Morning Report - Confidence is back at boom time levels.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2108.0	-1.9	-0.09%
Eurostoxx Index	3572.0	-2.9	-0.08%
Oil (WTI)	49.23	1.1	2.20%
LIBOR	0.261	0.000	-0.08%
US Dollar Index (DXY)	95.04	-0.250	-0.26%
10 Year Govt Bond Yield	2.01%	-0.02%
Current Coupon Ginnie Mae TBA	102.5	0.0
Current Coupon Fannie Mae TBA	101.7	0.1
BankRate 30 Year Fixed Rate Mortgage	3.94

Stocks are lower this morning after GDP came in a little better than expectations. Bonds and MBS are up small.

The second revision to fourth quarter GDP came in at 2.2%, a bit higher than the estimate of 2%, but a big drop from the Q3 reading of 5%. Personal consumption rose to 4.2%, a strong reading that bodes well for growth going forward. Government spending was down, driven by a 12.4% drop in defense spending. Business inventories were revised downward as well. Private capital expenditures slowed their rate of growth as well. 

Pending Home Sales rose 1.7% in January, lower than expected, but better than the upward-revised 1.5% drop in December. They are up 6.5% year over year. Supply remains tight, however the percentage of all-cash sales is decreasing, which indicates the professionals may be exiting, leaving room for "real" home buyers to enter. The big question remains regarding inventory: will it simply jack up prices, or will it attract new building? The answer may be "both."

In other economic data, the ISM Milwaukee Index came in at 50.32, a disappointment, while the Chicago Purchasing Manager index fell sharply from 59.4 to 45.8. The University of Michigan Consumer Sentiment index rose to 95.4. These consumer confidence indices are driven by gasoline prices for the most part, but the numbers are encouraging nonetheless. We are back to boom-time levels. This is being confirmed by the strong personal consumption numbers this morning.

Why is Germany worried about government spending when it is getting paid to borrow? Switzerland, Sweden, and Denmark are imposing negative interest rates on bank deposits. Separately, are these ultra-low rates creating issues that will blow up later? We are in uncharted territory, and while everyone hopes that the world's central banks can stimulate the global economy without causing another crisis, that is no sure bet. The stock market seems blithely oblivious to this possibility, however and that is another issue. I am wondering if this will all come to a head in time for the 2016 elections. Monetary policy acts with a lag, and if the Fed starts tightening in June, the effects will start kicking in by summer of 2016. Wouldn't it be ironic to see obama struggle with a financial crisis at the end of his term the way W did?

We are starting to see more evidence of improvement in the labor market with small business, which has been the engine of job creation historically. We are actually beginning to see the unwind of a strange dichotomy: the stock market had been flying over the past few years, yet things have been pretty gloomy for the economy overall. To the average American, the economy didn't feel like the stock market should be at record levels -  in other words, it didn't feel like 2005 or 1999. The reason for this was that the big S&P 500 names have lots of international exposure, which was driving earnings and the indices and ultimately their stock prices. Not only that, they could borrow at exceptionally low rates, while smaller business was subject to tighter credit. This is beginning to reverse however: as Europe weakens and the US dollar strengthens, the international divisions of the big index names are having a rougher go of it, while US domestic focused small business is benefiting from a turnaround in the US economy.  

Morning Report - The McMansion is back

Vital Statistics:

	Last	Change	Percent
S&P Futures	2109.9	-0.3	-0.01%
Eurostoxx Index	3553.7	11.9	0.34%
Oil (WTI)	49.73	-1.3	-2.47%
LIBOR	0.261	-0.001	-0.19%
US Dollar Index (DXY)	94.61	0.399	0.42%
10 Year Govt Bond Yield	1.97%	0.00%
Current Coupon Ginnie Mae TBA	102.8	0.1
Current Coupon Fannie Mae TBA	101.9	0.0
BankRate 30 Year Fixed Rate Mortgage	3.91

Markets are flat this morning on no real news. Global bonds continue to rally, but Treasuries are not really participating. 

Inflation remains largely muted, with the Consumer Price Index falling .7% in January. Ex-food and energy, it rose .2, a little higher than expectations. On a year over year basis, inflation ex food and energy increased 1.6%. 

Durable Goods orders rose 2.8% in January, rebounding smartly after a very weak December. Capital Goods (a proxy for business capital expenditures) rose .6%. 

Initial Jobless Claims rose to 313k last week from 282k the week before. The Bloomberg Consumer Comfort Index fell from 44.6 to 42.7 last week. 

Home Prices rose .8% in December, according to the FHFA. Home Prices are now about 4% from peak levels. The report has been expanded to include all sorts of additional data. The growth continues to be on the West Coast, while the Northeast lags. 

