Morning Report - Home price appreciation is decelerating

Markets are higher this morning after the Chinese stock market posted an impressive turn-around and rallied 5.5% overnight on hopes the government would do more to support stock prices. Bonds and MBS are down.

Greece's bailout expires tonight, and they are preparing for life post-bailout. The government has scheduled a referendum for 7/5 to accept or reject the austerity. Mohammed El-Arian lays out the path forward.

After the Greek situation gets resolved, attention will turn to the melt-down in China. Chinese stocks entered bear market territory (notwithstanding yesterday's humongous rally) and a lot of this rally is being supported by dumb money - margined retail money. People are looking to the government to do something to support the markets, and it feels a lot like the Japanese market did in the 90s, where the Ministry of Finance would call the banks during the lunch break and basically tell them to tear up their sell tickets for the day.

House prices increased 4.9% year over year in April, according to Case-Shiller. Home price appreciation is decelerating as wages fail to keep up with house prices.

Consumer confidence rose to 101.4 in June, according to the University of Michigan.

Obama just increased the cost of labor by demanding that anyone who earns just less than $1,000 a week be eligible for overtime, whether they are managerial or not. The new rules will take effect in 2016. IMO, this will only accelerate the replacement of technology for labor and the Uber-ization of the economy, but I suspect Obama isn't thinking about that. He is focused on whipping up the base, which is lukewarm with Hillary. With employment costs already soaring from regulatory mandates, I don't see how this helps overall employment levels. I suspect this is a variation of the French mentality that limiting hours will somehow encourage more hiring. It never ceases to amaze me that the left is completely comfortable with the concept of raising the price of gasoline and cigarettes via excise taxes in order discourage consumption, but yet they somehow imagine the laws of supply and demand are suspended in the labor markets.

Morning Report: Grexit imminent?

Stocks are down worldwide as Greece imposed capital controls and China enters a bear market. Bonds and MBS are up.

We have a short week coming up, with markets closed on Friday for the 4th of July. The jobs report has been moved up to Thursday. Liquidity could be lighter than normal this week as traders head to the Hamptons for a long weekend.

Greece and their creditors are at an impasse, with the Greek government scheduled a vote to determine whether to accept the creditor demands. The European Central Bank froze their Emergency Liquidity program at the same level as last week, making the Greek banks more or less insolvent. ATMs are out of money and the banks will be closed for the next six days. If they cannot get a deal with creditors, Greece will have to start printing money in order to keep the banks solvent, which would pave the way for their exit from the Euro.

While the Greek economy is only about 2% of the Eurozone (in reality, about the size of Milan or Dusseldorf) their exit will probably be bond bullish. Why? In order to support European banks which hold Greek sovereign debt, the ECB will probably announce further measures to support the banking system, and that means more QE. This will cause the Bund to rally, and relative value trading will pull the US 10 year along for the ride.

ICYMI: Puerto Rico can't pay their debts, either.

TBAs got clobbered last week, with the Fannie TBA and the Ginnie TBA losing well over a point. This sent mortgage rates up. It may have been an overreaction to the strong personal spending data we got on Thursday, or fears of volatility over the Greek situation, but it is something to keep an eye on.

Pending Home Sales rose .9% in May, which is the highest level in over 9 years. Home Price Appreciation continues to rise about 4 times wage growth, which is an issue.

The Supreme Court ruled that the CFPB could use the "disparate impact" theory in housing discrimination cases. This was unexpected. It no longer matters whether a lender intended to discriminate, all that matters is the numbers. While the Court tried to explain that this doesn't mean lenders just got quotas, for all intents and purposes, they just did.

Morning Report - A generation of renters?

Vital Statistics:

	Last	Change	Percent
S&P Futures	2111.6	-4.8	-0.23%
Eurostoxx Index	3595.1	-30.9	-0.85%
Oil (WTI)	60.99	0.0	-0.03%
LIBOR	0.282	0.001	0.34%
US Dollar Index (DXY)	95.24	-0.189	-0.20%
10 Year Govt Bond Yield	2.39%	-0.02%
Current Coupon Ginnie Mae TBA	100.7	0.1
Current Coupon Fannie Mae TBA	99.28	0.1
BankRate 30 Year Fixed Rate Mortgage	4.18

Markets are lower after Greek Prime Minister Tsipras expressed shock that his proposals still do not go far enough to get a deal. Bonds and MBS are up.

Mortgage Applications rose 1.6% last week as purchases rose 1.2% and refis rose 1.8%. 

The third revision to first quarter GDP came in at -0.2%. This is an upward revision from the previous -0.7% estimate. A combination of harsh weather, a West Coast port strike, and a slowdown in the oil patch depressed growth. Lower gas prices still are not translating into higher spending at the malls, however. Consumers continue to save / repay debt.

Greece was handed new terms for a bailout. The proposals Tspiras provided do not go far enough, and he took to Twitter to harangue the IMF and the EU. Brave new world: negotiating and posturing via Twitter. “There is still a lot of work to do,” Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of his euro-area counterparts, told reporters in Brussels. “We are not there yet.”

