Morning Report: Self-employed borrowers get some help from Congress

Vital Statistics:

	Last	Change
S&P futures	2911	-3.75
Eurostoxx index	385.16	-1.42
Oil (WTI)	69.93	0.42
10 year government bond yield		2.86%
30 year fixed rate mortgage		4.55%

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

Donald Trump is suggesting that a new NAFTA could be in place by the end of the week. One sticking point is removing a provision that inhibits the US from pursuing anti-dumping and anti-subsidy cases. Mexico has agreed, but Canada is still fighting it. 

Initial Jobless Claims slipped 1K to 213,000 last week. 

Personal incomes rose 0.3%  and personal spending rose 0.4% in July, which was right in line with estimates. The PCE inflation index came in at 0.1% MOM / 2.3% YOY, and the core PCE index rose 0.2% MOM / 2.0% YOY. Inflation is pretty much right at the Fed's target, which means they don't have to move quickly to increase rates and can still just gradually lift off the lower bound. 

A Reuters poll of real estate experts suggests that home prices will rise 6% this year and then begin to taper off the growth. Limited inventory has pushed up home prices well in excess of wage growth and inflation over the past 6 years. That sort of phenomenon can work when interest rates are falling, as the lower mortgage payment offsets the higher prices, but that game is over. 

Congress is entertaining legislation that will make it easier for self-employed borrowers to get a mortgage. The bipartisan "Self-Employed Mortgage Access Act" will address the needs of borrowers who don't have traditional W-2 income. Sponsor Mark Warner said: “An increasing number of Americans make their living through alternative work arrangements, like gig work or self-employment. Too many of these otherwise creditworthy individuals are being shut out of the mortgage market because they don’t have the same documentation of their income – paystubs or a W-2 – as someone who works 9-to-5. This bill will allow these workers to supply other forms of paperwork to verify their income while continuing to protect consumers from predatory lending.” The bill will expand the universe of income documentation to allow these borrowers to fall under QM. The bill is supported by the MBA and the Consumer Federation of America. 

The Great Recession left what looks to be a permanent gap between potential GDP and actual GDP, which amounts to something like $70,000 per person. You can see the output gap in the chart below. Interestingly, the word "bubble" appears nowhere in the article - it is as if the financial crisis appeared out of nowhere, which certainly demonstrates a blind spot for the Fed (and central bankers in general). 

They don't take into account that the trajectory of growth (beginning in 1998 through 2006) was artificially boosted due to increasing asset prices. The trajectory begins with the stock market bubble and ends with the real estate bubble. Granted the late 90s growth was also influenced by a boom in productivity, but that ended soon after. I always find it interesting that central bankers believe "too much money chasing too few goods" (i.e. inflation) is a monetary phenomenon, but "too much money chasing too few assets" (i.e. asset bubbles) is not. 

Morning Report: Q2 GDP revised upward

Vital Statistics:

	Last	Change
S&P futures	2899	-1
Eurostoxx index	385.81	0.35
Oil (WTI)	69.08	0.55
10 year government bond yield		2.88%
30 year fixed rate mortgage		4.55%

Stocks are flat this morning after GDP came in better than expected. Bonds and MBS are down small. 

Mortgage Applications fell 1.7% last week as purchases fell 1% and refis fell 3%. This is despite a drop in rates. 

Second quarter GDP was revised upward to 4.2% from 4.1%, which was higher than the street estimate of 4.0%. The main revisions were to consumption (downward) and fixed residential investment (upward). Inventories were a drag on GDP, which means that we should see a bump to Q3's numbers. The GDP price index was also revised up a touch, from 1.8% to 1.9%. All of this provides a good environment for the Fed to ease back from the zero bound. 

Mortgage bankers made $580 per loan in the second quarter, an increase from $118 in the first quarter. Banks cut costs aggressively (dropping production costs per loan by about $1,000) however declining volumes offset that, and this turned out to be the weakest quarter since the MBA began keeping records in 2008. That $580 represents a profit of 21 basis points per loan, which was a drop form 24 bps a year ago. Fee income dropped to 341 bps from 370 in the first quarter. Refis continue to decline, with purchases accounting for 81% of all volume. 

Here is something wild. Last night, there were no trades in the JGB market (the world's second largest bond market). This is the 7th time this has happened this year. The Bank of Japan basically controls the market, and trading has dried up. We live in interesting times, at least if you are a central banker. 