Delinquencies and foreclosure rates dropped in Q4, according to the MBA. For the most part, we are back at pre-2007 (or pre-crisis) levels. Judicial states still have 3x the foreclosure rate as non-judicial states.

The McMansion is back. The median square footage of new homes topped 2,400 square feet last year. Builders are chasing the affluent because the first time homebuyer is still largely out of the market. That said, some builders, like D.R. Horton, are introducing new brands that are in the first time homebuyer price points.  

How much slack is there really in the labor market? Are wages rising because of a shortage of labor in some areas? If so, then that means (a) the speed limit of the economy is lower, because more people working = higher output, and (b) the Fed will have to move earlier than they may want to in order to quell inflation. If these discouraged workers return to the labor force, downward pressure on wages will continue, however in the long run, output will be higher. This issue was discussed in the June 2014 FOMC minutes, but it hasn't been brought up since. 

Morning Report - New Home Sales still depressed

Vital Statistics:

	Last	Change	Percent
S&P Futures	2111.7	-2.0	-0.09%
Eurostoxx Index	3540.4	-6.7	-0.19%
Oil (WTI)	49.64	0.4	0.73%
LIBOR	0.262	-0.001	-0.38%
US Dollar Index (DXY)	94.3	-0.192	-0.20%
10 Year Govt Bond Yield	1.99%	0.01%
Current Coupon Ginnie Mae TBA	102.6	0.0
Current Coupon Fannie Mae TBA	101.8	0.0
BankRate 30 Year Fixed Rate Mortgage	3.92

Markets are down small this morning as we go into Day 2 of Janet Yellen's Humphrey-Hawkins testimony. Bonds and MBS are flat.

New Home Sales fell to 481k from 482k in December. We are still at something like 34% of peak levels during the bubble, which is a historically recessionary level. Toll Brothers was somewhat bullish, and it seems like the spring selling season is improving, but tight inventory remains an issue. Given that builders have pushed price hikes about as far as they can go, in order to boost revenues, they will need to push through more units. 

Chart: New Home Sales 1963 - Present

Mortgage Applications fell 3.5% last week. Purchases were up 4.6% while refis fell 7.5%. Rates jumped a lot for jumbos - from 3.92% to 4.09%, while the 30 year FRM forse from 3.93% to 3.99%. The 10 year picked up 6 basis points in yield last week as well. Mortgage rates did not follow Treasuries down during the plunge of late January, and therefore had held steady as rates went back up. It looks like we are back to mortgage rates moving with Treasuries. Not sure what is going on in jumbos, though - that is a big move. 

Janet Yellen's prepared remarks pretty much revealed nothing new. "Patient" still means 2 FOMC meetings. She came out strongly against the "audit the Fed" movement, pointing to 1970s inflation as the result of Congressional meddling in monetary policy. Elizabeth Warren laid into her like a prosecutor on cross over of matters, even getting Yellen to roll her eyes at one point. There was talk about possible regulatory relief for small community banks. For the most part, it was a non-event. Day 2 continues today in front of the House. 

Mortgage REIT Annaly Capital reported better than expected earnings yesterday. It looks like they made few adjustments to their portfolio.  Their conference call is later today. Annaly is a big player in the TBA market, which is the starting points for loan pricing. 

Big Box Home Improvement Retailer Lowe's reported good numbers this morning as home improvement continues to drive sales. Can't afford a new home? How about a new kitchen?

Retailer TJ Maxx is raising wages to $9.00 to compete with WalMart in attracting and retaining the best talent. While we are still nowhere near seeing anything that could be considered "wage inflation," it appears we could be laying the ground work for it. Wage inflation and new home construction are the last pieces to the puzzle for the US economy. 

Morning Report - Janet Yellen on the hill

Vital Statistics:

	Last	Change	Percent
S&P Futures	2106.0	-0.7	-0.03%
Eurostoxx Index	3526.4	6.9	0.19%
Oil (WTI)	50.09	0.6	1.29%
LIBOR	0.263	0.001	0.42%
US Dollar Index (DXY)	94.75	0.183	0.19%
10 Year Govt Bond Yield	2.08%	0.02%
Current Coupon Ginnie Mae TBA	102	-0.2
Current Coupon Fannie Mae TBA	101.3	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.94

Markets are flat this morning after the EU and Greece agreed to a 4 month extension of their rescue package. Bonds and MBS are down small.

Janet Yellen is set to testify in front of the Senate this morning. Watch for volatility in rates. The prepared remarks are here. Initial reaction of bonds is negative.  

Home prices rose .87% month-over-month and 4.5% year over year, according to Case-Shiller. We continue to approach normalcy, but housing starts / new home construction remain at recessionary levels. The Great Millennial Develeraging continues...