Homeownership levels have fallen back to the levels of the early 90s. Millennials are renting in droves. Is this the new face of homownership, or simply the pendulum overcorrecting on the other side? While house prices are back in bubblicious territory (primarily due to a lack of inventory), rates are so low that mortgage payments are still comparable to rents. 

Speaking of lack of inventory, homebuilding giant Lennar reported earnings this morning, beating the Street. Revenues increased 30% as deliveries increased 21% and ASPs increased to $348,000. New orders increased 18% in units as well. The stock is up about 5% pre-open. Could housing be the new engine for the economy? Hopefully, as manufacturing seems to be going through a soft patch. 

Washington is alleging discrimination in REO, saying that homes in low-income neighborhoods are not being properly maintained. The problem in many of these place, especially in the rust belt, is that the opportunities are so sparse that people are moving out, and no one is moving in. When you have a net outflow of people and an endless supply of vacant houses, these properties become basically worthless. And what bank wants to throw good money after bad maintaining a house that probably will never sell in the first place?

Morning Report - New Home Sales highest in 7 years

Vital Statistics:

	Last	Change	Percent
S&P Futures	2115.6	2.8	0.13%
Eurostoxx Index	3637.5	41.5	1.15%
Oil (WTI)	59.92	-0.5	-0.76%
LIBOR	0.281	0.001	0.18%
US Dollar Index (DXY)	95.44	1.106	1.17%
10 Year Govt Bond Yield	2.41%	0.04%
Current Coupon Ginnie Mae TBA	100.8	-0.7
Current Coupon Fannie Mae TBA	99.13	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.11

Stocks are higher this morning on optimism for a Greek deal. Bonds and MBS are down.

New home sales rose 546k in May, higher than the 523k expectation and the upward-revised 534k April number. We will hear from homebuilding giant Lennar tomorrow. This is the highest number in 7 years, which will hopefully alleviate the problem of low inventory.

Durable Goods Orders fell 1.8% in May. April was revised downward from -0.5% to -1.5%. Capital Goods Orders ex defense and air (which is a proxy for business capital expenditures) rose 0.4% in May after falling a revised 0.3% in April. The low CAPEX numbers were largely driven by the decline in oil prices, which appear to have stabilized. 

Home Prices rose 0.3% in April, according to the FHFA. The index is now roughly 2.3% below its March 2007 peak and corresponds to Feb 2006 prices. Note the FHFA index is narrower than the other indices like Case-Shiller in that it only looks at homes with a conforming mortgage. As usual, the West coast did the best, while the Northeast lagged.

Tspiras surrenders. That is the headline in Bloomberg regarding the Greek situation. Greece has more or less offered to meet the demands of their creditors. The glass of ouzo is close to being full.

Morning Report - Existing Home Sales increase

Vital Statistics:

	Last	Change	Percent
S&P Futures	2115.8	18.1	0.86%
Eurostoxx Index	3545.9	90.1	2.61%
Oil (WTI)	59.32	-0.3	-0.49%
LIBOR	0.281	0.001	0.18%
US Dollar Index (DXY)	94.11	0.023	0.02%
10 Year Govt Bond Yield	2.33%	0.07%
Current Coupon Ginnie Mae TBA	101.2	-0.4
Current Coupon Fannie Mae TBA	99.7	-0.4
BankRate 30 Year Fixed Rate Mortgage	3.99

Markets are higher this morning after the Greek government offered a new proposal to end the standoff. Bonds and MBS are down

The Chicago Fed National Activity Index improved slightly in May to -.17. The 3 month moving average was also negative, which means the economy is growing a little below trend. Production and Consumption were negative, while employment was positive. 

Merger mania in the health insurance space: Cigna rejected an offer from Anthem, and Aetna supposedly approached Humana. Insurers are looking to cut costs.

Existing Home Sales improved 5.1% to 5.35 million in May, according to the NAR. This is the highest since May 2009.  The first time homebuyer accounted for 32% of sales, up from 30% in April, but still below its historical average of about 40%. All cash transactions were flat at 24%, while days on market ticked up slightly to 40 days. The median price of a home rose 7.9% to $228,700. This puts the median home price to median income ratio at 4.3x, which is again stretched and well outside the historical norm of 3.2x - 3.6x. 

In political news, the Supreme Court is supposed to rule on King vs Burwell, the case which decides whether states that did not set up exchanges are eligible for federal subsidies. This will dominate the news headlines in Washington if the Court decides the language in the law needs to be changed. 

