard Cordray was confirmed as head of the Consumer Financial Protection Bureau (CFPB). Republicans had been holding up the vote in an attempt to force changes to the agency - to make it a bipartisan committee vs a single head and to subject it to the normal Congressional appropriations process. Will it affect anything in our area? I am guessing not.

Morning Report - Affordability remains high

Vital Statistics:

	Last	Change	Percent
S&P Futures	1676.7	-0.8	-0.05%
Eurostoxx Index	2667.9	-18.8	-0.70%
Oil (WTI)	106.9	0.6	0.55%
LIBOR	0.266	-0.001	-0.52%
US Dollar Index (DXY)	82.74	-0.299	-0.36%
10 Year Govt Bond Yield	2.54%	0.00%
Current Coupon Ginnie Mae TBA	104.2	-1.3
Current Coupon Fannie Mae TBA	103.6	0.0
RPX Composite Real Estate Index	202.5	-0.5
BankRate 30 Year Fixed Rate Mortgage	4.45

Markets are flattish after the consumer price index came in more or less in line with expectations and Goldman beat earnings estimates. Bonds and MBS are flat as we await the Bearded One tomorrow morning.

Re Bernanke's testimony, the Washington Post is saying the Fed will be delaying debate over unwinding QE amid concerns over how the markets will react. One interesting concern, from Richmond Fed Jeffrey Lacker, is that the Fed will experience capital losses on its holdings of mortgage backed securities, and could find itself in a position where it makes no money (or even experiences losses), which will raise public and Congressional scrutiny. Want a proxy for the Fed's balance sheet?  Take a gander at the chart of Agency Mortgage REIT American Capital (AGNC). They hold a levered portfolio of agency fixed and adjustable rate mortgage backed securities. The stock is down a third since rates started going up in early May.

Mortgage REITs like AGNC or Annaly (NLY)  are unloading mortgage-backed securities as rates increase. This is largely due to margin requirements, although interest rate hedging plays a part. As the value of their holdings drops, which is what is happening as rates increase, the banks that provide them leverage will demand more capital. The REITs can either raise capital in the private markets (which isn't going to happen) or they can raise capital by selling their inventory. The thing to remember is that the margin clerk doesn't care if the mortgage backed securities are overvalued or undervalued. The margin clerk will hit whatever bid is available if the company doesn't sell the merchandise themselves. That is how you get these air pockets like we had on July 5, where the we set record highs on mortgage rates and the 10 year yields. As mortgage REITs de-lever, you can expect rate volatility. Floating in this environment can be a little hairy. 

CoreLogic's latest Market Pulse makes the argument that in spite of the recent rise in house prices and rates, housing affordability is still elevated compared to historical numbers. They dismiss (as do I) the notion that we are back in a bubble or are even close to one. Bubbles are psychological events where everyone gets this idea that an asset price cannot fall. We will not experience another real estate bubble, although our great-grandkids might. Here is Corelogic's chart on affordability:

Based on the weak retail sales numbers yesterday (headline +4% vs expectations of +.8%, ex-autos flat vs expectations of + .5%), a number of sell-side firms took down their 2Q GDP estimates a hair. We will get the preliminary estimate of 2Q GDP in a couple of weeks.

Freddie Mac's mid-year update gives a forecast for the rest of 2013. Punch line: home price appreciation will slow, but remain positive, the labor market will continue the pace of the first half of the year, home sales up 2% and starts up 12% from the first half, and mortgage rates will continue to rise. Will the rise in mortgage rates stall the housing recovery? They anticipate it won't, because affordability still remains high.

Morning Report - Earnings Season

Vital Statistics:

	Last	Change	Percent
S&P Futures	1674.0	3.7	0.22%
Eurostoxx Index	2680.7	5.8	0.22%
Oil (WTI)	105	-1.0	-0.92%
LIBOR	0.268	0.000	0.00%
US Dollar Index (DXY)	83.4	0.416	0.50%
10 Year Govt Bond Yield	2.63%	0.05%
Current Coupon Ginnie Mae TBA	101.6	0.1
Current Coupon Fannie Mae TBA	99.95	-0.4
RPX Composite Real Estate Index	203	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.48

Markets are higher on no real news. The NY Empire Manufacturing Survey came in higher than expected, while retail sales were weaker. Citi's 2Q numbers beat estimates. Bonds and MBS are flattish.