The Home Despot reported good earnings this moring, and the stock is up smartly. They boosted their quarterly dividend by 26% and authorized an $18 billion buyback. Sale store sales increased 7.9%. The conference call is going on right now, and it appears that the strike in the West Coast ports has not become an issue yet. Also, they are not seeing upward wage pressure as their wages are "above market."

McMansion builder Toll Brothers beat numbers this morning, and took up guidance for 2015. ASPs are forecast to increase to $742,500 higher than the previous guidance of $735,000. Deliveries will increase as well to 5,600 units from 5,500 units. They will hold a conference call at 11:00 am EST.

Morning Report - Existing home sales fall

Vital Statistics:

	Last	Change	Percent
S&P Futures	2102.7	-4.4	-0.21%
Eurostoxx Index	3504.3	13.8	0.40%
Oil (WTI)	48.92	-1.9	-3.72%
LIBOR	0.263	0.001	0.42%
US Dollar Index (DXY)	94.72	0.465	0.49%
10 Year Govt Bond Yield	2.09%	-0.02%
Current Coupon Ginnie Mae TBA	102	0.0
Current Coupon Fannie Mae TBA	101.3	0.2
BankRate 30 Year Fixed Rate Mortgage	3.97

Markets are lower this morning in spite of a loan extension for Greece. Bonds and MBS are up small.

Existing home sales fell to a 4.82 million unit pace in January from an upward-revised 5.07 million pace in December, according to the National Association of Realtors. Inventory is still tight at 4.7 months (6.5 is more or less a balanced market), but it is up from 4.4 months in December. The median home price is $199,600, an increase of 6.2% year over year. All cash transactions were 27%, down from 33% a year ago, and distressed sales were 11%, down from 15% a year ago. 

Janet Yellen will make her semiannual trek to the Hill to discuss monetary policy in front of Congress. The prepared remarks will undoubtedly be closely parsed, and the sense on the Street is that Yellen wants to lower expectations somewhat for a June rate hike. Aside from that, HH is generally a waste of time for market watchers. These are generally for the benefit of politicians who like to use it as a platform to pontificate on issues important to them.  The left will try to get her to agree with their views on inequality and the minimum wage, while the right will probably go after the long-term risks of ZIRP. It will be interesting to see if someone asks about the "audit the Fed" movement. She testifies in front of the Senate tomorrow at 10:00 am EST, and in front of the House on Wed.

A deal in the servicing field this morning: New Residential is buying subprime servicer Home Loan Servicing Solutions for $1.3 billion. HLSS has been examining strategic alternatives since last November, and the stock is up smartly. The servicing sector as a whole has gotten slammed from the Ocwen mess and the drop in interest rates. 

Speaking of servicing, Ocwen is trying to sell a 9.8 billion servicing portfolio to Nationstar.

If the US economy is improving (and all evidence says it is), why are banks still piling into Treasuries?  There are a couple of reasons. First, is Basel III. They were required by the regulators to increase their holdings of Treasuries. Second, if you look at the Bloomberg total return index on US Treasuries over the past year, they returned 8.8% in 2014. That includes periodic interest and capital gains. Compare that to the typical rate on a business development loan, or a line of credit paying LIBOR + 200 or something. Treasuries are working. And given the yields in European bonds, and the strength of the dollar, there is an underlying foreign demand for Treasuries. Yes, at some point Treasuries will become an awful bet, but that won't happen until inflation kicks in and that isn't happening at the moment. 

Chart: Bloomberg 10 year Treasury total return index:

Morning Report - Wal Mart wage hike bodes well for wages in general

Vital Statistics:

	Last	Change	Percent
S&P Futures	2090.8	-4.5	-0.21%
Eurostoxx Index	3469.7	-18.4	-0.53%
Oil (WTI)	51.07	-0.1	-0.18%
LIBOR	0.261	0.004	1.52%
US Dollar Index (DXY)	94.67	0.270	0.29%
10 Year Govt Bond Yield	2.07%	-0.04%
Current Coupon Ginnie Mae TBA	102	-0.2
Current Coupon Fannie Mae TBA	101.4	0.2
BankRate 30 Year Fixed Rate Mortgage	3.88

Markets are lower this morning as the EU / Greek kabuki dance continues. Bonds and MBS are up. 

The Markit US Manufacturing PMI Index rose to 54.3 in Feb from 53.9 in January. Good reading, given the fact that the Northeast got slammed with snow all month. 

Greece is set to run out of cash as early as next month, so the talks with the EU are increasingly important. Remember, this is all a kabuki dance. Greek voters want to stay in the Euro, and German voters want Greece to stay in the Euro. They will get a deal done, although bonds will be buffeted by the day-to-day headlines.

Megan McArdle on why Wal-Mart raised wages. It was not due to labor activists - it was a business decision to try and minimize turnover and motivate employees. This is good news for wage growth in general, as companies may be forced to raise wages to compete. The great stagnation might be ending.