Morning Report - Endgame for Greece

Vital Statistics:

	Last	Change	Percent
S&P Futures	2112.5	-2.2	-0.10%
Eurostoxx Index	3469.3	18.9	0.55%
Oil (WTI)	59.35	-1.1	-1.82%
LIBOR	0.286	-0.001	-0.19%
US Dollar Index (DXY)	94.34	0.312	0.33%
10 Year Govt Bond Yield	2.29%	-0.05%
Current Coupon Ginnie Mae TBA	101.2	0.1
Current Coupon Fannie Mae TBA	100.1	0.2
BankRate 30 Year Fixed Rate Mortgage	4.04

Markets are lower after the ECB increased the size of its emergency liquidity program to Greece. Bonds and MBS are up.

No economic data today

We are getting to crunch time with Greece. Euro-area leaders are meeting Monday to try and hammer out some sort of gameplan. The ECB's emergency liquidity package expires on June 30, which is also the day a big payment is due to the IMF. It is looking more and more likely that Greece is going to exit the Euro. While most Greek debt is owned by the Greek banking system, some is owned by the big European banks as well. Some could see a hit to their capital. This will probably be dollar (and Treasury) bullish. 

Chinese stocks have been selling off, and have entered correction territory (defined as down 10%). The Chinese stock market has been in bubble territory for a while, and it looks like it is finally bursting. This market is being fueled by a toxic cocktail of margin debt and dumb money. Current margin debt is $368 billion. The market increased over 150% in one year (or about $6 trillion). While the index was higher in 2009, the Shanghai Composite P/E is currently about 95x earnings, versus 68x at the height of the 2009 market.

The bursting of the Chinese stock and real estate bubbles is going to complicate the Fed's job of trying to normalize interest rates by causing a flight to quality in US Treasuries. The biggest headache for the Fed will be when China begins to export deflation. Inflation is still too low as far as the Fed is concerned. The biggest fear? Interest rates are already at the zero bound throughout the world, and central banks are largely out of ammunition.

Morning Report - FOMC data dump

Vital Statistics:

	Last	Change	Percent
S&P Futures	2095.3	6.1	0.29%
Eurostoxx Index	3406.8	-22.0	-0.64%
Oil (WTI)	60.37	0.4	0.75%
LIBOR	0.286	0.003	1.06%
US Dollar Index (DXY)	93.68	-0.615	-0.65%
10 Year Govt Bond Yield	2.32%	0.00%
Current Coupon Ginnie Mae TBA	101.1	0.0
Current Coupon Fannie Mae TBA	99.77	0.1
BankRate 30 Year Fixed Rate Mortgage	4.06

Markets are higher this morning after the FOMC statement was more dovish than people had feared. Bonds and MBS are flat

The Consumer Price Index rose .4% in May, slightly below expectations. Ex-food and energy, it rose 0.1%. On a year-over-year basis, the CPI is flat, while the core index is up 1.7%. Inflation remains below the Fed's target.

Initial Jobless Claims fell to 267,000 last week, another strong number. Real average weekly wages increased 2.3%.

The Bloomberg Consumer Comfort Index rose to 40.9 from 40.1 last week, while the Philly Fed index rose to 15.2 and the Index of Leading Economic Indicators was flat at 0.7%. 

The FOMC statement was pretty much non-eventful, as was the press conference. The action was in the projection materials and the revised economic forecasts. As expected, the Fed took down its forecast for 2015 GDP growth to a range of 1.8% - 2.0% versus 2.3% - 2.7%. The Fed has been consistently high in its estimates for GDP growth ever since the crisis. It is almost as if they are trying to shoehorn an post asset bubble economy into a garden-variety Fed-driven recession model. Unemployment was taken up as well, from a range of 5.0%-5.2% to 5.2%-5.3%. We will have to wait until the minutes come out to understand the rationale there. Inflation is still expected to come in around .7%. Overall, the economy is still fragile and the Fed wants to take it slow.

The dot graph lowered the median projection for the Fed Funds rate to .7% from .9% at the March FOMC meeting, and the trajectory of interest rates is expected to be lower. 

The CFPB is delaying the deadline for TRID until October, in order to give the industry a little more time. Sounds like the industry lobbied for this extension pretty hard. 

We are getting a woman on the $10 bill by 2020. Jack Lew is asking for suggestions. Of course no one will be using cash anymore by 2020 anyway, and you can put whoever you want on the wallpaper on your phone...

Morning Report: FOMC day

Vital Statistics:

	Last	Change	Percent
S&P Futures	2092.0	3.0	0.14%
Eurostoxx Index	3437.7	-16.4	-0.47%
Oil (WTI)	61.14	1.2	1.95%
LIBOR	0.283	-0.003	-0.98%
US Dollar Index (DXY)	94.84	-0.161	-0.17%
10 Year Govt Bond Yield	2.33%	0.02%
Current Coupon Ginnie Mae TBA	100.9	-0.2
Current Coupon Fannie Mae TBA	99.56	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.07

Stocks are flattish this morning ahead of the FOMC decision. Bonds and MBS are down small. 

The FOMC rate decision is scheduled for 2:00 pm EST today, so beware of volatility around that time. We will be getting a new set of economic projections and a new dot graph. Yellen will also hold a press conference afterward. What will investors focus on? the dot graph.