Pending Home sales fell 0.7% in July, according to NAR. Lawrence Yun, NAR chief economist, says the housing market’s summer slowdown continued in July. “Contract signings inched backward once again last month, as declines in the South and West weighed down on overall activity,” he said. “It’s evident in recent months that many of the most overheated real estate markets – especially those out West – are starting to see a slight decline in home sales and slower price growth.” Blame tight supply, which has driven up prices to unaffordable levels. 

The housing slowdown has not been lost on the stocks of the homebuilders, who despite strong earnings (and an incredibly strong stock market) are down 14% YTD. At some point, the sector will be unable to rely on increasing ASPs and will have to pump up volume to show growth. Despite the clear need for new housing, especially at the starter level, builders seem content to meter their growth and plow excess cash into buybacks. 

Morning Report: The Fed worries about the yield curve

Vital Statistics:

			Last	Change
S&P futures			2903	3
Eurostoxx index			386.36	.8
Oil (WTI)			68.91	0.02
10 Year Government Bond Yield				2.87%

30 Year Fixed rate mortgage                              4.58%

Stocks are higher this morning on optimism over trade talks with Mexico. Bonds and MBS are down. 

We saw a strong buildup of inventory in July, both at the retail level and the wholesale level. Inventory growth was negative in the second quarter, which depressed GDP growth slightly. This improvement in inventories will provide a boost to the third quarter numbers. Durable goods and autos led the increase, with retail inventories up 0.4% and wholesale inventories up 0.7%. 

Redbook reported that same store sales rose 5.1% last week, which was the third fastest pace this year. This bodes well for the back-to-school numbers which are the best predictors of the holiday shopping season. Consumption has been generally strong and these numbers bear that out.

Consumer confidence jumped to 133.4 in August according to the Conference Board. This is the highest level since late 2000. 

House prices rose 6.2% in June, according to the Case-Shiller home price index.  Las Vegas, San Francisco, and Seattle reported double-digit increases. The laggards included New York, Chicago and Washington DC which reported low single-digit gains. Las Vegas is one of the fastest growing US cities in terms of population and employment growth, which explains the rise there. Seattle and San Francisco has restricted supply along with foreign demand. On the other side, the Northeast continues to stagnate. 

The Urban Institute looked at mortgage denial rates along demographic lines and found that most of the studies that report discrimination overstate denial rates because they fail to take into account incomes and credit scores. While they still found some evidence of racial disparity it is much lower when you correct for these things. Not sure if the difference is statistically significant though. Given that CRA loans are worth more than traditional loans (all things being equal) it is surprising that there is any difference at all. 

As the long end of the curve continues to rally, we will have a steady diet of recession prediction stories in the business press. The latest Reuters story cites a Federal Reserve study that suggests the market may be warning of a potential recession: “In light of the evidence on its predictive power for recessions, the recent evolution of the yield curve suggests that recession risk might be rising,” wrote San Francisco Fed research advisers Michael Bauer and Thomas Mertens. 

The flattening yield curve provides plenty of fodder for the Wall of Worry, however there are a couple of things to bear in mind. First, the yield curve almost always flattens during a tightening cycle. Take a look at the chart below, and you can see the yield curve flatten as short term rates rise. 

The behavior of the yield curve is 100% normal. Not only that, longer term interest rates are being held artificially low due to the behavior of central bankers throughout the world. The Fed is still buying Treasuries, albeit at a slower pace, while Japanese and European central bankers are pushing down long-term rates, which influences US rates. The signal-to-noise ratio of the yield curve is extremely low right now. Finally, the short Treasury trade is probably the biggest macro bet on the Street right now. Every wiseguy is short, and that means you will sometimes get these rallies for no apparent reason. 

Morning Report: Moody's downgrades Chase's jumbo status

Vital Statistics:

			Last	Change
S&P futures			2888	11
Eurostoxx index			385	0
Oil (WTI)			68.79	0.02
10 Year Government Bond Yield				2.82%
30 Year fixed rate mortgage				4.58%

Stocks are higher this morning on news that the US and Mexico might strike a deal on NAFTA. Bonds and MBS are flat. 

We should have a quiet week heading into the Labor Day weekend. We will get GDP on Wednesday and Personal Incomes / Personal spending on Thursday and those are probably the only potential market-moving reports. 

Mohammed El-Arian believes there is a 60% chance that Trump's hard line on trade will result in a better deal for the US. There is a 15% chance that Trump's stance could result in a beakthrough with China (similar to Reagan's approach with the USSR during the Cold War), and another 25% chance that we go into a full blown trade war. He stressed that the US's role as the world's biggest consumer matters: “I’ve said from day one, it’s just a matter of time until other countries realize that their best approach is to collaborate with the U.S. and fix things that are broken,” El-Erian said.