Morning Report - WMT is *not* rolling back wages

Vital Statistics:

	Last	Change	Percent
S&P Futures	2094.8	-0.6	-0.03%
Eurostoxx Index	3472.6	6.8	0.20%
Oil (WTI)	49.96	-2.2	-4.18%
LIBOR	0.257	0.001	0.20%
US Dollar Index (DXY)	94.3	0.099	0.11%
10 Year Govt Bond Yield	2.07%	-0.01%
Current Coupon Ginnie Mae TBA	102.2	0.0
Current Coupon Fannie Mae TBA	101.4	0.0
BankRate 30 Year Fixed Rate Mortgage	3.89

Markets are flattish after Germany rejected a loan extension request from Greece. Bonds and MBS are flattish as well.

Initial Jobless Claims fell to 283k last week, which is a good number given the drop in oil prices. Eventually layoffs will start in the energy patch. 

The Bloomberg Consumer Comfort Index rose to 44.6 last week, while the Philly Fed fell and the Index of Leading Economic Indicators ticked down from .5% to .2%. 

WalMart reported Q4 earnings that beat analyst expectations. The biggest news out of it, is that WMT is increasing starting wages to $9.00 / hour in April and by Feb next year, all current associates will be making at least $10 an hour, If this is due to market pressures, then that is great news for the economy. If it was due to political pressure (though no one is taking credit so far) then it tells you less. The raise will be part of a larger program to streamline scheduling and other operational issues, and should cost about 20 cents a share over the next year.

The minutes of the Jan FOMC meeting were considered more dovish than expected. Bonds rallied hard on the announcement, as it appears some members are beginning to get cold feet about raising rates this June. Janet Yellen and Ben Bernanke are students of the Great Depression and are probably going to err on the side of waiting too long versus tightening too early. 

Freddie Mac took down its numbers for Q1 GDP to 2.5% from 3%, raised 2015 origination forecasts to $1.3 trillion from $1.2 trillion, cut the forecast 30 year fixed rate mortgage rate to 3.9% from 4.2% and is predicting 3.9% home price appreciation. Forecasts for home sales (5.6 million) and housing starts (1.18 million) are unchanged. Affordability is still a tale of two Americas, with the NYC / DC / South Florida / West Coast being unaffordable, and the rest of the country being affordable. 

Morning Report - On the waterfront

Vital Statistics:

	Last	Change	Percent
S&P Futures	2093.6	-2.3	-0.11%
Eurostoxx Index	3459.2	20.8	0.60%
Oil (WTI)	52.39	-1.1	-2.13%
LIBOR	0.256	-0.001	-0.35%
US Dollar Index (DXY)	94.28	0.223	0.24%
10 Year Govt Bond Yield	2.12%	-0.02%
Current Coupon Ginnie Mae TBA	101.8	0.1
Current Coupon Fannie Mae TBA	101.1	0.0
BankRate 30 Year Fixed Rate Mortgage	3.83

Markets are lower as Greece seeks to limit some of the reforms being demanded from other Euro area members as a condition to extending the country's 240 billion euro rescue package past February. Bonds and MBS are up small.

Mortgage Applications fell 13.2% last week as purchases fell 7.1% and refis fell 16%. It looks like mortgage rates didn't move tremendously, at least according to the Bankrate 30 year fixed rate mortgage numbers. Mortgage rates had lagged the move downward in the 10 year, so it is unsurprising they are lagged the move back up. It appears they are beginning to move up with bond yields this week, however.

Housing starts fell 2% in January to an annualized pace of 1.065 million units. Building permits fell .7% to an annualized pace of 1.053 million. 

Inflation remains muted at the wholesale level, with the Producer Price Index falling .8% month-over-month. Stripping out food and energy, it fell .1%, month over month, and increased 1.6% year over year. 

Industrial Production rose .2% in January, and capacity utilization fell from 79.7% to 79.4%. 

Speaking of inflation, there is a labor dispute between the longshoremen and the ports on the West Coast. We are starting to see some stirrings from labor unions, which could mean we are finally seeing the start of wage inflation. That said, the two labor unions involved are in industries which are in the middle of dramatic change. Ports are becoming more and more automated, and quite frankly do not need as many workers as they used to. The longshoreman are simply trying to delay the inevitable and are fighting over work rules that require two people supervise an automated crane. The steelworkers decided to pick a fight just as oil prices are falling and a labor surplus in the oil patch is being generated. Neither side has much in the way of negotiating leverage. That said, it will be interesting to see if they win. 

Another data point for the energy patch: Buffett sold all of his Exxon Mobil and ConocoPhillips. 

The minutes from the last Fed meeting should be released around 2:00 pm EST, so there is a chance for some bond market volatility around that time. 