Mortgage Applications fell 5.5% last week. Purchases fell 4.2% while refis fell 6.9%. 

It is looking like there might not be a deal with Greece, as Tsipras said Greece was willing to live with the consequences of saying "no" to their creditors. Bloomberg provides this helpful graph of where we are in the tug-of-war between creditors and Greece: The ouzo is definitely running out of the glass at this point

"Sell in May and Go Away" meets "Don't fight the Fed." A record number of investors have told BOA / Merrill Lynch that they have bought downside protection in stocks ahead of rate hikes. FWIW, I am not sure that a 50 basis point or 75 basis point Fed Funds rate is going to do that much to pull back the economy, and I think the Fed is going to take it very, very slow. This is not a typical tightening, where the Fed is trying to cool off the economy. The last thing they want to do is choke off the recovery. Second, if (when) China's stock market bubble bursts, we could see a massive flight to quality (in other words, investors buying Treasuries) that would probably offset at least some of the effect of higher short term rates. 

Barclay's is exiting the US MBS market, following Royal Bank of Scotland's lead. They will still trade risk sharing bonds and might still trade agency paper, but they are out of the market making business in pre-crisis paper. 

Morning Report - Building Permits highest in 8 years

Vital Statistics:

	Last	Change	Percent
S&P Futures	2072.2	-3.4	-0.16%
Eurostoxx Index	3431.0	-7.1	-0.21%
Oil (WTI)	59.61	0.1	0.15%
LIBOR	0.286	0.000	0.07%
US Dollar Index (DXY)	95.08	0.232	0.24%
10 Year Govt Bond Yield	2.34%	-0.02%
Current Coupon Ginnie Mae TBA	101	0.0
Current Coupon Fannie Mae TBA	99.48	0.1
BankRate 30 Year Fixed Rate Mortgage	4.09

Markets are lower this morning as the rhetoric between Greece and the EU gets heated. Bonds and MBS are up.

Housing starts dropped 11.1% in May to 1.036 million. April was revised higher from 1.135 to 1.165 million. Building permits rose 12% however to 1.275 million. Housing starts have been very volatile, so it makes more sense to look at the trend, which is generally up. You can see that April's reading was exceptionally good, so a pullback in May is not all that surprising. The good building permits number (highest in 8 years) provides some basis for confidence in the housing recovery. Permits went way up in the Northeast.

Is the private label market coming back, at long last? Issuance of mortgage backed securities have increased to $32 billion this year from $18 billion last year. Much of this new paper is tied to rentals or distressed mortgages from the bubble years. To put the $32 billion into perspective, the private label market was $1 trillion before the crash. As far as new origination goes, pretty much only high quality jumbos are getting securitized, and even that is difficult as the banks prefer to portfolio these loans. We are still a long way from having any sort of robust non-conforming securitization market, but we are headed that way. 

The FOMC meeting starts today, and tomorrow we will get the statement, along with the updated projections and a press conference from Janet Yellen. The Street is still thinking the first hike comes in September. 

Homebuilders Standard Pacific and Ryland announced a merger of equals yesterday, which will create the 4th largest homebuilder in the US behind D.R. Horton, Lennar, and Pulte. Standard Pacific and Ryland have been discussing the deal for years and they think the timing is right for a push out to the East Coast. Part of the rationale for the deal was to diversify Standard Pacific's footprint from the red-hot California market, which is showing signs of overheating. 

Morning Report: All eyes on the FOMC this week

Vital Statistics:

	Last	Change	Percent
S&P Futures	2093.1	-16.1	-0.76%
Eurostoxx Index	3434.5	-68.3	-1.95%
Oil (WTI)	59.08	-0.9	-1.47%
LIBOR	0.286	0.000	0.07%
US Dollar Index (DXY)	95.21	0.240	0.25%
10 Year Govt Bond Yield	2.33%	-0.07%
Current Coupon Ginnie Mae TBA	101.1	0.5
Current Coupon Fannie Mae TBA	99.57	0.4
BankRate 30 Year Fixed Rate Mortgage	4.09

Stocks are lower after talks between Greece and its creditors broke down over the weekend. Bonds and MBS are up.

This is supposedly "deal week" for Greece. They owe the IMF $1.7 billion. If they don't pay (and they have already missed one payment), then it makes it hard for the ECB to continue providing emergency liquidity. The current program with the ECB expires at the end of the month. Rhetoric is getting more and more heated between Germany and Greece at this point. At issue are the pensions. Greece is steadfastly resisting restructuring the country's pension system. And the Germans are getting sick of it: ‘We will not let the German workers and their families pay for the overblown election promises of a partially communist government,’’ Vice-Chancellor Sigmar Gabriel wrote in a Bild opinion column on Monday. If they can't get a deal, then the ECB will probably stop supporting the Greek banks and the county will have to impose capital controls to keep hard assets from fleeing the country. It sounds like the Europe will consider allowing Tsipras some sort of face-saving change to the deal, but nothing really meaningful. The bond markets are getting nervous, as the Greek 10 year bond yield is up almost one full percentage point this morning at 12.723%. For us in the the US markets, any sort of Greek exit will probably cause a flight to quality, which means it would be bullish for US bonds. 

