Morning Report: US banks pass stress test

Vital Statistics:

	Last	Change	Percent
S&P Futures	2067.7	0.9	0.04%
Eurostoxx Index	2838.7	6.5	0.23%
Oil (WTI)	48.86	-1.0	-2.04%
LIBOR	0.631	0.004	0.64%
US Dollar Index (DXY)	95.7	-0.069	-0.07%
10 Year Govt Bond Yield	1.50%	-0.02%
Current Coupon Ginnie Mae TBA	106.1
Current Coupon Fannie Mae TBA	105.4
BankRate 30 Year Fixed Rate Mortgage	3.54

Stocks are taking a breather after a ferocious two-day rally. Bonds and MBS are up. 

Initial Jobless Claims came in at 268k, up 9k from the previous week. Claims have now been below 300k for a year, which is an astounding run. 

In other economic data, the Chicago Purchasing manager index rose while the Bloomberg Consumer Comfort index fell. 

Last night, the Fed released the results of its stress tests and most, if not all, US banks passed. After the close, the tape was dominated by news of banks raising dividends and buybacks. Deutsche Bank failed to pass. Deutsche Bank's market cap stands at just under $19 billion, roughly the same size as M&T or Suntrust. Citi's market cap is $123 billion. This gives you an idea how hard the banking system has been rocked in Europe.

George Soros believes Brexit will be the catalyst to unleash a financial markets crisis. He believes it will be concentrated in Europe, where their economies are stuck in a deflationary trap, similar to Japan. His prescription is for European governments to adopt deficit spending en masse to boost aggregate demand. Of course Japan has been doing exactly that for over 25 years. All they have to show for it is negative interest rates, flat GDP and a debt to GDP ratio of 2.2x. He is also predicting a hard landing in China, which would add fuel to the fire. Punch line: Deflationary forces emanating out of Asia and Europe will keep the US dollar strong (which will dampen inflation in the US) and interest rates low. 

When talking about interest rates, it is important to remember that interest rate cycles are long. Below is a chart of long term Treasury yields in the US going back 90 years. The relevant comparison for the global economy right now is the 1930s. The crash was in 1929, (versus 2008) and rates kept falling for another 11 years. It looks like rates bottomed around 1940. Rates remained unusually low until the late 1950s. To put a parallel on that, we would be looking for rates to bottom out somewhere around 2020, and then have another 10 years where these exceptionally low rates increased only gradually. Note the trough-to-peak time was about 40 years. Of course history doesn't repeat - it only rhymes, however those looking for a cataclysmic top in the bond market might be waiting a while. 

Fun fact: There are now $11.7 trillion worth of bonds with negative yields right now. The notional amount of bonds with negative yields and maturities of 7 years or longer is $2.6 trillion. This number has doubled since April. The UK 10 year is still positive, yielding .95%, but who knows how long that will last. This is the thing to keep in mind: with global rates near or below zero, there will be a natural bid for Treasuries. It is inevitable as global investors sell bonds yielding nothing to buy bonds yielding something. 

Morning Report: Brexit panic over?

Vital Statistics:

	Last	Change	Percent
S&P Futures	2042.0	13.6	0.67%
Eurostoxx Index	2816.4	57.7	2.09%
Oil (WTI)	48.26	0.4	0.86%
LIBOR	0.627	0.004	0.56%
US Dollar Index (DXY)	95.89	-0.351	-0.36%
10 Year Govt Bond Yield	1.48%	0.01%
Current Coupon Ginnie Mae TBA	106
Current Coupon Fannie Mae TBA	105.4
BankRate 30 Year Fixed Rate Mortgage	3.6

Stocks are higher this morning as global stocks and commodities rally. Bonds and MBS are flat.

It seems like the big Brexit-related sell-off might be over.  Brexit will have a negligible effect on US corporate earnings, and stocks will benefit from a lower, steadier interest rate environment. I would look for the correlation between US stocks and global stocks to break down gradually. I am not sure we will see the same effect in the Treasury markets as the global bond market is simply much more integrated. Speaking of which, global bond yields are holding steady this morning, with the German Bund at -11 basis points and the the PIIGS slightly lower. 

First quarter GDP was revised to +1.1%. while personal consumption came in at 1.5% and the PCE index (the inflation measure preferred by the Fed came in at 0.4%). Housing as a percentage of GDP increased. I have long said the difference between this sub-par economy and a strong one is housing. Politicians have yet to figure this out.

Home prices rose .5% MOM and 5.4%YOY, according to the Case-Shiller home price index. Home prices in 7 MSAs (Denver, Dallas, Portland OR, San Francisco, Seattle, Charlotte, and Boston) have eclipsed their 2006 peaks. 

Personal Incomes rose 0.2% in May, slightly below forecasts, while personal spending increased 0.4%, right in line with expectations. For the month, the PCE core index rose 1.6% YOY, which is still below the Fed's target of 2%. 

