Morning Report: Personal income and personal spending numbers disappoint

Vital Statistics:

	Last	Change	Percent
S&P Futures	2087.0	4.0	0.19%
Eurostoxx Index	3404.9	-8.5	-0.25%
Oil (WTI)	46.14	0.1	0.17%
LIBOR	0.322	-0.002	-0.62%
US Dollar Index (DXY)	97.04	-0.239	-0.25%
10 Year Govt Bond Yield	2.16%	-0.01%
Current Coupon Ginnie Mae TBA	104.4
Current Coupon Fannie Mae TBA	104
BankRate 30 Year Fixed Rate Mortgage	3.83

Markets are higher this morning in spite of some disappointing spending and income numbers. Bonds and MBS are flat.

Personal Income rose 0.1% in September and personal spending rose 0.1% as well. Both numbers were below the 0.2% Street estimates. The core personal consumption expenditure index rose 0.1% in September and is up 1.3% year-over-year. The savings rate increased to 4.8% from 4.7%, a sign that consumers are still de-leveraging. Economic optimists are going to point to the turmoil in the financial markets as the reason for the weak numbers. Economic pessimists are worried about entering another recession. 

The employment cost index rose 0.6% in the third quarter, in line with expectations. This is an uptick from the June quarter, which was the lowest reading since 1982. On an annual basis, wages and salaries increased 2%. while benefit costs increased 1.8%. The labor market is tight for skilled labor, especially construction. 

Pending Home Sales fell 2.3% in September, according to the NAR. Blame low inventory, especially at the lower price points. 

The Chicago Purchasing Managers index jumped in October. Production and new orders drove the increase, which is a positive sign for the economy. 

Consumer sentiment dipped in October, according the University of Michigan survey. 

Congress passed a bipartisan 2 year deal that raises the debt ceiling and eliminates the sequester. This takes any government shutdown worries off the table.

As we approach Halloween weekend, Bankrate takes a look at the states with the highest zombie foreclosures... Needless to say, they are concentrated in the Northeast and the rust belt. 

Stock certificates from the tech stocks of yesteryear, inlcuding Computing Tabulating Recording Company (IBM) and The Haloid Company (Xerox).

Morning Report - The Fed stands pat

Vital Statistics:

	Last	Change	Percent
S&P Futures	2074.8	-9.7	-0.47%
Eurostoxx Index	3398.1	-23.0	-0.67%
Oil (WTI)	45.51	-0.4	-0.94%
LIBOR	0.324	0.001	0.23%
US Dollar Index (DXY)	97.49	-0.297	-0.30%
10 Year Govt Bond Yield	2.11%	0.01%
Current Coupon Ginnie Mae TBA	104.6
Current Coupon Fannie Mae TBA	104.2
BankRate 30 Year Fixed Rate Mortgage	3.8

Markets are lower this morning after a lousy third quarter GDP pring. Bonds and MBS are down small.

The advance estimate of third quarter GDP came in at 1.5%, a big drop from the second quarter 3.9% reading. The standout was gross private investment which fell 5.6% after increasing 5% the quarter before. I suspect that is dollar / commodity price driven - exporters are facing slowing demand and capital expenditures are falling in the energy sector.

The core PCE index (the inflation measure preferred by the Fed) rose 1.2% in the third quarter, well below the Fed's 2% target rate. 

Initial Jobless Claims rose slightly to 260,000 last week. 

The Fed maintained interest rates yesterday, and made very few changes in the October statement. There was one dissent (Lacker) who wanted to raise the Fed Funds rate 25 basis points. In terms of language, the concern over overseas markets was removed. They noted the pace of job creation slowed somewhat, however they characterized business investment as solid. That is surprising given the big drop in business investment from the GDP print from this morning. Bonds sold off slightly on the statement, and stocks ended up reversing their losses and going out on their highs. The take seems to be slightly hawkish. 

The unintended consequences of ZIRP continue as merger mania sweeps the country. The entire semiconductor industry is merging, and now Allergan is in talks with Pfizer. Interestingly many merger arbitrage hedge funds are shutting down as returns are paltry in the strategy. 

The Republicans had another debate last night: The winners were Ted Cruz and Marco Rubio. The losers were Jeb Bush, CNBC, the mainstream media, and maybe John Kasich. 

Members in Congress are unhappy with the FHA's rules on lending for condos. 