Chart: Greek 10 year bond yield:

In other "bullish for US bonds" news, the manufacturing sector had a rough go of it in May. Industrial Production fell 0.2%, manufacturing production fell 0.2% and capacity utilization fell to 78.1%. Separately the New York State Empire Manufacturing Index fell to -1.98. While manufacturing is no longer the economic driver it used to be, these are still lousy numbers, and reinforces the idea that the Fed will stand pat this week. 

The NAHB Homebuilder index rebounded to 59 in June, topping its post-crisis highs. Builder confidence is more or less back at "normalcy." While homebuilder sentiment is back to normalcy, housing starts most certainly are not. The Street is forecasting housing starts to come in at 1.09 million tomorrow, which is still 27% below the normal, pre-bubble level of 1.5 million starts a year. Starts are only now approaching the recessionary lows of the past. So while builders may have positive sentiment, they aren't putting their money where their mouth is, at least not yet. 

Chart: housing starts, long term:

The FOMC meets on Tuesday and Wednesday this week. This will be the first FOMC meeting where a rate hike is in play. Given some of the weak economic data and persistent low inflation, it is unlikely the Fed will hike rates this week, however the language of the statement will certainly be important. Expect to see some volatility this week in bonds, between the FOMC and the Greek situation. LOs, be sure to tell your borrowers about the risks of floating. 

If the Fed does in fact hike rates, it doesn't necessarily follow that the 10 year bond yield (and by extension mortgage rates) will spike. When you look at the tightenings in the past, the yield curve flattened, which means the short end of the curve (overnight rates etc) moved higher, but the longer end of the curve largely ignored the increase. The 2004 tightening cycle is probably the most relevant, as we were still in the aftermath of the collapse of the stock market bubble. The Fed increased the Fed Funds target rate from 1% to 5.25% over the course of 2 years. The US 10 year basically went nowhere.

Chart: aftermath of 2004 rate hikes:

For a contrarian view on the Fed and long-term interest rates, listen to Bill Gross, who thinks the world's central banks want higher long-term rates because they are worried about insurance companies and pension funds. These entities are not able to earn the returns they need in this low interest rate environment (the actuarial tables couldn't care less that rates are zero), and they have been forced to take a lot of credit risk. The most painless way to avoid a crisis is to let long-term rates slowly creep up. It just goes to show how small the eye is in the needle the world's central banks need to thread.

Elizabeth Warren and the left are not fans of share buybacks And there are legitimate questions about companies levering up to fund buybacks. And yes, buybacks are more tax efficient than dividend hikes because investors can defer taxes on capital gains by not selling. . However they are trying to conflate stock buybacks with "market manipulation," which is fraud and illegal. I think the gameplan is twofold here: The first is to weaken the presumption that management's first priority is to maximize shareholder value. The second is to shame companies into raising wages for workers. 

Morning Report - Bond bubble talk

Vital Statistics:

	Last	Change	Percent
S&P Futures	2109.2	2.3	0.11%
Eurostoxx Index	3497.1	-54.8	-1.54%
Oil (WTI)	59.89	-0.9	-1.45%
LIBOR	0.288	0.002	0.82%
US Dollar Index (DXY)	95.28	0.181	0.19%
10 Year Govt Bond Yield	2.40%	0.02%
Current Coupon Ginnie Mae TBA	100.8	-0.2
Current Coupon Fannie Mae TBA	99.29	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.11

Stocks are lower as both the EU and Greece dig in their heels over a rescue package. Bonds and MBS are up small.

Inflation remains muted at the wholesale level. The Producer Price Index rose 0.5% in May, however that is energy driven. Ex food and energy, it was up 0.1%, or 0.6% year-over-year. The PPI is not that critical of an inflation index - the Fed uses the PCE deflator - but it shows that inflationary pressures remain contained. IMO we won't see any sort of inflation until we see wage gains, and we are only just starting to see that. 

Higher energy prices are not denting consumer sentiment according to the University of Michigan. June Consumer sentiment rose to 94.6 from 90.7 in May. 

A couple Fed researchers have crunched the numbers and believe that the natural rate of unemployment is about 4.3%, versus the 5.2% number the Fed currently uses. They focus on labor's share of income, which has fallen from 72.2% in 2001 to 62.9% now. If correct, that means the Fed has room to let the economy run. The bigger question is why the number has fallen so much. Is it weak bargaining power? Is it the fact that the emerging companies in the US need less employees? (For example, GE has a market cap of $276B and has 305,000 employees. Facebook has a market cap of $228B and has only 10,000 employees). IMO, it will come down to the labor force participation rate. Are the people who have involuntarily exited the labor force coming back? 