Lots of data this week, punctuated by the Bernank's testimony on Wed in front of the House Financial Services Committee. On Tues, we have the Consumer Price Index; now that QE4EVA is officially done with, inflation numbers are becoming relevant again. We will also get capacity utilization, industrial production, and homebuilder sentiment. Wednesday, we get housing starts and building permits, Thursday is Philly Fed, and Leading Economic Indicators. 

Last week's rally in bonds was probably due to an overshoot on the jobs report after the 4th. We saw the average 30 year mortgage rate hit 4.64% on Friday, July 5 and the 10 year hit 2.74%. It looks like a lot of the Street took a 4 day weekend, so the market was illiquid and you had forced REIT selling in a thin market. While rates can certainly go higher, I would almost put an asterisk on those prices. I would be looking for a trading range in the 10 year of 2.45% - 2.65%. 

While earnings season officially started last week, it begins in earnest tomorrow. Heavyweights like Coca Cola, Goldman, American Express, IBM, Intel, Microsoft, Google, and GE will report this week. With the stock market at record highs, it is vulnerable to earnings disappointments. I would expect any sell-off in stocks to be bond bullish, but with the backdrop of ending QE, the effect may be modest.

Morning Report Fed unemployment forecast

Vital Statistics:

	Last	Change	Percent
S&P Futures	1669.4	-0.7	-0.04%
Eurostoxx Index	2686.9	5.6	0.21%
Oil (WTI)	105.5	0.6	0.55%
LIBOR	0.268	-0.001	-0.19%
US Dollar Index (DXY)	83.05	0.306	0.37%
10 Year Govt Bond Yield	2.55%	-0.03%
Current Coupon Ginnie Mae TBA	103.9	0.8
Current Coupon Fannie Mae TBA	103.4	0.1
RPX Composite Real Estate Index	203	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.52

Markets are flat this morning after yesterday's big rally and good earnings reports from JP Morgan and Wells Fargo were offset by a miss from UPS. Bonds and MBS are up small.

The Producer Price Index (a measure of inflation at the wholesale level) increased .8% in June, but that was primarily driven by high energy prices. The core came in at .2%. Both readings were ahead of expectations. At 10:00, we will get the preliminary University of Michigan Consumer Confidence Survey for July.

The thing that jumped out at me from the Fed Minutes was the downward revision in unemployment expectations. The Fed lowered the 2013 unemployment forecast from 7.4% to 7.25%, they took down 2014 from 6.85% to 6.65% and took down 2015 from 6.25% to 6%. Given that GDP was not revised materially upward leads me to believe that they believe the labor force participation rate will remain low, which could be a drag on the economy. The other thing is that the market has had the expectation that a hike in the Fed Funds rate is going to be a 2015 event. Given that the Fed has given a threshold number for raising the Fed Funds rate of 6.5%, we could be looking at a late 2014 / early 2015 tightening. 

Morning Report - Job report aftermath

Vital Statistics:

	Last	Change	Percent
S&P Futures	1634.1	6.8	0.42%
Eurostoxx Index	2654.1	58.1	2.24%
Oil (WTI)	102.5	-0.7	-0.72%
LIBOR	0.269	-0.001	-0.48%
US Dollar Index (DXY)	84.31	-0.140	-0.17%
10 Year Govt Bond Yield	2.68%	-0.06%
Current Coupon Ginnie Mae TBA	102.6	0.1
Current Coupon Fannie Mae TBA	102.5	0.4
RPX Composite Real Estate Index	203.5	-0.7
BankRate 30 Year Fixed Rate Mortgage	4.64

Markets are higher this morning as European stock markets rally.  Bonds and MBS are up

Friday's jobs report turned into a bloodbath for bonds. The 10 year yield jumped 24 bps, as did the average 30 year fixed rate mortgage. Nearly 200,000 jobs were added in June, while May and April were revised upward by 70,000. Goldman and JPM moved up their estimate for the start of FEXIT (Fed exit) to the Sep FOMC meeting from the Dec meeting.