Mortgage Applications fell 2.6% last week as purchases fell 3% and refis fell 2.4%. Pending Home Sales fell 3.7% MOM in May and are up 2.4% YOY. 

The Fed is scheduled to release the results of its stress tests for the largest US banks. The results should come out after the close. Billions of dollars in dividends and buybacks are on the line. Separately, GE's systemic designation has been rescinded by US regulators. GE is the first institution to have the designation removed, which requires stringent capital and leverage requirements. GE has sold much of its GE Financial division, and has returned to its roots as an industrial manufacturer. 

Speaking of banking crises, the European big banks have stabilized in the aftermath of Brexit. The canaries in the coal mine are Deutsche Bank and Unicredito. Even Barclay's and RBS have stabilized. The thing to keep in mind is that the banks now have almost double the capital they had in 2008 and Brexit is nothing like the bursting of the US residential real estate bubble. The Bernank agrees.

Freddie Mac wonders if the homeownership rate can fall below 50%. The current level is at 63.5%, which is the lowest in 22 years, and just off the low of 63%, which goes back to 1965, when Census started tracking the statistic. They look at 3 studies, which all predict lower homeownership going forward. The factors inhibiting an increase in homeownership are lower income growth, high rental prices, tight supply and and high student loan debt / tight credit. It is hard to tell what a "normal" homeownership rate as the 2005 spike was the result of a bubble and a lot of social engineering via the housing market, which really started early in the Clinton Administration.

Morning Report: Implications of Brexit

Vital Statistics:

	Last	Change	Percent
S&P Futures	2004.6	-14.0	-0.69%
Eurostoxx Index	2714.3	-61.8	-2.22%
Oil (WTI)	46.84	-0.8	-1.68%
LIBOR	0.624	-0.017	-2.58%
US Dollar Index (DXY)	96.58	1.131	1.18%
10 Year Govt Bond Yield	1.47%	-0.09%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105.3
BankRate 30 Year Fixed Rate Mortgage	3.56

Stocks are lower this morning as markets adjust to Brexit. Bonds and MBS are up.

Here is the summary of the financial market reaction to Brexit: Stocks down, Treasuries up, US dollar up, Gold up, but other commodities down. Fed Funds futures pricing in no more interest rate hikes this year. In many ways, markets were discounting #Bremain in the week or so heading up to the vote, so in many cases, they merely gave back those moves. Friday was volatile, with 3-sigma moves seen in 23 currencies, 30 sovereign bonds, and and 28 stock market indices. 

What does Brexit mean to the European financial markets?  The banks got crushed on Friday, and part of that is due to widening sovereign spreads. Brexit caused a yield divergence between the German Bund and the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) bonds. Greek spreads widened out 89 basis points to 8.65%. German bond yields fell 14 basis points to -5 basis points. While yields on the PIIGS are still low, they could become an issue going forward.

The biggest risk to the US is any sort of financial contagion. The tell will be the performance of the European and UK banks. Note Italy is considering injecting 50 billion euros into its banking system. The PIIGS are behaving this morning, but that will be something to watch.

Brexit has put the Fed in a box. The slowing economy in China plus the issues with Brexit have pretty much put them on the sidelines for now. In fact, the Fed Funds futures are beginning to price in the possibility of a rate cut. The bottom line is that rates will be lower for longer. FWIW, Bill Gross thinks the upside is limited in US bonds. While Brexit will probably dampen global growth slightly, it shouldn't be a catalyst to push the US into a recession. The biggest beneficiaries will be tourists who want to visit the UK this summer. The biggest losers will be US manufacturers who compete with UK manufacturers and become less competitive due to the sell-off in the pound. In other words, the economic fall-out to the US will probably be pretty limited. Perhaps US stocks were looking for a reason to sell off, but the effect of Brexit on US corporate earnings should be pretty small.

In terms of the mortgage markets, the TBA market (which sets mortgage rates) really didn't have much of a move on Friday. Ginnie II 3.5s were up about 1/4 of a point, which is more or less normal volatility. Fannie TBAs were up 3/8 of a point, which again is more or less normal volatility. Historically, TBAs have lagged movements in the bond markets, and days like Friday absolutely annihilate people who hedge MBS interest rate risk. So, while their portfolio goes up in value, their interest rate hedges lose a lot more than their book gains, so it ends up pressuring TBA pricing, which in turn prevents mortgage rates from moving as low as you think they should go. If the 10 year stays right here, expect mortgage rates to catch up only gradually over a week or even two. Note that the Bankrate US 30 year fixed rate mortgage had been lagging the moves downward in rates already, even before the big move on Friday. It dropped 11 basis points on Friday.

Construction wages are rising faster than the rest of the industry, however they are really just playing catch-up. It will make new houses marginally more expensive, however falling mortgage rates will cushion the blow. 