Cash sales make up 35% of all home sales, according to CoreLogic. That is down from the peak of 46.5% in Jan of 2011, but still well above the pre-crisis level of 25%. So for originators, this means more "gettable" business even if existing home sales don't improve all that much. I guess you can use cash sales as a proxy for distressed sales, and the places with the biggest foreclosure inventory and lowest price appreciation have the highest cash sales percent.

The raging debate in bond circles is whether we are in a bond bubble. Certainly sovereign debt yields are telling you that inflation is never, ever, ever coming back. However the bigger issue is corporate debt, which is being issued at a record pace as companies lock in low borrowing costs. If they were using that cash to build out capacity and invest in the business then there would be less concern. However, they are levering up to fund buybacks and M&A activity. That is a bigger issue. The biggest issue is that the holdings of corporate debt are now very, very concentrated in bond mutual funds, foreign investors and insurance companies. When there are bond fund redemptions, they have to sell. And new regulations regarding proprietary trading and bank capital mean that trading desks at the big investment banks are not going to absorb all that selling pressure. In addition, hedge funds are getting fewer and bigger as well. Corporate debt could get slammed hard if everyone heads for the exit all at once. Right now, the stock market is anticipating no problems when the Fed starts raising rates. That may end up being a bad bet. 

Morning Report - Optimism on housing, but pessimism on the economy

Vital Statistics:

	Last	Change	Percent
S&P Futures	2110.1	3.2	0.15%
Eurostoxx Index	3571.8	45.3	1.28%
Oil (WTI)	60.88	-0.5	-0.90%
LIBOR	0.286	0.003	1.17%
US Dollar Index (DXY)	95.07	0.423	0.45%
10 Year Govt Bond Yield	2.44%	-0.05%
Current Coupon Ginnie Mae TBA	100.2	-0.2
Current Coupon Fannie Mae TBA	98.81	0.3
BankRate 30 Year Fixed Rate Mortgage	4.14

Stocks are higher this morning after retail sales came in better than expected. Bonds and MBS are up.

Retail Sales rose 1.2% in May, matching estimates. The control group, which strips out some of the more volatile components rose 0.7%, higher than the 0.5% estimate. The big gainers were building supplies, autos and gasoline. 

Import prices rose 1.3% on a month-over-month basis. Business Inventories picked up 0.4% as well.

Initial Jobless Claims came in at 279,000, a strong number. This is the 14th consecutive week below 300k. 

The Bloomberg Consumer Comfort index slipped to 40.1 from 40.5. These sorts of consumer confidence / sentiment indices are really inverse gasoline price indices. 

2015 could be the best year in housing since 2006, according to the NAR. Rising rates are not discouraging buyers - in fact the opposite is happening. Buyers are worried that affordability is going down and that is motivating them to buy now. 

Separately, consumers are getting more bullish on housing, according to the Fannie Mae National Housing Survey. They are not getting more bullish on the economy however, even though their incomes are rising. Pessimism about the economy is at a six month high. 

The left is all up in arms after Jamie Dimon said that Elizabeth Warren doesn't understand the business of banking. I have seen stories where she confuses lending and servicing, so Jamie has a point. She has found her niche as the Ted Cruz of the Left - happy to play to the base and annoy her adversaries with overheated rhetoric. It is okay, Liz, even the really smart people don't understand it all that well.

Morning Report - tough times for East Coast builder Hovnanaian.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2086.4	6.3	0.30%
Eurostoxx Index	3479.5	22.7	0.66%
Oil (WTI)	61.68	1.5	2.56%
LIBOR	0.282	0.001	0.36%
US Dollar Index (DXY)	94.67	-0.498	-0.52%
10 Year Govt Bond Yield	2.47%	0.03%
Current Coupon Ginnie Mae TBA	100.2	-0.2
Current Coupon Fannie Mae TBA	98.63	-0.1
BankRate 30 Year Fixed Rate Mortgage	4.11

Stocks are flattish after Greece submitted a plan to creditors which was rejected. Bonds and MBS are down

Mortgage Applications rose 8.4% last week in spite of a massive sell-off in bonds, which took the 30 year fixed rate mortgage from 4.02% to 4.17%. Purchases were up 9.7% while refis increased 7%. Note that this bump is following the shortened Memorial Day week, so that accounts for some of the increase. The purchase index is approaching 2 year highs, although we are a long way from normalcy.

How much have the banks been fined / spent on legal for the financial crisis? About $300 billion. And the governments aren't done yet. They still are scratching their collective heads wondering why credit is so tight, though.

For all the talk about how tough the Millennials have it, Generation X has it even worse. The financial crisis hit them during their peak earnings years. Want to know why consumer spending is down so much? The elderly boomers already bought their last TVs, while Gen-Xers are struggling with the 50% hit to their net worth they took in the bust. Millennials are just trying to find a job. I do think that the next big political schism will fall along generational lines, with the baby boomers trying to extract more resources from their broke offspring who want to means test the benefits their parents get.