While it seems like Democrats and Republicans are in a death match struggle over the direction of this country and the days of genteel civility are in the past, here is some perspective. Turkey's President Recep Tayyip Erdogan has filed a lawsuit against the head of Turkey’s central bank, Erdem Basci, charging him with mismanaging the country's interest rate policy and not lowering rates as demanded by the government. He faces two years in jail.

Morning Report - The week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	2090.6	-2.9	-0.14%
Eurostoxx Index	3427.2	-6.1	-0.18%
Oil (WTI)	52.24	-0.5	-1.02%
LIBOR	0.257	-0.001	-0.39%
US Dollar Index (DXY)	94	-0.197	-0.21%
10 Year Govt Bond Yield	2.04%	-0.01%
Current Coupon Ginnie Mae TBA	102.7	0.2
Current Coupon Fannie Mae TBA	101.7	0.0
BankRate 30 Year Fixed Rate Mortgage	3.83

Stocks are lower this morning as Greek talks break down. Bonds and MBS are up small.

The Empire Manufacturing Index fell in Feb and came in slightly light. There is almost certainly some weather-related noise in that report. 

The NAHB Housing Market Index fell to 55 in February from 57 in January. The index increased in the Northeast and fell in the Midwest. The South and West were more or less unchanged. 

We have a lot of data this week with housing starts tomorrow, industrial production / capacity utilization, and finally the FOMC minutes. The minutes should be the big event for the week. The focus will be on handicapping a June rate hike.

Speaking of rate hikes, wage inflation continues to be the missing piece of the puzzle for the economy. That said, Big Labor is waking up, with refinery strikes and a longshoreman's strike on the West Coast. Strike activity is still well below where it was in the 70s and 80s, but it could be the start of wage inflation. 

One in three FHA borrowers could save money by refinancing today. Of course many will find the savings to small to make it worthwhile, but the drop in annual MIP is a big deal. Certainly MBS investors think so as Ginnie Mae TBAs continue to underperform Fannie Mae TBAs.

Finally, I appeared on Capital Markets Today and did a deep dive into the economy and housing. You can listen to the podcast here.

Morning Report - Bill Ackman's Fannie Mae trade

Vital Statistics:

	Last	Change	Percent
S&P Futures	2088.2	4.1	0.20%
Eurostoxx Index	3458.4	40.8	1.19%
Oil (WTI)	52.73	1.5	2.97%
LIBOR	0.258	0.000	0.00%
US Dollar Index (DXY)	94.19	0.091	0.10%
10 Year Govt Bond Yield	2.01%	0.02%
Current Coupon Ginnie Mae TBA	102.8	0.2
Current Coupon Fannie Mae TBA	101.9	0.0
BankRate 30 Year Fixed Rate Mortgage	3.83

Happy Friday the 13th.

Markets are higher this morning on optimism of a deal in Greece and encouraging economic data out of Germany. The Greek 10 year yield is down almost 100 basis points this morning and is approaching 9%. The market has a risk-on feel with stocks up and bonds / MBS down.

Import prices fell 2.8% MOM and 8% YOY. Consumer sentiment fell from 98.1 to 93.7. 

Bloomberg has a good piece on Mel Watt and the issues surrounding principal mods for Fan and Fred loans. The biggest question remains: how can you help underwater homeowners without triggering a wave of strategic defaults? 85% - 90% of people whose mortgage is underwater are current on their payments. The last thing you want to do is encourage them to stop paying in order to get a principal mod. Luckily, time has been doing the heavy lifting here, as the number of homes with negative equity has fallen from 31% in 2012 to just about 17% today. Second, many of those homes are not Fan and Fred loans in the first place, and FHFA is only looking at cutting principal on Fan and Fred loans that it owns. The FHFA Home Price Index, which tracks the prices of homes with a conforming mortgage is within 5% of the peak. 

Bob Shiller warns of a bond bubble. He is probably right, although it could last some time. Interest rate cycles are long: the current cycle began in 1981 or so. Note that in the 1950s, the bond market crashed and the generation that lost their shirts in the stock market crash of 1929 ended up blowing up in levered flattening trades. Persistently low interest rates can wreak all sorts of havoc, especially with pension funds and insurance companies. They have a return bogey they must meet, and the actuarial tables couldn't care less that interest rates are zero. Note that Dr. Cowbell is copacetic with all of this. Note that the 4 most dangerous words in investing are: This Time Is Different.

Bill Ackman sees the common stock of Fannie Mae and Freddie Mac as "the best trade in capital markets" He is betting that Congress will eventually stop taking all of Fannie's profits and allow them to recapitalize in private markets. The thing is, this is a litigation lottery ticket. It is either worth a lot, or worth nothing. If it actually had access to its profits - it doesn't - all p/l goes to Treasury - it would have a P/E of 1. FWIW, the Administration is bound and determined to see that Fannie Mae common shareholders do not see a dime. But administrations could change, and Congress may decide that housing reform is simply too tough and we go back to the old F&F. 