Morning Report: Brexit implications.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2056	-48.5	-2.37%
Eurostoxx Index	2810.4	-228.1	-7.57%
Oil (WTI)	48.21	-2.0	-2.16%
LIBOR	0.656	0.002	0.24%
US Dollar Index (DXY)	94.4	-0.169	-0.18%
10 Year Govt Bond Yield	1.57%	-0.18%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.72

Stocks are getting sold this morning after the UK voted to leave the EU. Bonds and MBS are up.

Last night the UK voted to leave the EU, which was a surprise to the markets. European stocks are getting crushed this morning, and the biggest ones taking a hit are the banks. Barclay's is down 17%, Santander is down 18%, for example, so there is the distinct possibility of some sort of banking crisis over there. Note we are not seeing a huge move in US banks, so it looks like any crisis over there isn't going to spill over to the US banking sector. 

Big picture: The Fed is doing nothing - in fact there will be calls for the next move to be a rate cut. This could cause a mild recession over here, which means lower rates.  In fact, durable goods orders were terrible this morning, down 2.2%. One of the big investment banks was calling for a 1.4% 10 year bond yield if the UK left. The 2 year bond yield dropped 14 basis points to 64 bps, That will be the one to watch to get a read on what the market thinks the Fed will do.

In terms of mortgage rates, the TBAs (which determine mortgage rates) will lag the move downward in yields. For example, the Fannie Mae TBAs are up this morning, but nowhere near the move in bonds. So, while the 10 year bond yield will get everybody excited, don't expect a huge move downward in mortgage rates, at least initially. Once the 10 year finds its level, TBAs will find their level, probably over the next few weeks or so. If the European banking system goes into full crisis mode, the impact on mortgage rates will probably be a pull-back in jumbo pricing, which is the most vulnerable since it relies on a private securitization market. FN and GN pricing should not be affected. So basically, we will see some drama in the stock and bond markets, and not so much in the mortgage markets. 

Morning Report: Markets optimistic as Britain votes

Vital Statistics:

	Last	Change	Percent
S&P Futures	2104.1	18.5	0.87%
Eurostoxx Index	2852.4	33.1	1.17%
Oil (WTI)	47.21	1.0	2.16%
LIBOR	0.656	0.002	0.24%
US Dollar Index (DXY)	94.4	-0.169	-0.18%
10 Year Govt Bond Yield	1.72%	0.03%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.72

Markets are higher this morning as the Brexit vote happens in the UK. Bonds and MBS are down.

Last night, the Sporting Index Brexit Markets were tilted towards Remain at 53-47. If the UK leaves, it probably won't have much of an effect on the US economy, however it will probably cause a flight to safety, meaning US Treasury yields would fall.

New Home Sales fell to an annualized pace of 551k in May. This is down on a sequential basis but is still up 9% YOY. April was revised lower as well. The median new home price was $290,400 and the average sale price was $358,900. At the end of May there were 244,000 new homes for sale, which represents a 5.3 month supply. I plotted new home sales going back to the early 1960s, and put a trend line in so you can see how much of a deficit we have, and where that number should be (about 50% higher)

Tight supply of starter homes are pushing prices up 9% per year in that segment, more than double the price appreciation at the high end. This is a combination of lower foreign demand for luxury homes and increasing demand by Millennials who want to buy. 

Initial Jobless Claims fell to 259k last week. For all the talk about a slowdown in the labor markets, you aren't seeing any evidence of layoffs.

The Chicago Fed National Activity Index turned negative last month, while the Kansas City Fed Index turned positive. 

Finally, the Index of Leading Economic Indicators turned negative last month.

The 20 hottest real estate markets, according to Realtor.com. No, it isn't Phoenix, Palm Springs, Vegas, and Orange County. Note how many are in the Rust Belt! The D is supposedly a hot market - I thought they were going to abandon about 1/3 of the city and turn it back into farmland. 

Morning Repot: Lennar's take on the state of housing

Vital Statistics:

	Last	Change	Percent
S&P Futures	2093.1	3.5	0.17%
Eurostoxx Index	2852.4	33.1	1.17%
Oil (WTI)	47.21	1.0	2.16%
LIBOR	0.656	0.002	0.24%
US Dollar Index (DXY)	94.4	-0.169	-0.18%
10 Year Govt Bond Yield	1.71%	-0.01%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.72

Markets are flattish ahead of the Brexit vote tomorrow. Bonds and MBS are down small.

Mortgage Applications rose 2.9% last week as purchases fell 2.4% and refis rose 6.5%. Refis rose to 57.7% of all loans as rates bombed out on the FOMC decision.

The FHFA House Price index rose 0.2% in April, and is up 5.9% year-over-year. Interestingly, New England went from cellar-dweller to the leader in monthly price appreciation. The region is still lagging the most on a YOY basis however. The FHFA index is the only housing price index that has regained all of the losses from the crisis. This is because it concentrates only on houses with a conforming mortgage, so it ignores the all-cash distressed sales and the jumbo space.