Hovnanian, the New Jersey based homebuilder, fell 13% yesterday after they disappointed the Street with earnings. Margins fell as they company had to offer more incentives to move their inventory. Gross margins fell from 20% to 16%. The company characterized the housing market as "a  bit tentative." Hovnanian operates in New Jersey, North Carolina, Pennsylvania, Virginia, Maryland, California, Texas, Tennessee, Alabama, and Mississippi. Not surprising since the Northeast / Mid Atlantic / Deep South housing markets have been lagging the red-hot West Coast markets.

More gloomy prognostications from JP Morgan: The US is entering a period of slower growth due to low productivity (which fell 3.1% last quarter). They anticipate job creation to average around 75,000 a month, unless some new productivity-enhancing technological development comes around. The last time we went through that was the 1970s, productivity stagnated and the oil shocks along with automatic wage increases in union contracts ignited a wage-price spiral. FWIW, I am not sure I buy that argument - cheap energy is not going away, and solar keeps getting cheaper and better. 

Morning Report: The labor market is getting tight.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2076.2	-2.0	-0.10%
Eurostoxx Index	3453.9	-14.5	-0.42%
Oil (WTI)	59.5	1.4	2.34%
LIBOR	0.281	0.002	0.82%
US Dollar Index (DXY)	95.55	0.249	0.26%
10 Year Govt Bond Yield	2.43%	0.05%
Current Coupon Ginnie Mae TBA	100.6	-0.3
Current Coupon Fannie Mae TBA	99.42	-0.1
BankRate 30 Year Fixed Rate Mortgage	4.06

Stocks are lower this morning on concern that Chinese growth is slowing. Bonds and MBS are lower.

Wholesale Inventories increased 0.4% in April, while wholesale sales rose 1.6%. The inventory to sales ratio was 1.29x, which is on the high side. This means that unless sales increase markedly, manufacturers will have to slow down production to work down the excess inventory. This would dampen GDP growth going forward.

Job openings hit 5.4 million in April, the highest number since the survey began in late 2000. The "quits rate," which is an important data point for the Fed is inching up to 1.9% from 1.7% a year ago. 

The NFIB Small Business Optimism index rose to 98.3 in May, finally approaching "normalcy." Money quote regarding the labor market: "Owners report that the labor market is, from an historical perspective, getting very tight. Owner complaints about “finding qualified workers” are rising, job openings are near 42 year record high levels, and job creation plans remain solid. Over 80 percent of those hiring or trying to hire in May reported few nor no qualified applicants. This is inconsistent with current Fed policy, which has no impact on the supply of qualified workers." In terms of biggest concerns for small business, quality of labor (not cost) remains the #3 biggest concern, behind taxes and government regulation. Quality of labor has now displaced "poor sales" on the top 3 list.

The Chinese stock market bubble continues to inflate despite a weakening economy. The Chinese government is basically endorsing the rally, and is changing the rules regarding margin selling to ease the problem of forced selling. China is undoubtedly having an episode similar to the US in the 20s and Japan in the 80s. It may (and probably will) go on for a lot longer than people think it will. But with each passing day, the "investments" get more marginal and more speculative, and the whole edifice is built on borrowed funds, which always seems to end badly when the music stops. 

Completed foreclosures fell to 40,000 in April, down from 50,000 a year ago, according to CoreLogic. The seriously delinquent rate fell to 3.6%, the lowest since Feb 2008. About 521,000 homes are in some stage of foreclosure, down from 694,000 a year ago. Foreclosure inventory remains the highest in the judicial states of New Jersey and New York. Note, New York is going to do something about zombie foreclosures: vacant homes which are taking their time to get through the process. Lest anyone think they are doing this to give investors a chance to limit their losses, the real reason is so they can sue if they are unhappy with the way the property is being maintained.

Morning Report - Jobs report data dump

Vital Statistics:

	Last	Change	Percent
S&P Futures	2088.7	-3.5	-0.17%
Eurostoxx Index	3491.1	-18.9	-0.54%
Oil (WTI)	58.74	-0.4	-0.66%
LIBOR	0.281	0.002	0.82%
US Dollar Index (DXY)	95.91	-0.398	-0.41%
10 Year Govt Bond Yield	2.38%	-0.03%
Current Coupon Ginnie Mae TBA	100.6	-0.1
Current Coupon Fannie Mae TBA	99.45	0.2
BankRate 30 Year Fixed Rate Mortgage	4.08

Stocks are lower after Greece officially missed its payment to the IMF. Bonds and MBS are up small.

The week after the jobs report is usually data-light and this week is no exception. The only data that should matter is retail sales on Thursday. While the labor market seems to be improving, consumer spending is still lagging. Part of that is demographic, where you have a bunch of old rich people who probably bought their last TVs, toasters, etc and a bunch of young broke people. 