How bad are things in the energy patch? We have another arctic blast hitting the Eastern part of the country and natural gas cannot get out of its own way.  Kind of amazing, really. 

Morning Report - layoffs in the energy patch could be good news for housing

Vital Statistics:

	Last	Change	Percent
S&P Futures	2077.7	12.0	0.58%
Eurostoxx Index	3420.1	46.0	1.36%
Oil (WTI)	50.99	2.2	4.40%
LIBOR	0.258	0.000	-0.10%
US Dollar Index (DXY)	94.25	-0.737	-0.78%
10 Year Govt Bond Yield	1.97%	-0.05%
Current Coupon Ginnie Mae TBA	102.7	0.0
Current Coupon Fannie Mae TBA	101.8	0.2
BankRate 30 Year Fixed Rate Mortgage	3.87

Markets are higher this morning on news of a cease-fire in Ukraine. Bonds and MBS are up.

Greek bonds are rallying with bonds globally. Unusual, as a rally in Greek debt has been triggering the risk-on trade lately. 

Retail Sales disappointed in January. The headline number fell .8%, however falling gas prices were a big contributor (gas is measured in dollars, not gallons). However, the control group, which strips out volatile segments like autos, gas, and building materials only rose .1%, versus Street expectations of .4%. The strength appears to be in autos and food service. Bad weather in the Northeast may have played a role in the number, however. 

Business Inventories rose .1% and the Bloomberg Consumer Comfort Index fell to 44.3. 

Initial Jobless Claims rose to 304k last week. This is going to be a number to watch - falling energy prices are triggering layoffs in the energy patch. Interestingly, part of the reason why labor has been so tight in construction was due to workers moving from the construction sector to the energy sector after the housing bust. As energy prices fall and construction begins to ramp up, this could be good news for the housing sector and especially the homebuilders. The builders have been frustrated by an inability to find skilled labor, and a reversal of the migration from construction to the energy sector should help them. 

Julian Castro appeared before the House Financial Services Committee yesterday. His prepared remarks are here. He was there to defend the cut in mortgage insurance and to rah-rah everything the Administration has done to get housing (and the economy) moving. It was basically a defense of an activist government role in the housing market. 

Morning Report - Good early indications on the Spring Selling Season

Vital Statistics;

	Last	Change	Percent
S&P Futures	2059.5	-2.7	-0.13%
Eurostoxx Index	3373.8	-9.4	-0.28%
Oil (WTI)	49.27	-0.8	-1.50%
LIBOR	0.258	0.003	1.08%
US Dollar Index (DXY)	94.77	0.014	0.01%
10 Year Govt Bond Yield	1.98%	-0.01%
Current Coupon Ginnie Mae TBA	102.8	0.0
Current Coupon Fannie Mae TBA	101.7	0.0
BankRate 30 Year Fixed Rate Mortgage	3.88

Stocks are lower worldwide as Greece and Germany continue to posture over future Greek bailouts. The Greek 10 year bond yield is up 33 basis points to 10.58%. Global bonds are up small, and MBS are flat.


Mortgage Applications fell 9% last week as rates backed up 32 basis points. Purchases were down 6.5% while refis were down 10.3%.


Hedge funds that bought distressed mortgage debt in 2008 and 2009 are unwinding their positions as spreads have tightened and real estate prices have risen. Probably next on the agenda is the unwind of the REO-to-Rental trade which has simply not lived up to the hype.


Homebuilder KB Home is doing a $250 million bond issue today. Separately, they announced new orders were up 25% so far this year. Key quote from CEO Jeffrey Metzger: "Based on our expanding community count and the strength of our recent net order results, we are optimistic about the spring selling season. We believe the momentum of these favorable trends, in combination with our solid backlog, support a positive revenue outlook for the remainder of the year, particularly in the third and fourth quarters.”


Lewie Ranieri's Shellpoint Partners rolled out their non-QM credit repair product in October, and they hope to do their first securitization of these loans this year. They believe the agencies will demand 15% credit enhancement for AAA tranches with high quality non-QM loans, and credit enhancement of 34%-40% for the tougher stuff: 620 FICO, 50 DTI, 80 LTV loans. Shellpoint lends through its New Penn unit. Sounds like we are getting closer to non-QM securitization.

Morning Report - Consumers are becoming more constructive on housing

Vital Statistics:

	Last	Change	Percent
S&P Futures	2056.0	13.6	0.67%
Eurostoxx Index	3388.9	41.1	1.23%
Oil (WTI)	52.24	-0.6	-1.17%
LIBOR	0.256	-0.001	-0.20%
US Dollar Index (DXY)	94.77	0.324	0.34%
10 Year Govt Bond Yield	2.00%	0.02%
Current Coupon Ginnie Mae TBA	102.5	0.0
Current Coupon Fannie Mae TBA	102	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.85

Markets are higher this morning as the Greek government offered a compromise on the bailout. Bonds and MBS are down worldwide, with the US 10 year yield flirting with a 2 handle.