Morning Report: Homeownership rate rebounds in Q3

Vital Statistics:

	Last	Change	Percent
S&P Futures	2063.0	2.6	0.13%
Eurostoxx Index	3397.8	16.8	0.50%
Oil (WTI)	43.59	0.4	0.90%
LIBOR	0.323	0.000	0.08%
US Dollar Index (DXY)	96.6	-0.307	-0.32%
10 Year Govt Bond Yield	2.03%	-0.01%
Current Coupon Ginnie Mae TBA	105
Current Coupon Fannie Mae TBA	104.6
BankRate 30 Year Fixed Rate Mortgage	3.78

Markets are slightly higher as we await the FOMC decision. Bonds and MBS are flat.

Mortgage Applications fell 3.5% last week as purchases fell 3.1% and refis fell 3.8%. 

The FOMC decision is set to be released around 2:00 pm EST. I don't expect major volatility around that time, but you never know. Just be aware. 

The FOMC meeting is expected to be a non-event, with no move in rates and perhaps some hawkish language. One thing to watch for will be how the Fed handles its QE portfolio. For the moment, they are re-investing maturing proceeds from their portfolio back into the market. Some Fed-watchers are thinking the Fed may announce plans to let at least some of their Treasury portfolio run off. For the moment, they don't intend to let their MBS portfolios run off.

The homeownership rate rebounded off the 50 year low set in the second quarter. It rose from 63.4% to 63.7%. Household formations have been decelerating all year, however they increased by a 1.3 million pace in September. So far it looks like these people are renters and not homeowners, as rental vacancies remain low and rental inflation continues. We have yet to see a downturn in Millennials living at home with their parents.  

Mortgage REIT American Capital Agency got roughed up last quarter with volatility in world markets. This is notable given that interest rates actually fell during the quarter. Mortgage Backed Securities spreads (the risk premium that investors demand to hold this asset over Treasuries) widened considerably during the quarter. That poor performance in MBS almost necessarily will translate into poor performance of TBAs, which help set mortgage rates. So, if you noticed mortgage rates didn't fall as far as you would have expected during the quarter, that is why. 

Morning Report: House prices rise 5%

Vital Statistics:

	Last	Change	Percent
S&P Futures	2057.0	-5.3	-0.26%
Eurostoxx Index	3393.7	-20.9	-0.61%
Oil (WTI)	43.1	-0.9	-2.00%
LIBOR	0.323	0.003	0.94%
US Dollar Index (DXY)	96.76	-0.101	-0.10%
10 Year Govt Bond Yield	2.04%	-0.02%
Current Coupon Ginnie Mae TBA	104.9
Current Coupon Fannie Mae TBA	104.6
BankRate 30 Year Fixed Rate Mortgage	3.79

Stocks are lower this morning as the Fed begins their two day FOMC meeting. Bonds and MBS are up small. 

Another sign the economy is slowing down: Durable goods orders fell 1.2% in September, and are down 0.4% ex-transportation. Capital Goods orders (a proxy for business capital expenditures) fell 0.3%. As a result of these numbers, Goldman took down their Q3 GDP estimates to 1% from 1.2% and JPM took theirs down to 0.6%.  

The Markit US Composite PMI slipped to 54.5 from 55 in October and the Services PMI fell from 55.1 to 54.4.

Consumer confidence fell in October to 97.6 from a downward-revised 102.6 in September. 

The S&P/Case-Shiller Home Price Index rose 0.11% in August and is up 5.1% year-over-year. They make this point about home price appreciation: “A notable part of today’s economy is the continuing low inflation rate; in the year to September, consumer prices were unchanged. Even excluding food and energy, the core inflation was 1.9%. One result is that a 5% price increase in the value of a house means more today than it did in 2005-2006, the peak of the housing boom when the inflation rate was higher. The rebound from the recent lows was faster than the 1997-2005 housing boom, and also much less driven by inflation."

Supposedly there is a deal to prevent a government shutdown. The sequester is lifted, and the carried interest deduction goes away. This should clear the decks for Paul Ryan to take over as Speaker of the House. This deal will probably get unanimous Democratic support, but it might be hard to get the necessary 30 Republican votes. 

How to get the Millennials to buy houses? NAR had a symposium on that recently, with HUD Secretary Julian Castro speaking. He lamented the tight credit in the mortgage market. The aftermath of the housing bubble has sent homeownership rates to the lowest levels in almost 50 years. 

Morning Report: New Home Sales drop, but prices up 13.5%.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2066.8	0.8	0.04%
Eurostoxx Index	3417.5	-8.3	-0.24%
Oil (WTI)	44.45	-0.1	-0.34%
LIBOR	0.323	0.003	0.94%
US Dollar Index (DXY)	96.97	-0.157	-0.16%
10 Year Govt Bond Yield	2.06%	-0.02%
Current Coupon Ginnie Mae TBA	104.9
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.79

Stocks are flattish this morning on no real news. Bonds and MBS are up.