Existing home sales rose 1.8% in May to 5.53 million. This is the highest pace since February 2007. The median house price was $239,700 up 4.7% YOY. Total housing inventory is at 2.15 million units, which represents a 4.7 month supply. Inventory is still tight. The first time homebuyer accounted for 30% of all sales, a decrease from last month and last year. Days on market dropped to 32 days, a record.

On Lennar's earnings conference call, CEO Stuart Miller summed up Lennar's view of the housing market. In a way, he also explained why housing starts remain so low. "As we've noted consistently over the past years, the overall housing market has been generally defined by a rather large production deficit that has continued to grow over the past years. While questions have been raised as to the real normalized levels of production that are required to serve the U.S. current population, we believe that production levels in the 1 million to 1.2 million starts per year range are still too low for the needs of American household growth that is now normalizing.While measuring current production levels against historical norms of 1.5 million starts per year might be flawed logic as there may be a new normal, we believe that the very low inventory levels in existing and new homes and the low vacancy rates and high and growing rental rates for apartments indicate that we are in short supply nationally. 

The idea of a "new normal" being somewhere above current production levels (1.2 million units) and the historical average (1.5 million units) is as good an explanation as any. Lennar mentioned on their call that they have been transitioning from the early growth phase of the cycle to the mature phase of the cycle. In other words, they aren't looking for the typical 2 million level of starts you usually see in the recovery from a recession. They do give a good graphic analysis of the supply / demand state of the housing market in this slide from a recent JP Morgan housing conference. 

Notice that the current level of production (sub 1.2 million units is closer to the "housing depression" line than it is to the "normal production" line.. That would make 2009-2012 "nuclear winter." Lennar is making the same bet a lot of other builders are making that multi-fam is the way to go as they see the Millennials happy to rent. Actually, the meta-bet they (and everyone else in the financial markets) are making is that inflation is gone, dead, buried, and never, ever, ever coming back. The only reason why you would lend money to the government for no return is that you think inflation is gone. It truly is a "this time is different" argument, which is the most dangerous argument in all of investing, especially when every central bank on the planet is on a mission to create inflation. Inflation is a debtor's best friend, and if the Millennials can get out from under their student loan debt, we should see a bull rush for new SFR housing. The cautious homebuilders will probably be caught with too little inventory, and will suddenly start bidding against each other for workers, land and materials. That dynamic is how recessions typically end and is the difference between a strong economy and the "meh" economy of the past 8 years. 

KB Home also reported earnings last night. Earnings were better than expected, and they see a return of the first time homebuyer. Note that the current number of first time homebuyers (30%) is well below the historical average of 40%. Average selling prices were up 2%, which is much lower than the other builders. 

Morning Report: Janet Yellen gets more dovish

Vital Statistics:

	Last	Change	Percent
S&P Futures	2087.1	3.5	0.17%
Eurostoxx Index	2852.4	33.1	1.17%
Oil (WTI)	47.21	1.0	2.16%
LIBOR	0.656	0.002	0.24%
US Dollar Index (DXY)	94.4	-0.169	-0.18%
10 Year Govt Bond Yield	1.68%	-0.01%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.53

Markets are up this morning as the market frets about Brexit and Janet Yellen speaks. Bonds and MBS are up small.

The latest polls for Brexit are mixed, and the bottom line is that it is too close to call. If the UK leaves the EU, the most likely effect will be a flight to safety, which would mean global flows to US Treasuries, lowering rates. Some of the forecasts I am seeing would be a sub 1.4% on the 10 year if the UK leaves, or a return to the old 1.7% - 1.9% range if they stay. FWIW, spread betting is common in the UK, and the markets there are much deeper than the political betting sites in the US. Right now, the spread betting markets are assigning a 25% probability of Brexit. 

Janet Yellen adjusted her language to be slightly more dovish ahead of her testimony today in front of the Senate Banking Committee. She is exhibiting a little more uncertainty over whether the economy is ready to return to moderate growth. Not sure what changed in the last week or so, but there you go. 

Homebuilder Lennar beat estimate this morning as the housing market continues to improve and wage growth begins to appear. Interestingly, they are pulling back a little from the market, it appears: "As this year's spring selling season improved over last year, our second quarter new orders increased 10% to 7,962 homes year-over-year, while our home deliveries and home sales revenue also increased to 6,724 homes and $2.4 billion, respectively.  As the recovery has continued to mature, we have remained focused on our strategy of moderating our growth rate in community count and home sales, as well as on our soft-pivot land strategy, targeting land acquisitions with a shorter average life." For some reason, the builders don't seem to trust this recovery in housing. 

Perhaps Lennar's reticence comes from the attitudes of consumers. A recent survey shows housing affordability remains a big problem. That said, perceptions of real estate as a good long-term investment are improving. They should, since rental inflation is generally outpacing house price appreciation and the buy-rent decision is skewed heavily towards buying. That said, consumers are becoming more pessimistic that the housing crisis is over. 