Greek 10 year bond yields are down 68 basis points as the Greek government and international creditors hammer out a deal.  This is fueling a risk-on trade as stocks rise / bonds fall. 

The NFIB Small Business Optimism Survey fell to 97.9 from 100.4 in January. Expectations were for a  101. The IBD / TIPP Economic Optimism Index fell in February from 51.1 to 47.5. Job Openings topped 5 million according to the JOLTS survey. 

Consumers are feeling a little better about the housing market, according to the Fannie Mae National Housing Survey. Expectations of home price appreciation rose to 2.5% from 2.3% a month ago, and almost half of respondents thing prices will go up in the next year. Americans are still negative on the economy, but less so, with 49% believing we are on the wrong track and 44% believing we are on the right track. 

Foreclosure Completions fell to 39,000 in December, a 4.9% drop month-over-month and a 13.7% drop year-over-year, according to CoreLogic. Current foreclosure inventory is 552k homes, a decrease of 34.3% from a year ago. New Jersey and New York continue to lead the US with the highest percentage of foreclosures. 

Morning Report - more on the jobs report

Vital Statistics:

	Last	Change	Percent
S&P Futures	2048.8	-2.7	-0.17%
Eurostoxx Index	3386.7	-22.2	-0.65%
Oil (WTI)	52.7	1.2	2.42%
LIBOR	0.255	0.000	0.00%
US Dollar Index (DXY)	93.98	0.407	0.43%
10 Year Govt Bond Yield	1.92%	-0.03%
Current Coupon Ginnie Mae TBA	103.5	0.1
Current Coupon Fannie Mae TBA	103	0.1
BankRate 30 Year Fixed Rate Mortgage	3.82

Markets are lower this morning on European weakness. Bonds and MBS are up.

This week is going to be relatively data-light, with retail sales being the highlight. 

Friday's jobs report was undeniably strong, but I would keep in mind one thing in the back of my mind: We are in a sort of a sweet spot, where lower energy prices are helping things along, but the big layoffs in the energy sector have yet to materialize. If energy prices stay here, producers will cut production and staff. Also, the Fed will start hiking rates in June and then all bets are off. 

Note that last week, Ginnie Mae TBAs underperformed Fannie Mae TBAs are rates shot up. I suspect this is still related to the new MI changes. The bottom line is that conforming pricing is getting more attractive relative to government pricing. 

The NY Times comments on the social engineering aspects of the housing market. Note that one of Bill Clinton's first acts was to prod Fan and Fred into increasing the homeownership percentage. That percentage is now back to 1994 levels more or less. Mel Watt is trying to push it up again, but really has limited tools given that he has to explicitly protect taxpayers and there is still not much of a private mortgage market. 

Never one to ignore technical progress, NAR is urging Congress to allow people to use drones to market homes...

Morning Report - Very strong jobs report

Vital Statistics:

	Last	Change	Percent
S&P Futures	2062.8	7.7	0.37%
Eurostoxx Index	3386.7	-22.2	-0.65%
Oil (WTI)	51.7	1.2	2.42%
LIBOR	0.255	0.000	0.00%
US Dollar Index (DXY)	93.98	0.407	0.43%
10 Year Govt Bond Yield	1.88%	0.06%
Current Coupon Ginnie Mae TBA	103.5	0.1
Current Coupon Fannie Mae TBA	103	0.1
BankRate 30 Year Fixed Rate Mortgage	3.85

Markets are higher this morning after a very strong jobs report. Bonds and MBS are down.

Jobs report data dump:

• Nonfarm payrolls + 257k
• Two month payroll revision + 147k
• Unemployment rate 5.7% (increase of .1%)
• Average Hourly earnings +.5% MOM
• Average Hourly earnings + 2.2% YOY
• Average Weekly Hours 34.6
• Labor Force Participation rate 62.9% (increase of .2%)
• Underemployment rate 11.3% (increase of .1%)

Overall, a very strong report, especially with the two month revision and the increase in wages. Bonds sold off hard on the number, although Euro bonds are off as well, so the global backdrop is "risk-on." BLS did the annual revision to the data series this month, so there may be some technical factors in the data. This report certainly adds weight to the hawks who want to see rates increase and worry that the Fed is behind the curve.

Notwithstanding the average hourly earnings increase, I still don't see much in the way of wage inflation. I suspect some of the increase is due to people who have variable compensation - people on commissions, people who get production bonuses, etc. When the economy improves, they do better, however that increase can be temporary. Are "base wages" increasing? It certainly doesn't fell like it is yet.