Moody's downgraded Chase's jumbo underwriting rating to "above average" from "strong" based on concerns over the percentage of loans that come from its delegated correspondent channel. Moody's also dinged them over their proprietary LOS (licensed from Quicken), disliking the look and feel of it. Chase obviously disputes the downgrade, and defended their underwriting. "We respectfully disagree with the rating and feel it's based on insufficient information. While we provide select correspondent lenders with delegated underwriting authority, we also then conduct individual underwriting reviews on roughly half of those loans. These are high-quality loans that perform well," Amy Bonitatibus, chief marketing and communications officer of Chase Home Mortgage, said in an email.

Elon Musk ended his proposed buyout of Tesla late last week. The Street never took it seriously to begin with, and was highly skeptical of his claim that funding for the deal was secured. The SEC is investigating the "funding secured" comment, which sounds like it was based largely on the existence of a pitch book, not any sort of letter from an investment bank (not even a "highly confident" letter). 

Layoffs continue in the mortgage biz. Wells let go 600 people, mainly in servicing and retail fulfillment. Lower volumes and margins contributed to a 33% drop in mortgage banking income for Wells in the second quarter. 

Economic activity decelerated in July, according to the Chicago Fed National Activity Index, which is a meta-index of 85 economic indicators. Production-related indicators decelerated, while employment-related indicators improved. The 3 month moving average fell as well. 

Morning Report: Jerome Powell speaks in Jackson Hole

Vital Statistic:

			Last	Change
S&P futures			2865	6.75
Eurostoxx index			383.72	0.32
Oil (WTI)			68.91	1.08
10 Year Government Bond Yield				2.85%
30 Year fixed rate mortgage				4.58%

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

Another slow news day. Low level talks between China and the US over trade didn't really go anywhere. 

Durable Goods orders fell 1.7% in July on weak aircraft orders, but the core capital goods rate jumped 1.4%, which shows another month of strong business investment, particularly business equipment. Many economists had been skeptical that cutting corporate taxes would increase capital expenditures, but it looks like it has. Theory certainly predicted it would. 

Jerome Powell is speaking in Jackson Hole this morning. There probably won't be anything market moving, but just be aware. The conference will focus on a academic papers for the most part. The agenda is here. One of the papers argues that the Fed should continue to hike rates, even in the absence of current indications of inflation, if the unemployment rate is below the long-term sustainable rate. Since monetary policy acts with a lag, a low unemployment rate can increase inflationary pressures before monetary policy takes effect. 

The Fed faces two major risks of “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating,” said Mr. Powell. “I see the current path of gradually raising interest rates as the [Federal Open Market Committee’s] approach to taking seriously both of these risks. In other words, expect maybe 2 more hikes this year, and maybe one or two more next year.

The Fed funds futures increased their handicapping of a Dec hike slightly, to 68% (Sep is a given). Longer term, the September 2019 futures predictions look like this:

The central tendency seems to be 2 more hikes this year, one more next year, and then the Fed takes a break. Slightly more people think the Fed stops after 2 hikes than those who think the Fed does 4 or more.

St. Louis Fed President James Bullard would vote to maintain the current Fed Funds rate through the end of the year. “If it was just me, I’d stand pat where we are and I’d try to react to data as it comes in,” he said Friday in an interview with CNBC’s Steve Liesman. “I just don’t see much inflation pressure. ... I’m an inflation hawk, but I just don’t see that developing. ... I just don’t think this is a situation where we have to be pre-emptive.” He also sees the economy slowing next year, and in 2020. 

The Senate Banking Committee voted 13-12 along party lines to advance the nomination of Kathy Kraninger to run the CFPB. Remember if Kraninger is rejected, Mick Mulvaney continues to run the agency, which was probably the plan all along. 

Morning Report: No surprises in the FOMC minutes

Vital Statistics:

			Last	Change
S&P futures			2858	-2.75
Eurostoxx index			384.09	0.07
Oil (WTI)			67.46	-0.4
10 Year Government Bond Yield				2.81%
30 Year fixed rate mortgage				4.58%

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

The FOMC minutes didn't offer anything too surprising. Most participants said it would be appropriate to raise rates soon, which wasn't a surprise - the Fed Funds futures have a Sep hike as pretty much a sure thing. They worried about how trade could be a downside risk to the economy, especially if it affects business sentiment, investment and employment. They mentioned that in the "not too distant future" monetary policy will no longer be viewed as accomodative. This statement seems to hint that rate hikes should wind up next year, provided inflation remains around these levels. Note that the head of the Dallas Fed suggested that the tightening cycle might be done once we get 75 - 100 basis points higher on the Fed Funds rate.  Bonds didn't react to the minutes at all, and the Fed Funds futures didn't budge either. 