Good breakdown on how big of a boost homebuilding is for the economy. Unfortunately, the only discussion of housing in DC revolves around how hard we should be slugging the banks. 

Morning Report: Housing starts and building permits are flat

Vital Statistics:

	Last	Change	Percent
S&P Futures	2067.1	-3.5	-0.17%
Eurostoxx Index	2852.4	33.1	1.17%
Oil (WTI)	47.21	1.0	2.16%
LIBOR	0.656	0.002	0.24%
US Dollar Index (DXY)	94.4	-0.169	-0.18%
10 Year Govt Bond Yield	1.58%	0.01%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.68

Markets are flattish on no real news. Bonds and MBS are flat as well.

Housing starts came in at 1.16 million in May, a tiny decline from the downward-revised April number. Building Permits rose slightly. Starts rose the most in the West and fell the most in the Northeast. It is amazing that we have a shortage of housing and are building very little. Take a look at the chart below: It is housing starts divided by population. We have just barely touched the low from the 91-92 recession, which also was the result of a frothy real estate market. If the government wants to get the economy going, it should be asking the question why housing is still so depressed in the face of such tight inventory and high demand. 

The Brexit campaign is on hold after a member of Parliament was murdered yesterday. Officials don't have a motive, however there have been calls on both sides to tone down the rhetoric. 

The current global economy resembles the 1930s in many ways, and can help explain why the Fed is going so slowly in raising interest rates. Of course there are major differences as well - rates didn't go negative in the 1930s, the world was on the gold standard, and capital was much less mobile. Still, we have a recession in the aftermath of an asset bubble and the hangover is debt that needs to be worked down. The Fed is trying to avoid the mistake of the 1937 "depression within the depression" where they hiked rates too quickly. Of course by that time, FDR was on an anti-business tear with the undistributed profits tax, and that certainly put a wet blanket on business investment. 

The most deadly words in investing are "this time is different." That said, we are in a world of negative bond yields, and massive central bank balance sheet growth, which you won't find in your Econ 101 textbook. This time is indeed different. Or, is the answer more simple: we are in a bubble for sovereign debt? When you are purchasing a German Bund for no yield whatsoever, the only reason why you would make that investment is because you anticipate a capital gain - in other words you are making the investment on the "greater fool" theory. Which is of course no different from paying 60x earnings for Cisco Systems in 1999 hoping to flip it to someone willing to pay 61x earnings. Or flipping condos in Palm Beach for that matter. 

I went on Louis Amaya's Capital Markets Today podcast after the Fed decision and discussed the Fed, the economy, housing and regulations. You can hear the podcast here.

Morning Report: The Fed acknowledges reality in the bond market

Vital Statistics:

	Last	Change	Percent
S&P Futures	2052.1	-11.3	-0.55%
Eurostoxx Index	2805.2	-25.1	-0.89%
Oil (WTI)	47.11	-0.9	-1.87%
LIBOR	0.655	0.002	0.35%
US Dollar Index (DXY)	95.03	0.419	0.44%
10 Year Govt Bond Yield	1.57%	0.00%
Current Coupon Ginnie Mae TBA	106
Current Coupon Fannie Mae TBA	105.1
BankRate 30 Year Fixed Rate Mortgage	3.65

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

The Fed left interest rates unchanged yesterday, and the biggest data point was the dot graph which showed 6 members expect no change in interest rates this year. That sent the 10 year yield down 4 basis points and the 2 year down 5. The actual language of the statement wasn't dramatically different from April. They released new economic forecasts, taking down their estimate for 2016 and 2017 GDP to 2%, and increasing their estimate of 2016 inflation from 1.2% to 1.4%. In the press conference afterward, Janet Yellen acknowledged the upcoming vote in the UK (Brexit) was also a factor. The big admission was that rates will remain lower for longer. 

The Fed Funds futures market is now discounting a single-digit chance of a rate hike in July, and the futures are predicting less than a 50% chance of a move throughout the rest of the year. 

Bond yields are falling worldwide, with the German Bund trading at -2.3 basis points, the Swiss 10 year at -51 basis points, and the Japanese government bond yield at -20 basis points. Like it or not, the US 10 year probably won't be able to escape the low rate vortex in the rest of the world, as investors swap out negative-yielding assets and buy Treasuries. Not saying we are going to go negative, but I find it hard to see where the selling pressure is going to come from. Are we going to be positioned for another refi boom? Don't rule it out. 

The other potential beneficiary of low rates worldwide should be mortgage backed securities, especially GN securities which are guaranteed by the government. I would have to imagine overseas investors will find these appetizing at some point. GN and FN TBAs have lagged the movement in Treasuries so far this month. This should translate into better conforming and government pricing going forward, even if bonds take a breather. 

The other beneficiary of negative interest rates? Gold, which has been on a tear lately. The knock on gold has always been that it has no yield. No yield is better than negative yields, and gold has upside, while there probably isn't much upside in a government bond with a negative yield. A rule of thumb for gold has always been that an ounce of gold should buy a high quality men's suit. 