Bonds got rocked on Friday after the stronger than expected jobs report. 280,000 jobs were created in May, and the two prior months were revised upward from "dismal" to "not hideous." Average hourly earnings rose to $24.96, up 2.3% from last year. The unemployment rate ticked up to 5.5% as the labor force participation rate improved to 62.9%. It is looking like the first quarter weakness was indeed transitory, and weather-driven. It probably doesn't mean the Fed is moving in June, but September is definitely in play. 

The big question the Fed is grappling with is the ceiling on the labor force participation rate. If it is high, say 66% - 67%, then returning workers will keep a lid on wages, and the Fed will be able to let the economy run a bit longer. It also means the overall growth potential for the economy is higher. If the ceiling is low, say 64% - 65%, it means wage inflation will force the Fed's hand earlier, which means the "speed limit" of the economy is lower. Of course demographics explain some of the long term changes in the labor force participation rate, however many of the long-term unemployed want to (and need to) have a full-time job. Whether they can get meaningful jobs after being on the sidelines for multiple years is an open question. 

In spite of the huge sell-off in bonds over the past two months, the street is forecasting  a 2.5% 10 year yield for 2015. The Fed has been consistently over-optimistic on the economy in general, and the simple fact that the Fed funds rate is increasing does not necessarily mean long term rates are going to go up big. Take a look at the chart below: it is the 10 year bond yield minus the Fed Funds target rate. In the last tightening cycle (early 2004 to early 2006), the Fed Funds rate increased from 1% to 5.25% over the course of two years. During that same period, the 10 year bond yield increased from about 4.8% to 5.2%. The yield curve actually inverted towards the end of the cycle (which more or less broke the real estate bubble). In other words, the Fed could start hiking rates this year and we could see the 10 year go basically nowhere. 

Morning Report - Bond Market Volatility

Vital Statistics:

	Last	Change	Percent
S&P Futures	2107.4	-8.6	-0.41%
Eurostoxx Index	3552.8	-31.0	-0.87%
Oil (WTI)	58.92	-0.7	-1.21%
LIBOR	0.279	-0.004	-1.35%
US Dollar Index (DXY)	95.23	-0.237	-0.25%
10 Year Govt Bond Yield	2.34%	-0.02%
Current Coupon Ginnie Mae TBA	101.1	0.1
Current Coupon Fannie Mae TBA	99.78	0.2
BankRate 30 Year Fixed Rate Mortgage	4.03

Stocks are lower this morning as talks in Greece stall. They have a big payment due to the IMF tomorrow.

Some labor market numbers this morning. Initial Jobless Claims fell to 276,000, a great number. That said, the final revision to productivity for the first quarter is in, and it fell to -3.1%. Unit Labor Costs rose 6.7%.

The IMF is urging the Fed to hold off raising rates until the first half of 2016. They also cut their forecast for US GDP growth from 3.1% to 2.5%, more or less matching what the Fed was forecasting at its March meeting. Given the weak Q1, that forecast is probably coming down in the June FOMC meeting. 

If you have been caught by surprise with the big moves in the bond market, you aren't alone. The volatility in the bond market has been stunning over the past several months. The mood of the markets seems to go from fear of deflation in Europe to fears of inflation in the US. Jim Bianco characterized the bond market like this: “You want to shove rates down to zero, people are going to make big bets because they don’t think it can last,” Bianco said. “Every move becomes a massive short squeeze or an epic collapse -- which is what we seem to be in the middle of right now.” IMO, the action in the markets is also a function of the fact that the major players in the markets right now are central banks, and they are taking positions based on social policy considerations, not economic ones. In other words, the ECB isn't buying bonds because it thinks they are cheap - it is buying them in an attempt to create inflation. When you have non-economic players (players that are not concerned about their p/l) dominating the market, the ones that do care about their p/l (everyone else) are bound to get whipsawed. 

Another issue is the fact that new regulations against proprietary trading has diminished the historical market stabilization role of trading desks. In the old days, when a big buyer or seller (say someone like a PIMCO) had an big order, they would find an investment bank to take the other side of the trade. The bank would bid (or offer) a little bit above or below the market and gradually work out of the trade over the course of the day or days. This had the effect of dampening volatility as it kept the market from getting whipsawed by big orders. Ironically, the regulatory push to "make banking boring again" has had the effect of making the government bond market anything but boring.

For mortgage bankers, the thing to keep in mind is that mortgage rates have been "fading" this volatility. In other words, they have been reluctant to follow big outsized moves. You can see it in the graph below, where the upper line is the Bankrate 30 year mortgage rate and the lower line is the US 10 year bond yield. Note how mortgage rates ignored the big dip in yields at the end of Janurary and have lagged the moves upward lately. Think about this when you are locking. If rates stop going up, mortgage rates will still probably keep rising to "catch up" with Treasuries. Even if rates fall, mortgage rates will probably stay up here for a while.  In a volatile market like this it doesn't make a lot of sense to be floating. Rates are still at historical lows, and can move up in a hurry. It would be shame to end up paying an extra 30 basis points on your mortgage because you were waiting to catch a rally that never came.