There wasn't much talk about reducing the size of the balance sheet, which is more or less on autopilot right now. As the yield curve flattens, you would think the Fed would consider getting more aggressive on the balance sheet unwind. Maybe not on the mortgage backed securities side, but on the Treasury side. If credit is still widely available and the demand is there, why not? If the ducks are quacking, feed 'em. 

Central Bankers are meeting in Jackson Hole today. There usually isn't much in the way of market-moving statements out of these things, but just be aware. 

Initial Jobless Claims fell to 210,000 last week. We are bumping around levels not seen since 1969. When you consider the fact that the US population was only 200 MM back then (compared to 325 MM today), it is even more impressive. It certainly has economists scratching their heads. 

Home prices rose 0.2% in June and 1.1% for the second quarter, according to the FHFA House Price Index. The second quarter's pace was the slowest increase in 4 years, which shows that higher interest rates are beginning to have an effect on prices. Prices did rise in all 50 states and 99 out of 100 MSAs. 5 states (NV, ID, DC, UT, and WA) had double digit increases. The Las Vegas MSA had the biggest increase - almost 19%. The laggards were CT, AK, ND, LA, and WV. 

Heidi Heitkamp, a moderate Democrat from North Dakota says she will not support Kathy Kraninger to run the CFPB. She said she was inclined to vote yes, however she is concerned about Kraninger's experience in consumer protection and also felt she "lacked empathy" for consumers and didn't believe in the Bureau's mission. Heitkamp has been supportive of regulatory relief, which means she was a gettable vote. Kraninger's nomination looks largely to fall along partisan lines now. 

New Home Sales fell 1.7% MOM to 627,000, which was below the Street estimate of 649,000. It is up 12.8% on a YOY basis however. The new home inventory situation is getting more balanced, with 5.9 month's worth of supply. As always, the question is whether that inventory represents the oversupplied luxury market or the undersupplied starter market. 

Morning Report: Existing home sales fall again

Vital Statistics:

			Last	Change
S&P futures			2856	-5.75
Eurostoxx index			383.91	-0.25
Oil (WTI)			67.32	0.89
10 Year Government Bond Yield				2.82%
30 Year fixed rate mortgage				4.58%

Stocks are modestly lower this morning after Paul Manafort was found guilty and Michael Cohen copped a plea. Bonds and MBS are flat.

Paul Manafort was found guilty of fraud and tax charges and there was a mistrial on the other charges. Nothing was found on the Russian front. Ex Trump lawyer Michael Cohen pled guilty to FEC violations, which relates to the Stormy Daniels case. Whether this ends up getting legs remains to be seen. FWIW, the markets are saying it is no big deal. 

We will get the FOMC minutes today at 2:00 pm. Given the lack of liquidity in the markets, we could see some market movement in what should otherwise be a non-event. 

Mortgage applications rose for the first time in 6 weeks as purchases rose 3% and refis rose 6%. Overall they rose 4.2%. Mortgage rates were unchanged, so that is a surprising jump in refi activity. Given that the index is sitting at lows not seen since the turn of the century, it doesn't take much of a bump in activity to move the index. 

Existing home sales fell again for the fourth month in a row. They fell 0.7% on a MOM basis and are down 1.5% on a YOY basis. This is the fifth straight month of YOY declines. It looks like much of the decline was attributable to weakness in the Northeast. The median house price rose 4.5% to 269,600.  Current estimates of median income are around 61,500, so that puts the median house to median income ratio around 4.4x. While other measures of housing affordability remain decent, this one is flashing red for valuations overall. The MP / MI ratio ignores interest rates, which are the biggest determinant of affordability, but over time house prices correlate with incomes, and it wouldn't be a surprise to see home prices begin to take a breather. 

Fed Chairman Jerome Powell assured Senator Tim Scott that the Fed remains independent despite the jawboning from Trump. Powell said in a radio interview: “We do our work in a strictly nonpolitical way, based on detailed analysis, which we put on the record transparently, and we don’t ... take political considerations into account,” Powell told the radio show. “I would add though that no one in the administration has said anything to me that really gives me concern on this front.” Separately, Dallas Fed Chairman Robert Kaplan said that the Fed only needs to hike 3 or 4 more times to get to neutral. 