Initial Jobless Claims rose to 277k last week from 264k the week before. While it looks like payroll growth is slowing, we aren't yet seeing evidence of layoffs. As a rule of thumb, a sub-300k initial jobless print is a sign of strength in the labor market. 

The consumer price index rose 0.2% in May, and is up 1% YOY. Ex-food and energy, it is up 2.2%. Note the Fed doesn't use the CPI, it uses the PCE. 

Real average weekly earnings rose 1.1%. 

Purchase loans are the majority of new originations despite the rally in bonds, according to Ellie Mae's Origination Insight Report. Purchases accounted for 62% of all loans. Days to close increased a day to 45 days and average FICO increased a point to 724. 

Morning Report: Awaiting the Fed

Vital Statistics:

	Last	Change	Percent
S&P Futures	2070.3	4.4	0.21%
Eurostoxx Index	2840.2	43.0	1.54%
Oil (WTI)	47.9	-0.6	-1.22%
LIBOR	0.653	-0.003	-0.47%
US Dollar Index (DXY)	94.77	-0.156	-0.16%
10 Year Govt Bond Yield	1.62%	0.01%
Current Coupon Ginnie Mae TBA	105.9
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.66

Stocks are higher this morning as we await the FOMC decision at 2:00 pm today. Bonds and MBS are flat.

Bonds had a sensational rally yesterday, with the 10 year yield falling to 1.57% and the German Bund going negative before giving it all back. The Bund is basically at zero this morning. 

The FOMC decision is due out at 2:00 pm EST today. No one is expecting a rate increase, but we the press release and press conference might have some market-moving news. We will also get new a new Fed Funds dot graph and updated forecasts for inflation, unemployment, and GDP growth. Here is a primer on what to look for. 

Mortgage Applications fell 2.4% last week as purchases fell 4.9% and refis fell 0.7%. Refis accounted for 55% of the total number of loans.

Inflation remains in check at the wholesale level, as the producer price index rose 0.4% MOM and fell 0.1% YOY. Ex food and energy, the PPI was up 1.2%, much lower than the Fed's 2% target rate.

Paul Singer of Elliott discusses central banks and how all of their policies have been slowing growth and exacerbating inequality. He is bearish on stocks, bullish on gold. Separately, Jeffrrey Gundlach of DoubleLine says that central bankers are losing control. 

Completed foreclosures ticked up to 37,000 in April from 36,000 a month ago, however they are down 16% YOY. The foreclosure inventory is just over 400,000 homes, which works out to be 1.1% of all homes with a mortgage. This number is down 23.4% from a year ago. Foreclosure inventory remains concentrated in the Northeast, Florida, and the sand states. 

iServe got a nice mention in Rob Chrisman's blog this morning. If you want to learn more about VA loans, we conduct seminars all over the US with our VA expert. We serve those that served. 

In other economic news, the New York State Empire Manufacturing Index rebounded in June, while industrial production and manufacturing production fell in May. Motor vehicles (which can be volatile) accounted for a big part of the drop. Capacity Utilization fell to 74.9%. Interestingly, more CEOs intend to increase capital expenditures than they did in the first quarter. 

The long-term bearish take on oil. 

Morning Report: Uncle Sam is the creditor for 28% of the consumer loan market

Vital Statistics:

	Last	Change	Percent
S&P Futures	2081.4	-5.9	-0.28%
Eurostoxx Index	2868.3	-42.8	-1.47%
Oil (WTI)	48.5	-0.6	-1.16%
LIBOR	0.656	0.000	-0.07%
US Dollar Index (DXY)	94.55	-0.021	-0.02%
10 Year Govt Bond Yield	1.63%	-0.02%
Current Coupon Ginnie Mae TBA	105.7
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.7

Stocks are lower this morning on fears over Brexit (The 6/23 vote to decide whether the UK leaves the EU). Bonds and MBS are up small.

No economic data today. The big event this week will be the FOMC meeting Tuesday and Wednesday. The markets are expecting no changes to interest rates, so any bond rally on the news of no changes will probably be limited. 

Interesting chart about the Federal government's percent of ownership of consumer debt. This is money that US citizens owe Uncle Sam. Ever since Obama nationalized the student loan sector, they have taken their percentage of consumer debt from 5% to 28%. The student loan market is a $1.3 trillion market - not exactly chump change. Expect some sort of write-down of student loan debt in the future: many graduates have degrees that will never pay enough to work this down. As a side note, more young adults aged 18-34 live at home with Mom and Dad than in any other arrangement. 

Speaking of Millennials, the high student loan debt is causing lower credit scores. The average credit score for the 18-34 age cohort is 625, compared to the national average of 667. Almost a third of that age cohort have sub-600 scores. Good luck getting a loan with that. Finally, all of the new post-2008 regulations have added anywhere form 50k-100k to the cost of building a starter home, making it difficult for builders to make homes that are affordable for the first-time homebuyer. 