New Home Sales fell in September to a seasonally-adjusted annual rate of 468,000, down from 529,000 in August. The median home price rose 13.5% however to $296,000. So, inventory is tight, and the builders continue to raise prices but aren't really ramping up production. Builder sentiment is at a 10 year high, but building permits continue to disappoint. Strange state of affairs. 

The FOMC meets this Tuesday and Wednesday. The decision will be out around 2:00 on Wednesday. The markets are handicapping a very low probability of a move at this meeting (something under 10%). Mohammed El-Arian lays out the no-action case. 

We will get some important economic data this week with Durable Goods tomorrow and Case-Shiller. On Wed we will get the FOMC decision, and on Thursday, the first estimate of third quarter GDP. Finally, on Friday we get personal income and personal spending. GDP, the FOMC statement, and personal income / personal spending are the biggest chances of volatility in the bond markets. 

Deutsche Bank is predicting a good holiday season this year for retailers. The average consumer intends to spend about $812 on gifts this year, which is about the same level in 2007. Punch line: "U.S. consumers don’t seem to worry about the risk of a hard landing in China, the widening of high yield credit spreads, a potential government shutdown, Brazilian corporate debt levels or low bond market liquidity."  We will get personal income and personal spending data on Friday. FedEx confirmed they expect record shipments this holiday season.

House prices rose 0.3% last month and are up 5.5% from a year ago, according to Black Knight Financial Services. The index came in at $253,000, which is off 5.3% from its June 2006 peak of $268,000. 

Morning Report: China cuts rates

Vital Statistics:

	Last	Change	Percent
S&P Futures	2069.3	16.2	0.79%
Eurostoxx Index	3439.4	86.3	2.57%
Oil (WTI)	45.22	-0.2	-0.35%
LIBOR	0.316	-0.004	-1.25%
US Dollar Index (DXY)	96.71	0.335	0.35%
10 Year Govt Bond Yield	2.09%	0.06%
Current Coupon Ginnie Mae TBA	105
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.78

Stocks are higher this morning after China cut interest rates. Bonds and MBS are down. 

Definitely a risk-on feel to the markets after yesterday's torrid rally. China's easing and yesterday's comments from the ECB regarding further QE are putting green on the screen. All of this stimulus is going to make it harder for the Fed to raise rates.  Economists are beginning to warn of a global recession.

China's official growth rate is just shy of the government's 7% goal. Nobody actually believes that number however - estimates by foreign economists are closer to 3%.

The Markit US Manufacturing PMI rose in October.

The House Financial Services Committee spent some time yesterday looking at the future of HUD. The hearing looked at how HUD could help people escape poverty instead of simply pushing people to build more affordable housing. HUD has been very aggressive in suing local communities to change their zoning laws. 

Morning Report - Existing Home Sales rebound

Vital Statistics:

	Last	Change	Percent
S&P Futures	2019.4	10.9	0.54%
Eurostoxx Index	3297.9	25.7	0.78%
Oil (WTI)	45.83	0.6	1.39%
LIBOR	0.32	0.004	1.18%
US Dollar Index (DXY)	95.54	0.500	0.53%
10 Year Govt Bond Yield	2.04%	0.02%
Current Coupon Ginnie Mae TBA	104.9
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.79

Stocks are higher this morning after ECB President Mario Draghi signaled that the central bank may use more stimulus to counteract a weakening Eurozone. Bonds and MBS are down small. 

Existing Home Sales rose 4.7% in September to 5.55 million. This is up 4.7% month-over-month. The median existing home price was $219k, up 6.1% from a year ago. Housing inventory dipped again to 2.21 million homes, which represents a 4.8 month supply, down from 5.1 months in August. Tight inventory remains an issue - 6.5 months is considered a balanced market. First-time buyers continue to sit on the sidelines, as their percentage fell to 29%. This is flat with a year ago. 40% is more or less the historical average. 

The Chicago Fed National Activity Index was more or less flat at -.37 in September. The 3 month moving average was zero, which means the economy is growing pretty much on trend. The index can be volatile, but the trend in the last few months is distinctly downward. 

Confirming the CFNAI trend, the Index of Leading Economic Indicators fell by 0.2% in September. The Conference Board is forecasting GDP growth of around 2.5% over the next couple of quarters. 

Initial Jobless Claims rose to 259k last week. We are still bouncing around 40 year lows in this number.

The Bloomberg Consumer Comfort index fell last week to 43.5 from 45.2. 