Given the unofficial 4 day weekend, trading desks were understaffed on Friday, which means the markets may have overshot. Thin markets tend to be volatile markets.

The jobs report did a number on mortgage backed securities as well. The Fannie Mae 4s had their worst day since the whole sell-off began as they lost nearly 2 points. That explains why the average 30 year fixed rate mortgage increased by 24bps on Fri.

Chart: Fannie Mae August 4s TBA:

We don't have much in the way of economic data this week, with the exception of the FOMC minutes on Wed. That is probably the only thing that would be market-moving this week. The Western MBA Secondary Conference is this week in San Francisco, so a lot of traders will be out there for that. 

Alcoa kicks off 2Q earnings season after the close. 

The MR will be spotty the rest of the week as I will be in SF for the secondary conference

Morning Report - positive jobs report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1620.0	10.9	0.68%
Eurostoxx Index	2625.8	-20.7	-0.78%
Oil (WTI)	101.8	0.5	0.53%
LIBOR	0.27	-0.001	-0.37%
US Dollar Index (DXY)	84.38	1.152	1.38%
10 Year Govt Bond Yield	2.68%	0.18%
Current Coupon Ginnie Mae TBA	103.9	-0.5
Current Coupon Fannie Mae TBA	102.6	-1.2
RPX Composite Real Estate Index	203.5	-0.7
BankRate 30 Year Fixed Rate Mortgage	4.4

Green on the screen after a strong jobs report. Stocks are up, while bonds and MBS are getting hammered

Note: many desks are going to be understaffed today as senior traders take a 4 day weekend. Thin markets tend to be volatile

The jobs report was pretty good, which is why bonds are selling off. Payrolls increased 195k vs the 165k expectations and the prior two months were revised upward by a total of 70k. The unemployment rate stayed the same at 7.6%. The labor force participation rate ticked up .1%. Hourly  earnings increased, while hours were unchanged. 

The employment report probably does not change anything with respect to the Fed's intentions. They plan on tapering back purchases this year, and plan to end QE entirely when the unemployment rate reaches 7%, which they expect to happen in mid 2014. 

With this report, the 10 year bond yield spiked to 2.68%. We should be best-exing into 4s at this point.

The MR will be spotty next week as I will be in SF for the Western Secondary Conference.

Morning Report - watch the PIIGS

Vital Statistics:

	Last	Change	Percent
S&P Futures	1603.2	-4.0	-0.25%
Eurostoxx Index	2558.8	-44.4	-1.71%
Oil (WTI)	101.4	1.8	1.78%
LIBOR	0.274	0.001	0.37%
US Dollar Index (DXY)	83.39	-0.151	-0.18%
10 Year Govt Bond Yield	2.46%	-0.01%
Current Coupon Ginnie Mae TBA	102.5	0.1
Current Coupon Fannie Mae TBA	101.4	0.0
RPX Composite Real Estate Index	204.2	-0.3
BankRate 30 Year Fixed Rate Mortgage	4.35

Early close today for stocks (1:00 pm) and bonds (2:00 pm). 

Markets are down small after political issues in Europe are pushing PIIGS spreads out. The Portuguese 10 year yield is 117 basis points higher to 7.89% and Greece is out 58 bps. Want to know what can stop the bond market selloff in its tracks?  Risk off trade due to European sovereign bond problems

We have a slew of economic data this morning, and Friday's jobs report looms large. Mortgage applications fell 12%. Purchases were down 3%, while refis dropped 16%. The ADP Employment Change report which foreshadows the private part of Friday's jobs report came in better than expected at +188k. Initial Jobless Claims were 343k, better than expected. 

The Fed approved Basel III capital requirements yesterday. The Fed apparently relaxed some of the capital requirements for mortgages, but it appears this would only apply to community banks. I haven't seen anything with regards to MSRs.