There is now $10 trillion worth of global sovereign debt trading at negative yields. Bill Gross of Janus Capital calls that a "supernova" that will explode one day. All of the worlds' central banks are on a mission to create inflation: one day they will succeed. What has been the best trade for bond investors lately? The Japanese 30 year bond, which now yields 28 basis points. Bill says that bond yields today are the lowest in 500 years. Not sure where he comes up with that number.

Speaking of Central Bank jiggery-pokery, ECB corporate bond buying now makes up for 1 in 5 trades. We are truly in uncharted waters with global central banking. 

As a general rule, buy stocks in an election year. Election years tend to be optimistic times, and the Fed is usually on your side. That might not be the case this year. 

Morning Report: Negative equity falls

Vital Statistics:

	Last	Change	Percent
S&P Futures	2114.2	-3.9	-0.18%
Eurostoxx Index	2918.0	-71.0	-2.38%
Oil (WTI)	49.83	-0.7	-1.44%
LIBOR	0.658	0.001	0.21%
US Dollar Index (DXY)	94.13	0.180	0.19%
10 Year Govt Bond Yield	1.65%	-0.03%
Current Coupon Ginnie Mae TBA	105.8
Current Coupon Fannie Mae TBA	104.9
BankRate 30 Year Fixed Rate Mortgage	3.67

Stocks are lower this morning on no real news. Bonds and MBS are up as sovereign bonds rally globally. 

The 10 year has broken out of its range and is now trading at 1.65%. The catalyst has been lower rates throughout the world. The German 10 year Bund is now trading at 2 basis points. The Japanese Government Bond yields negative 13 basis points. At some point, gold has to become interesting as an investment. The knock on gold was always that there is no yield, but compared to long term sovereign bonds that have no yield and (probably) no upside, why not? Definitely a better risk / reward. 

Mortgage originator and servicer Walter Investment got slammed yesterday after the CEO resigned. Regulatory difficulties and costs were the catalyst. The stock has lost 82% of its value over the past year. 

In economic news, initial jobless claims fell to 264k from 268k the week before. So in spite of the low job creation numbers, we aren't seeing firms lay off people yet. 

Consumer confidence fell slightly in June to 94.3 from 94.7 according to the University of Michigan Consumer Sentiment Survey

268,000 homes regained positive equity in the first quarter, according to CoreLogic. They estimate that 4 million homes (or about 8% of the homes with a mortgage) have negative equity. 18% of homes have less than 20% equity. Negative equity remains a problem in the Northeast, the Rust Belt and FL, NV, and AZ. 

Ex Fed Head Narayana Kochlerakota argues the Fed should be doing more to get inflation up. Not only should they hold off on raising rates until the core PCE is above 2%, but it should pay nothing on excess reserves. 

Morning Report: Job openings match the record set last year

Vital Statistics:

	Last	Change	Percent
S&P Futures	2116.0	2.9	.05%
Eurostoxx Index	3031.4	-32.1	-1.05%
Oil (WTI)	50.1	0.39	0.72%
LIBOR	0.673	-0.001	-0.15%
US Dollar Index (DXY)	95.38	-0.510	-0.53%
10 Year Govt Bond Yield	1.7%	-0.01%
Current Coupon Ginnie Mae TBA	105.6
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.74

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

Mortgage applications rose 9% last week as purchases rose 11.7% and refis rose 7.4%. Interest rates were flat for most of the week until the jobs report on Friday, so these are good numbers, all things considered. The 10 year continues to bump to see resistance at the 1.7% level.

Job opening increased to 5.8 million in April, according to the JOLTS report, which matches a record set last July. Hires and quits fell however, which is another reason for the Fed to stand pat at the FOMC meeting next week. 

Separately, a survey of CFOs indicates that companies are holding off hiring due to uncertainties regarding regulation and the general machinations in DC. Interestingly, hiring and retaining skilled labor came in as the #2 concern from #5 last year. That corroborates what the JOLTS report is saying: there are a lot of openings for skilled labor, but hirings are down because skilled labor is tough to find. On the other side of the coin, unskilled labor is becoming more expensive due to the recent spate of minimum wage hikes, which is creating an even bigger glut as companies substitute technology for labor. 

Meanwhile in banking, machine learning continues to displace more and more workers. What can be automates ultimately will be. 

Hillary Clinton won California and has enough delegates to sew up the nomination. Donald Trump continues on his mission to alienate as many people as possible. The big question is Bernie Sanders. Given the backdrop of the FBI investigation, he may decide to stick around until that is settled. That said, Obama has signalled that Hillary did nothing wrong, and I am sure his DOJ and his FBI has taken note. The Democratic establishment is going to put more and more pressure on Bernie to throw his support behind Hillary and unite to defeat Trump. 

Was the big miss in payrolls just a spurious data point or is it the start of a downturn in the labor market. Citi says to watch the initial jobless claims number tomorrow. Typically you should see a spike in initial jobless claims following such a weak number. 

