Morning Report - State of play with the government

Vital Statistics:

	Last	Change	Percent
S&P Futures	1676.5	-12.9	-0.76%
Eurostoxx Index	2920.1	-12.9	-0.44%
Oil (WTI)	102.1	0.0	0.05%
LIBOR	0.244	-0.002	-0.61%
US Dollar Index (DXY)	80.12	-0.017	-0.02%
10 Year Govt Bond Yield	2.61%	-0.04%
Current Coupon Ginnie Mae TBA	105.4	-0.1
Current Coupon Fannie Mae TBA	104.9	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.32

Markets are weaker after the ECB maintained interest rates at current levels and the ADP jobs report came in disappointing. Mortgage Applications fell .4% last week. Bonds and MBS are higher.

Bonds are rallying (interest rates are falling) on the shutdown. What gives? The shutdown means that the Fed is on hold for QE tapering. Certainly an October move is off the table, and perhaps December is as well. Then we get Janet Yellen, who is an even bigger dove than The Bernank. Maybe, just maybe, we can squeeze in one last refi wave if rates drop below 2.5% on the 10 year. 

If the shutdown remains in place, you just got Friday's all-important jobs report with the ADP number. The economy created 166k jobs last month, while the Street was expecting 180k. The August number was revised downward from 176k to 159k. As we have seen, the financial industry is laying off mortgage origination staff as the refi boom dries up. 

The Washington Post gives you the state of play with the shutdown. Punch Line: there are no high level negotiations happening at the moment. Both sides absolutely despise each other and neither one trusts the other further than they can throw them. Republicans are playing a strategy similar to the sequester. Democrats believed that once people started feeling the effects of the sequester (think business travelers and flight delays) that the pressure would bring everyone to the table. That didn't happen. Instead, Congress passed a bill requiring the FAA to move funds to keep the air traffic controllers on the job. That took the pressure off and the sequester stayed, much to the chagrin of Democrats. Republicans are planning to submit separate continuing resolutions to fund the most popular government activities and daring the Democrats to vote against them. In other words, this could take some time to play out.

Rob Chrisman has a decent analysis of the shutdown and its effects on the mortgage business.  Here is another. The IRS is playing hooky taking the day off so don't expect any tax transcripts in the near future. I would be surprised if this stays - the government isn't going to want to shut down the entire mortgage market while this goes on. I am sure there is a tweak they can make to fix this within the law.

Once we climb continuing resolution mountain, we have to deal with the debt ceiling. Nobody thinks we will miss a principal or interest payment on the debt, but it could potentially affect the economy if the government stops paying some bills. One potential issue is the repo market, which could hit a bump if T-bills become classified as "defaulted securities." Defaulted securities are unacceptable as collateral for repo transactions (a repo is just a secured loan and is a huge way banks and companies handle cash management). This could start to affect the financial markets and restrict credit.