The FHFA House Price Index rose 0.3% in August. We are now within 1% of the peak level set in March of 2007. This index only looks at houses with conforming mortgages, so it will be a little different than Case-Shiller or CoreLogic. 

The number of underwater homeowners is still elevated at 14 million, but that number is falling.There are 6.9 million homeowners who are "seriously underwater" or are down by over 25%, but that number has been cut almost in half from the worst point of the crisis. Equity rich homeowners are declining as well, as many use a cash out refi to pay off credit card debt. 

FICO scores ticked down a touch to 723 in September, according to Ellie Mae's Origination Insight Report. Time to close ticked down as well, but we should start seeing that increase due to TRID.

CFPB director Richard Cordray told the MBA conference that the rollout of TRID has not been smooth. Closings are being delayed and consumers end up paying for an extra two weeks of lock protection. Cordray's reply: “These claims reflect a failure or perhaps a refusal to understand what the rule actually says.” Cordray didn't lay it all on lenders - vendors also shoulder some of the blame. 

Morning Report: Homeownership rate down to almost 50 year lows.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2031.2	10.6	0.52%
Eurostoxx Index	3278.1	22.4	0.69%
Oil (WTI)	45.39	-0.9	-1.94%
LIBOR	0.317	-0.001	-0.16%
US Dollar Index (DXY)	94.91	-0.004	0.00%
10 Year Govt Bond Yield	2.04%	-0.02%
Current Coupon Ginnie Mae TBA	104.8
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.79

Stocks are higher this morning as a couple big mergers are announced. Bonds and MBS are up.

Mortgage Applications rose 11.8% last week, as purchases rose 16.4% and refis rose 8.8%. 

Education opportunity: It is better for Millennials to buy than to rent. The catch: Millennials like the urban environment and in the hot markets like San Francisco and New York, they are priced out of the market. Not all urban areas are bad however: Here are the affordable places:

UBS is closing down its Manged High Yield Plus Fund. Is that a harbinger of bad things to come? The closing of a BNP Paribas fund in 2007 is credited with starting the financial crisis, though I remember the first tell being the inability of banks to sell the debt associated with the Alliance / Boots merger. High yield has been struggling lately as over-extended energy exploration companies are getting hammered by low oil prices. While we don't have a residential real estate bubble anymore, it could still cause some ripples in the bond markets. 

Freddie Mac is looking to expand its offering of low downpayment loans. The government is worried about people being shut out of the mortgage market, particularly low income borrowers and those with difficult to document income. Fannie Mae is looking to make income documentation easier.  Note that the homeownership rate in the US has fallen to 63.4%, about where it was before the US began the Great Experiment In Expanding Home Ownership, which began with Bill Clinton's HUD around 1994. The last time the homeownership rate was this low? 1967. This represents a lot of pent-up demand for purchase business and is an opportunity.

Morning Report: Housing starts rebound to 1.2 million.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2023.2	-4.2	-0.21%
Eurostoxx Index	3253.8	-18.3	-0.56%
Oil (WTI)	46.2	0.3	0.68%
LIBOR	0.317	0.002	0.63%
US Dollar Index (DXY)	94.73	-0.201	-0.21%
10 Year Govt Bond Yield	2.07%	0.04%
Current Coupon Ginnie Mae TBA	104.8
Current Coupon Fannie Mae TBA	104.4
BankRate 30 Year Fixed Rate Mortgage	3.8

Stocks are lower this morning after IBM missed earnings. Bonds and MBS are down.

Housing starts rose 1.2 million in September, beating the 1.1 million estimate. These are up 4.7% from a year ago. Building Permits disappointed however, coming in at 1.1 million vs. the 1.2 million estimate. Starts saw an increase in single fam and multi-fam, however permits saw a drop in multi-fam. 

Goldman is calling the rally in Treasuries overdone. Their argument is that investors are underestimating the potential for inflation. Not seeing where inflationary pressures are going to come from, with a strong dollar, very little wage growth, and capacity utilization at 77%. The current probability of a Dec rate hike is 33%. 

Speaking of wage growth, Wal Mart was hammered last week after announcing that wage increases would cause earnings to drop next year. This will be interesting to watch - do other retailers follow suit or do they maintain lower wages? Some early hints that it will be the former. Turnover for retailers has increased to 65% from 50% and open retail positions are up 31% this year. 

The Obama administration rejected calls to re-privatize Fannie and Fred, leaving GSE reform for the next president. The government is making a lot of cash from F&F. Both private investors (especially activist funds who hold Fannie prefs and common) and affordable housing advocates are pushing the government to clarify where F&F stand. 

Apparently Joe Biden's decision of a presidential run will be released any day now. 