Morning Report - Highest home price appreciation since Feb 2006

Vital Statistics:

	Last	Change	Percent
S&P Futures	1606.5	-0.2	-0.01%
Eurostoxx Index	2597.2	-25.4	-0.97%
Oil (WTI)	98.8	0.8	0.83%
LIBOR	0.273	0.000	-0.07%
US Dollar Index (DXY)	83.42	0.368	0.44%
10 Year Govt Bond Yield	2.48%	0.00%
Current Coupon Ginnie Mae TBA	102.8	0.1
Current Coupon Fannie Mae TBA	101.5	-0.1
RPX Composite Real Estate Index	204.5	-0.8
BankRate 30 Year Fixed Rate Mortgage	4.34

Markets are flattish on no real news. Later on today, we will get the ISM New York, Factory Orders, IBD / TIPP Economic Optimism and Vehicle Sales. None of these releases should be market moving. Bonds and MBS are flat.

The Fed votes on the Finalized Basel III rules today. For originators, the most important part of this will be the treatment of mortgage servicing rights. Basel III requires banks to over-reserve for MSRs once they reach a threshold point as a percent of capital. MSRs had been under pressure for quite some time in anticipation of the rule, but now that rates are rising, you are starting to see cheeky bids for newly-originated MSRs. For LO's, the value of MSRs affects the value of SRPs which influences your ratesheet.

The CoreLogic Home Price index rose 12.2% in May, which was the highest price increase since Feb 2006. Excluding distressed sales, prices rose 11.6%. Home prices nationwide remain 20.4% below their peak which was set in April 2006. The Pending Home Price Index indicates that prices are expected to rise even more (13.2%) in June. These sales would have had contract signings before interest rates started backing up, so you can't read too much into how higher rates are affecting home prices, but the pending home price index is encouraging. 

12 month home price appreciation:

• Arizona - 16.9%
• California - 20.2%
• Connecticut - 3.8%
• Florida - 11.1%
• Nevada - 26%
• New York - 9.8%
• North Carolina - 5.6%
• Tennessee - 5.3%
• Texas - 8.5%

In anticipation of Friday's jobs report, here is a cool little widget courtesy of the Federal Reserve Bank of Atlanta. The jobs calculator shows you how many jobs need to be created to get the unemployment rate down to a target rate. You can play with the labor force participation rate, population growth rate, etc. If you  take Ben Bernanke at his word that the Fed will end QE when unemployment hits 7%, you can use the calculator to figure out whether we are on pace or not.

Finally, I did an interview on Capital Markets Today where I discussed the recent rise in rates and its implications for housing and the economy. Check it out.

Latest interview on Capital Markets Today

I discuss the Fed, interest rates, and real estate.

http://www.blogtalkradio.com/capitalmarketstoday/2013/07/01/special-edition-market-turmoil-bond-market-interest-rates

Morning Report - Record outflows for bond funds.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1607.5	8.2	0.51%
Eurostoxx Index	2618.1	15.5	0.60%
Oil (WTI)	97.87	1.3	1.36%
LIBOR	0.273	0.000	0.00%
US Dollar Index (DXY)	83.16	0.022	0.03%
10 Year Govt Bond Yield	2.53%	0.04%
Current Coupon Ginnie Mae TBA	102.3	-0.2
Current Coupon Fannie Mae TBA	101.3	-0.2
RPX Composite Real Estate Index	205.3	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.39

Markets are higher on no real news. The Markit US Purchasing Managers Index came in a little lower than expected. Later this morning we will get construction spending and the ISM manufacturing. ISM could be market moving. Bonds and MBS are down.

This week is relatively data-light, with the 4th of July holiday in the middle. The highlight of the week will be the jobs report on Friday. 

A record $80 billion was pulled out of bond funds and bond ETF funds in the month of June, according to Trim Tabs. This record outflow is also based on people who follow the news closely. Q2 statements are coming out soon and a lot of people who don't follow their investments closely may be in for a shock. Which means we could face another deluge of selling.

Delinquencies are falling again, with serious delinquencies dropping to 2.83% in the month of May, according to Fannie Mae's monthly summary. Serious DQs were 3.57% a year ago. Separately, Citi paid just under $1 billion to settle buyback claims on mortgages originated from 2000 to 2012.

I will be on Capital Markets Today later this afternoon discussing the latest from the bond markets