Final job report observation: the feared job losses in the energy patch have yet to materialize. 

Grandpa, tell me again about what it was like when interest rates were set by people in colorful jackets shouting at each other in a big room... Goodbye pit traders..

Morning Report - Principal mods on the horizon? Maybe

Vital Statistics:

	Last	Change	Percent
S&P Futures	2045.8	15.7	0.77%
Eurostoxx Index	3404.6	-10.9	-0.32%
Oil (WTI)	49.61	1.2	2.39%
LIBOR	0.255	0.003	1.19%
US Dollar Index (DXY)	93.78	-0.211	-0.22%
10 Year Govt Bond Yield	1.81%	0.06%
Current Coupon Ginnie Mae TBA	103.1	-0.3
Current Coupon Fannie Mae TBA	102.8	-0.2
BankRate 30 Year Fixed Rate Mortgage	3.85

Markets are higher this morning as Greece and Germany spar over bailouts for the Greek banking system. Bonds and MBS are down.

In economic data, initial jobless claims rose to 278k, higher than expected, but still good. Productivity fell 1.8% while unit labor costs rose 2.7%. Finally the trade deficit increased by $8 billion, dashing hopes for a big upward revision in Q4 GDP. 

Uber-dove Boston Fed President Eric Rosengren says they Fed can remain "patient" in terms of raising interest rates, given the deflationary winds from overseas. Rosengren is a non-voting member. Janet Yellen in the Dec FOMC press conference characterized "patient" as "more than two FOMC meetings away). So, if the Fed intends to move at the June meeting, that word will probably be gone in the March statement. Listen to the language of the different Fed heads going forward - if it starts disappearing from prepared statements, etc that fact is telling you something..

Grexit (the name for Greece leaving the Euro) will get a lot of discussion in the press, but it probably won't happen. Voters in Germany and Greece both support Greece staying in the Euro. Exporters like Germany benefit from the drag Greece (and the rest of the PIIGS) put on the Euro. The issue is that Germany, Finland etc don't trust the Greek government to make the necessary structural changes without the risk of being booted. In other words, much of what you will hear over the next few months will be posturing ahead of another bailout. 

Mel Watt is considering principal mods for underwater borrowers with loans held by FHFA. However, any plan will be "narrow" and will have to be done without incurring costs to the taxpayer. Interestingly, by cutting MI premium and G-fees, he is effectively increasing costs to taxpayers by increasing the chance they have to bail out the fund. Given that we are within 5% of peak levels, according to the FHFA Home Price Index, Mel can probably make this problem disappear by running out the clock. Note that Mel says mass principal forgiveness would cost the government billions. The Congressional Budget Office disagrees that a mass principal forgiveness program would cost anything. Looks like not even the Administration buys that argument...

Standard and Poors agreed to pay $1.5 billion in fines, without admitting wrongdoing. They have been forced to stop saying the suit was in retaliation for their downgrade of US Treasuries. Moody's - you're next. Hopefully Mark Zandi said enough nice things about the Administration that you'll get off easier...

Morning Report - What if?

Vital Statistics:

	Last	Change	Percent
S&P Futures	2032.5	-9.6	-0.47%
Eurostoxx Index	3398.3	-15.9	-0.47%
Oil (WTI)	50.8	-2.3	-4.24%
LIBOR	0.252	-0.001	-0.40%
US Dollar Index (DXY)	93.84	0.239	0.26%
10 Year Govt Bond Yield	1.81%	0.02%
Current Coupon Ginnie Mae TBA	103.1	-0.2
Current Coupon Fannie Mae TBA	102.8	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.8

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

The ISM Services Index rose in January to 56.7. The ISM manufacturing index fell however.

Mortgage Applications rose 1.3% last week. Purchases were down 2.3% while refis were up 2.5%. Note that FHA purchases and refis soared after the proposed change in MI.

The ADP Employment Survey came in at 213k jobs in January, lower than expected. The Street is looking for 230k jobs in this Friday's employment situation report. The big number for Friday will be wage growth, not necessarily the payroll number of the unemployment rate. 

Sign of the times: On the American Capital Agency conference call yesterday, one of the analysts asked the mortgage REIT giant "What happens to mortgage REITs if US Treasuries fall to German Bund type yields, below 50 basis point? What happens to the mortgage market? What happens to mortgage backed securities?" Six months ago, the question would be dismissed out of hand. No longer.

One thing is for sure - if that happens, stand by for the mother of all refi waves. 

Partying like it is 1997. Staples and Office Depot are merging. Interestingly, the Obama administration has had a very laissez-faire attitude about antitrust enforcement. Arbs better watch and see if Obama's newfound progressivism extends to antitrust. They could be in a for a rude shock.