Morning Report: Homebuilder sentiment reaches a decade high

Vital Statistics:

	Last	Change	Percent
S&P Futures	2016.8	-8.7	-0.43%
Eurostoxx Index	3263.6	-1.4	-0.04%
Oil (WTI)	46.17	-1.1	-2.31%
LIBOR	0.317	0.002	0.63%
US Dollar Index (DXY)	94.78	0.235	0.25%
10 Year Govt Bond Yield	2.02%	-0.01%
Current Coupon Ginnie Mae TBA	105.1
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.8

Markets are lower this morning on some disappointing economic data out of China. Bonds and MBS are up small. 

Not a lot of big data this week, but we do have some stuff related to real estate. Tomorrow, we will get housing starts and building permits. On Thursday, we will get existing home sales and the FHFA House Price Index. We will also hear from homebuilder Pulte on Thursday. 

The NAHB Housing Market Index rose to 64 in October from a downward-revised 61 in September. This is the highest reading since October 2005. Tight supply means that builders can increase average selling prices pretty easily. Unfortunately, since wage inflation remains muted, the median house price to median income ratio has become stretched again. 

Everyone knows China has been dumping Treasuries, yet rates aren't increasing. The reason why is that US firms are buying them. This means that (a) US investors are more making bearish bets on the US economy (b) the Fed will probably be watching this closely as a "tell" whether they need to raise rates, and (c) even if rates go up, you might not see any effect out on the curve, which means that mortgage rates might simply brush off any tightening for a while. 

Deutsche Bank is beginning to discuss scenarios where the next move could be something like a re-introduction of Operation Twist, which is where the Fed sells short term T-bills to fund purchases of long term Treasuries. 

Speaking of the Fed, Republican presidential candidate Donald Trump accused the Fed of keeping rates low for political reasons - to help Barack Obama and Hillary Clinton. Cleveland Fed President Loretta Mester fired back saying that politics is never a factor in their decisions. The political independence of the Fed is extremely important - no politician would ever argue that the Fed should hike rates. One thing to keep in mind however is that as we approach the election in 2016, the Fed will probably hold off on making any rate hikes late in the year to prevent the appearance of being political. 

Morning Report: Exporters are cutting jobs

Vital Statistics:

	Last	Change	Percent
S&P Futures	2020.5	1.5	0.07%
Eurostoxx Index	3256.1	17.3	0.53%
Oil (WTI)	47.35	1.0	2.09%
LIBOR	0.317	-0.003	-1.08%
US Dollar Index (DXY)	94.56	0.184	0.19%
10 Year Govt Bond Yield	2.01%	-0.01%
Current Coupon Ginnie Mae TBA	105
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.8

Markets are flattish this morning as earnings come in. Bonds and MBS are flat.

Consumer sentiment increased in October, according to the University of Michigan.

Job openings fell in August to 5.37 million from 5.67 million the month before. 

Industrial production fell by 0.2% in September, and manufacturing production fell by 0.1%. The strong dollar and overseas weakness is obviously having an impact on exporters. Capacity Utilization fell to 77.5%. Capacity utilization hit a post-crisis high about a hear ago at 79% but has been falling ever since. This is going to concern the Fed, but keep in mind that manufacturing isn't the dominant economic force that it was 20 or 30 years ago. 

Needless to say, when exporters are facing headwinds like a strong dollar and weak overseas economies, they start cutting jobs. The biggest industries affected: transportation equipment, machinery, computer and electronic products, and primary metals. You can see below the trend in export employment versus employment overall. 

Inflation remains tough to find. Social Security recipients will get no cost of living adjustment this year. Yet another excuse for the Fed to stand pat in December. 

The Federal government now backs 50% of all mortgage loans made in the US. To put that number in perspective, in 1981, the Federal government backed about 7% of mortgages in 1981. Banks are reluctant to portfolio as many mortgages as they used to, which makes sense - anyone with grey hair knows how the banks got absolutely annihilated by their mortgage portfolios in the 1970s when rates went up dramatically to combat inflation. 

Morning Report: Earnings season is off to a rough start

Vital Statistics:

	Last	Change	Percent
S&P Futures	1994.0	10.0	0.50%
Eurostoxx Index	3230.5	38.9	1.22%
Oil (WTI)	45.66	-1.0	-2.10%
LIBOR	0.321	0.000	-0.08%
US Dollar Index (DXY)	94.55	0.618	0.66%
10 Year Govt Bond Yield	2.00%	0.03%
Current Coupon Ginnie Mae TBA	105.2
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.8

Stocks are higher this morning after some strong economic data. Bonds and MBS are down.