Republicans are drafting a bill to fix some of the issues with Dodd-Frank, particularly Volcker rule and some of the issues with the CFPB. Banks that meet capital requirements will be allowed to prop trade, and the CFPB will come under Congressional oversight and have a Board instead of a single director. There are two issues this is intended to fix. First, market making almost doesn't exist any more as banks are afraid to venture too close to proprietary trading and the Volcker rule. The next crash (and there will be one) investors will be in for a rude awakening when they cannot sell their less liquid stocks because there is no bid. It will be even worse for bonds, and could be a major issue for ETFs. The second issue is the CFPB, which is regulating by enforcement action. Consumer advocates are getting sick and tired of tight credit, which is creating some consternation with other members of the left who still think the banks are unregulated and need to be reined in. Elizabeth Warren is leading the charge against this, which makes sense since the CFPB is her baby. 

Morning Report: Janet Yellen acknowledges the bad jobs report

Vital Statistics:

	Last	Change	Percent
S&P Futures	2112.0	2.9	-.03%
Eurostoxx Index	3031.4	-32.1	-1.05%
Oil (WTI)	50.1	0.39	0.72%
LIBOR	0.673	-0.001	-0.15%
US Dollar Index (DXY)	95.38	-0.510	-0.53%
10 Year Govt Bond Yield	1.71%	-0.01%
Current Coupon Ginnie Mae TBA	105.6
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.74

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

Janet Yellen spoke yesterday and voiced optimism on the economy overall, while characterizing Friday's jobs report as "weak" and "concerning." The Fed has said they remain data-dependent, and the latest data suggests that they will not raise rates next week. That said, the Fed has a growing credibility issue as they have set up the markets for rate hikes several times over the past couple of years only to get cold feet at the last minute. 

The final revision for nonfarm productivity for the first quarter came in unchanged at -0.6%. Unit Labor costs were revised upward to 4.5%.  Output ended up increasing 0.9% while compensation was revised upward in a big way to 4.2%. Productivity has been oscillating close to 0% for the past 8 years or so, and that is a big reason why wages have been going nowhere. While there is some debate going on in academic circles over whether we are measuring productivity correctly these days, it remains an issue that explains stagnant wage growth. And that stagnation cannot be fixed by raising the minimum wage or playing with the Fed Funds rate. 

Coming on the back of Friday's putrid jobs report, the Labor Market Conditions Index turned down in May. This is a meta-index of leading and lagging employment indicators. While it probably won't factor into the Fed's decision next week, it is worth watching.

Home prices increased 6.2% in April, according to CoreLogic. They are forecasting a 5.3% increase for next year as builders increase production and rates start to rise. 

Hillary secured enough delegates to win the Democratic Party nomination last night. Bernie Sanders will begin to come under immense pressure to withdraw from the race while Hillary pivots towards Trump.

Morning Report: Terrible jobs report means June rate hike off the table

Vital Statistics:

	Last	Change	Percent
S&P Futures	2098.0	-6.9	-0.33%
Eurostoxx Index	3031.4	-32.1	-1.05%
Oil (WTI)	48.5	-0.6	-1.22%
LIBOR	0.673	-0.001	-0.15%
US Dollar Index (DXY)	95.38	-0.510	-0.53%
10 Year Govt Bond Yield	1.71%	-0.09%
Current Coupon Ginnie Mae TBA	105.6
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.63

Stocks are lower this morning after a weak jobs report. Bonds and MBS are up.

Jobs report data dump:

• Nonfarm payrolls + 38k
• 2 month payroll revision - 59k
• Unemployment rate 4.7%
• Average weekly hours 34.4
• Average hourly earnings +0.2% MOM / +2.5% YOY
• Labor force participation rate 62.6%
• Underemployment rate 9.7%

Massive disappointment in the the payroll number. Lowest print in 6 years. If you add in the 2 month revision, May was negative. While the Verizon strike is adding some noise to these numbers (could be depressing them by as much as 35k), it was a huge miss compared to the 160k street estimate. The labor force participation rate seems to be heading back towards the lows of last September, which puts the number back towards lows not seen since the 1970s. The population increased by 205k while the labor force fell by 458k. The unemployment rate fell to 4.7%, however that is due to half a million people exiting the labor force.

The conclusion from the markets? Take June off the table. The market probability of a rate hike in June is now about 4%. You can see this in bonds: The 10 year bond yield fell 9 basis points on the report, but the real tell is the 2-year, which fell 11 basis points to 78 basis points. Between this report and the fears over Brexit (The UK leaving the EU) gives Janet Yellen enough uncertainty to not want to upset the apple cart any more. The focus will now turn to July. You can see the dramatic move lower in yields below:

Mortgage Credit Availability fell in April, according to the MBA. We saw tightening primarily in jumbos and high balance loans, which were offset by loosening in the new low-downpayment conforming loans.