Initial Jobless Claims fell to 255k last week matching the low set in July. That 255k print is the lowest since 1973. Pretty amazing number given how much the population has increased. 

However that is translating into weak real wage growth. Last week real average weekly earnings increased 2.2%, We definitely have a tight labor market in some areas but wage growth has been hard to come by. 

Inflation at the consumer level fell 0.2% in September on a month-over-month basis and is flat year-over-year. Ex-food and energy, consumer prices rose 0.2% on a MOM basis and are up 1.9% YOY.

The Bloomberg Consumer Comfort Index edged up last week to 45.2 from 44.8. 

The Philly Fed manufacturing index improved to -4.5 in October. 

The Fed Beige Book survey reported that the US continued to experience modest economic expansion during the August - October period. Pretty much all districts reported growth except for Kansas City. Labor markets tightened in most districts and some are reporting shortages of skilled labor and are seeing upward wage pressure. 

Earnings season is off to a rough start as Alcoa, JP Morgan, Goldman, and Netflix all missed and Wal Mart guided lower. Wal Mart was down 10% yesterday after they announced profit will fall as they retool their stores and face higher labor costs. The strong dollar is weighing on manufacturing and the volatility in the markets over the summer is hurting the banks. 

Americans are more sanguine about the real estate market, according to the National Association of Realtors. House prices are up, less and less people are underwater and the economy has improved. 

Corporate balance sheets are deteriorating, as many took advantage of the record low interest rates to lever up and fund buybacks. Interest coverage ratios are at the lowest since 2009, and companies are returning 35% of EBITDA back to shareholders via dividends and buybacks. Interestingly, the markets are beginning to punish companies with big buyback programs. One thing to keep in mind: when companies spend money on buybacks, they are making a statement about the opportunity set they see for expansion. The other place corporate funds are going: mergers. AB Inbev plans to issue $55 billion of debt to fund its purchase of SABMiller. Dell will issue something like $40 billion in debt to purchase EMC. 

Good breakdown of what the Fed will want to see in order to raise rates in December. Punch line:

• No further market volatility
• Two good jobs reports
• Solid consumer spending and further improvement in housing
• No further deterioration in exports
• No protracted government shutdown

Morning Report - A historical examination of the last 3 tightening cycles

Vital Statistics:

	Last	Change	Percent
S&P Futures	1992.4	-1.5	-0.08%
Eurostoxx Index	3206.2	-15.1	-0.47%
Oil (WTI)	46.29	-0.4	-0.79%
LIBOR	0.321	0.000	0.05%
US Dollar Index (DXY)	94.28	-0.481	-0.51%
10 Year Govt Bond Yield	2.01%	-0.04%
Current Coupon Ginnie Mae TBA	105
Current Coupon Fannie Mae TBA	104.4
BankRate 30 Year Fixed Rate Mortgage	3.88

Markets are flattish as earnings season begins in earnest. Bonds and MBS are up.

Last night JP Morgan reported weaker than expected earnings. Mortgage originations are up 41% year-over-year and up 2% on a quarter-on-quarter basis. Charge-offs fell dramaticallyl.

Bank of America reported better than expected earnings. Originations for them were up 17%. 

Mortgage Applications fell 27.6% last week as the "beat the TRID deadline" effect was unwound. Purchases were down 34% and refis were down 22.5%.

Retail Sales rose 0.1% in September, while the control group, which ignores gasoline, autos, and building supplies, fell 0.1%. Where are consumers spending their money? Cars, furniture, apparel, and entertainment. 

The Producer Price Index fell 0.5% in September as the strong dollar depressed commodity prices. Ex- food, energy and trade the index is up 0.5% year-over-year. We have yet to see any sort of meaningful inflation at the producer level. 

Business inventories were flat in August. Commodity prices could be playing a role in this number. 

We know the Fed is going to start hiking rates soon. But does that necessarily mean that mortgage rates are going up? If you look at the historical record, at least over the past 3 tightening cycles. the Fed Funds rate increased, but the long term rate moved up much less, or not at all. If you look at the spread between long term and short term rates, the yield curve flattened dramatically and ended up inverting. The vertical blue lines are the 1994, 1999, and 2004 tightening cycles. The red line is the yield on the 10 year, which will most approximate mortgage rates, while the blue line is the Fed Funds rate. The green line is the difference between the two. The lower the green line, the more flatter the yield curve. 

What are the takeaways from this? 1) Don't necessarily fear a tightening in December - it might not affect mortgage rates at all, and 2) When the Fed starts tightening, that is the time to get people out of ARMS and into a 30 year fixed rate mortgage. LIBOR will increase with the Fed funds rate, resetting ARM rates, but if the 30 year fixed doesn't move (or barely moves), then that switch is a great trade for the borrower. 

Morning Report - Main street is hiring

Vital Statistics:

	Last	Change	Percent
S&P Futures	1998.5	-12.4	-0.62%
Eurostoxx Index	3193.5	-53.9	-1.66%
Oil (WTI)	46.82	-0.3	-0.59%
LIBOR	0.321	0.001	0.31%
US Dollar Index (DXY)	94.79	-0.053	-0.06%
10 Year Govt Bond Yield	2.05%	-0.04%
Current Coupon Ginnie Mae TBA	104.9
Current Coupon Fannie Mae TBA	104.3
BankRate 30 Year Fixed Rate Mortgage	3.9

Markets are lower this morning after weak economic data out of China. Bonds and MBS are up.

The NFIB Small Business Optimism index rose to 96.1 from 95.9 the prior week. Good news on the labor front - small businesses are hiring or trying to hire despite the volatility in the markets. This actually points to a bit of dichotomy we have seen since the financial crisis - a bifurcation of the "S&P 500 economy" and the "main street economy." The S&P 500 economy has a lot of international exposure and this acted as a tailwind for the stock markets as the US economy began recovering. Many people were perplexed that the economy could feel so tepid yet the stock market was hitting new highs. Now the phenomenon seems to be reversing. Companies with big international exposure are feeling the effects of the commodity sell-off and emerging markets pain, while the small manufacturer who serves the local area is thinking about expanding and hiring. 

Low oil prices are here to stay, at least through 2016, according to the IEA. You have a combination of decreasing demand as China slows combined with an additional million barrels of oil a day coming out of Iran. Rig count has already fallen and is at 5 year lows.

There were 36,000 completed foreclosures in August, according to CoreLogic. This is up 0.8% versus July, but down 20% year-over-year. The foreclosure rate of 1.2% is back to January 2008 levels. The non-judicial states have largely worked through their inventory, however the judicial states (especially in the Northeast) still have some wood to chop. 

UBS has a piece out on hybrid funds - funds that hold stocks and high yield debt. If we continue to see a sell-off in junk bonds, these funds will face redemptions, and that meant that the stocks will get sold as well. This is an issue in particular for the energy patch. 

Morning Report: Slow news day

Vital Statistics:

	Last	Change	Percent
S&P Futures	2006.1	-1.3	-0.06%
Eurostoxx Index	3239.8	-10.6	-0.32%
Oil (WTI)	49.42	-0.2	-0.42%
LIBOR	0.321	0.001	0.31%
US Dollar Index (DXY)	94.74	-0.075	-0.08%
10 Year Govt Bond Yield	2.09%	0.00%
Current Coupon Ginnie Mae TBA	104.8
Current Coupon Fannie Mae TBA	104.1
BankRate 30 Year Fixed Rate Mortgage	3.89

Markets are flattish on no real news. Bonds and MBS are closed for the Columbus Day holiday.

No economic data this morning, but we will get a slew of data this week. We will get retail sales on Wednesday, which promises to be a big number as well as inflation data. On Friday we get some big manufacturing data. 

Earnings season kicks off in earnest this week with many of the big banks reporting. We will hear from JP Morgan after the close. 

The CFPB is going after mandatory arbitration clauses in banking and credit cards. This will make it easier for consumers to sue. Separately, the SEC is reducing its use of in-house administrative law judges, which critics have said gives it a "home court" advantage.

The rental market has been on fire, and has been doing much better than the single family construction market. Is that about to change? As the Millennials age, they will become house buyers. The demographics are changing, and 2015 may be the known as "peak rentals" The one thing our economy needs more than anything right now is more housing construction. We have a shortage, and housing construction employs a lot of people with jobs that pay good wages. The difference between 1.2 million housing starts and 2 million in terms of growth is very meaningful. 

Last week the House passed a bill that would extend a hold-harmless period for TRID until February. Its fate in the Senate is unclear. The CFPB has said it will take into account whether a company is making a good faith effort to comply but does not support a hold harmless period. 

Shortest honeymoon ever. After agreeing to a deal to stop developing nuclear weapons in exchange for the lifting of sanctions, Iran tested a long range ballistic missile with a range of around 800 miles, potentially violating the agreement signed in July.

Morning Report: FOMC minutes confirm Fed is worried about the global economy

Vital Statistics:

	Last	Change	Percent
S&P Futures	2010.8	4.2	0.21%
Eurostoxx Index	3265.5	40.6	1.26%
Oil (WTI)	50.18	0.8	1.52%
LIBOR	0.319	0.001	0.19%
US Dollar Index (DXY)	94.81	-0.509	-0.53%
10 Year Govt Bond Yield	2.12%	0.01%
Current Coupon Ginnie Mae TBA	104.8
Current Coupon Fannie Mae TBA	104.3
BankRate 30 Year Fixed Rate Mortgage	3.83

Markets are higher this morning as commodities continue to rebound. Bonds and MBS are down.

Import Prices fell 0.1% in September and are down almost 11% on a year-over-year basis. 

Wholesale inventories rose 0.1% in August, while wholesale sales fell 1%. Both numbers were worse than expectations. The increase in the inventory to sales ratio is a worrisome sign., You typically see the ratio build ahead of a cyclical recession. 

The FOMC minutes confirmed what everyone suspected - that international worries prompted the Fed to hold interest rates steady at the September FOMC meeting. Overall, the Committee seemed rather constructive on the US economy in general. The Fed Funds futures are currently handicapping a 10% probability of a hike at the October meeting and something like 40% in December. 

Note that while the Fed is sanguine on the US economy, economists are generally more cautious. A survey of strategists and economists puts the chance of a US recession at 15% over the next 12 months. It is important to note that the Fed's forecasts for economic growth have been consistently high since the Great Recession. 

Representative Kevin McCarthy withdrew his name from consideration for the next House speaker after allegations of an affair ended up on a Wikipedia page. This leaves current speaker John Boehner in charge for the time being. Interestingly, the Wikipedia edit emanated from the US government itself - someone in the Department of Homeland Security. After the Secret Service started distributing confidential information on Representative Chaffetz, it looks like the worker bees in the government are going directly after Republican politicians. It will be interesting to see if anyone in the Obama administration actually cares. 

Hillary's plan for the financial system. A surtax on banks with over $50 billion in assets, an increase in the statute of limitations for financial crimes, and toughening the Volcker rule regarding proprietary trading. 

Note that margin debt is falling on the stock exchanges. This could be a reaction to the turmoil in overseas markets. Generally speaking margin selling tends to exacerbate downward moves, so having less margin debt is actually a good thing. 

The share of foreign homebuyers is at an 8 year low in California. 

Morning Report: Awaiting the FOMC minutes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1979.3	-7.9	-0.40%
Eurostoxx Index	3217.2	-9.2	-0.29%
Oil (WTI)	48.24	0.4	0.90%
LIBOR	0.318	-0.005	-1.61%
US Dollar Index (DXY)	95.49	-0.008	-0.01%
10 Year Govt Bond Yield	2.05%	-0.01%
Current Coupon Ginnie Mae TBA	104.9
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.8

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

Third quarter earnings season starts tonight with the traditional report out of Alcoa. 

Initial Jobless Claims fell to 263k last week, the lowest since July.

The minutes from the September FOMC meeting will be out at 2:00 pm EST. Be aware of possible bond market volatility as the market digests it.

The Bloomberg Consumer Comfort Index rose to 44.8 from 43 last week. 

Fannie Mae is announcing further reps and warranties guidance for loans starting Jan 1. It will include new alternatives to repurchase if the loan has a defect. The government is sick and tired of tight credit, especially at the lower end of the credit spectrum. These are intended to ease credit by giving lenders more certainty. The government is clearly worried given that the big banks like JP Morgan are backing away from FHA originations.  

A case for allowing student loan debt to be discharged in bankruptcy is winding its way through the courts. There is about $1.2 trillion in student loan debt outstanding. 

It looks like a strike at Fiat-Chrysler has been avoided. It sounds like the union got some of what they wanted so we could start seeing the beginnings of increasing wages. 

Larry Summers makes the case for going big on expansionary fiscal policy. His argument is that China's slowdown threatens to drag the global economy into a secular stagnation similar to what Japan has been going through. He argues that monetary policy is pretty much played out: rates are at zero, and the stimulative effect of additional QE with the 10 year at 2% would be de minimus. He argues for a new "New Deal" where the government deficit spends on infrastructure spending. Of course this isn't a new idea in the modern age: Japan has been doing precisely that for 25 years and has nothing to show for it except for a debt to GDP ratio of 2.3x. That would be like the US spending $40 trillion over 25 years. Before we advocate spending that kind of money, we should figure out  why it hasn't worked in Japan.. And if over 1 quadrillion yen is not enough, then what is? We need a better answer than the un-falsifiable "More Cowbell." If the Rx only works in theory, then maybe the answer is to just slug it out until the economy corrects on its own.