Morning Report: Housing inventory is still falling, albeit at a slower rate

Vital Statistics:

			Last	Change
S&P futures			2862	4
Eurostoxx index			384.93	1.7
Oil (WTI)			67.47	1.04
10 Year Government Bond Yield				2.83%
30 Year fixed rate mortgage				4.58%

Stocks are higher this morning as earnings season winds down. Bonds and MBS are down. 

Same store sales rose 4.7% last week, which is indicative of a strong back-to-school shopping season. BTS is a good predictor of the holiday shopping season, which would support strong GDP growth for the rest of the year. Consumption is about 70% of US GDP. Current projections are looking at north of 3% growth for the year.

The Fed Funds futures are now handicapping a 96% chance of a Sep hike and a 63% chance of a Sep and Dec hike. Meanwhile, the yield curve continues to flatten. 

Trump made some comments about Fed Chairman Jerome Powell at a fundraiser, saying that he expected him to be a "cheap money guy" and didn't expect him to raise interest rates. He also tweeted that he is "getting no help" from the Fed. While publicly discussing monetary policy is not a normal thing for the President to do, wishing rates were lower is. The only politicians who want higher rates are the ones not in power. He also called the Europeans and the Chinese currency manipulators. Under any other President this would be big, but the dollar and the bond market largely ignored it. It  shows that markets are largely dismissing "Donald being Donald" communiques from the WH.  

The YOY declines in inventory that have bedeviled the industry are beginning to moderate, at least according to Redfin. Inventory was down 5.8% in July, which is lower than the double-digit decreases we had been seeing. The median sales price rose 5.3%. Homes went under contract in 35 days, which is 3 days faster than a year ago. Activity is slowing in some of the hotter markets however, especially Washington DC. The inventory issue won't be fixed until we get housing starts back to some semblance of normalcy, which means a few years of 2MM units before returning to historical averages of around 1.5MM. 

Toll Brothers reported strong numbers this morning, which has sent the stock up 11%. Revenues were up 27% and deliveries were up 18%. Backlog rose 22% in dollars and 13% in units. They also bought back about $137 million worth of stock, which accounts for about 70% of earnings. Robert I. Toll, executive chairman, stated: “We believe there is room for continued growth in the new home market in the coming years. Household formations have been increasing and in many regions the aging housing stock may not satisfy the lifestyles of today’s buyers. Yet new home production has not kept pace with the growth in population and households. On the single-family side, housing starts, other than during the anemic years of this recovery, are at their lowest level since 1970. In addition, existing home values have increased, providing potential move-up and empty nester customers with more equity that they can put toward a new home purchase. We believe these two groups, along with the growing number of millennials starting to buy homes, are all sources of potential new demand in the coming years.”  

I find it interesting that he talks about the low level of housing starts, while at the same time spending 70% of Toll's net income on buybacks. Certainly the actions don't seem to match the words. 

Morning Report: Fannie Mae cuts housing forecast.

Vital Statistics:

			Last	Change
S&P futures			2855.5	3.8
Eurostoxx index			383.49	2.43
Oil (WTI)			65.92	0.02
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.58%

Stocks are higher this morning on optimism of a deal with China. Bonds and MBS are up small. 

Late August is a generally dull time to begin with, and this week promises more of the same. We will get some housing data (Existing home sales, new home sales, FHFA price index) and one possible market-moving report (durable goods) but that is about it. We will get the FOMC minutes on Wednesday as well. 

Liquidity is drying up in the bond market as it usually does this time of year. Note that the short bond position is one of the biggest on the Street, so we could see some quick rallies in the 10 year. 

Flagstar has been released from special oversight that limited its corporate options to pay dividends, make acquisitions, etc. 

Luxury apartments in NYC are falling in price, after years of torrid growth. Some are blaming the new tax laws, however some could be from falling foreign demand. We are seeing the same thing in London. Note that luxury properties in the suburbs of NYC are doing the same thing. You can't give away properties priced at $1MM + 

Fannie Mae cut their housing forecast for 2018 for the 4th time this year. They are looking for $1.67T in originations this year and $1.7T next year. The 30 year fixed rate mortgage is expected to average 4.5% this year and 4.7% next year. They are also forecasting a major slowdown in GDP growth, from 3% this year to 2.3% next year. 

Morning Report: Housing starts disappoint

Vital Statistics:

			Last	Change
S&P futures			2832	11
Eurostoxx index			380.51	0.81
Oil (WTI)			65.03	0.02
10 Year Government Bond Yield				2.87%
30 Year fixed rate mortgage				4.58%

Stocks are higher this morning on a potential that in trade tensions. Bonds and MBS are flat.

Initial Jobless Claims fell to 212k from 215k last week. 

Housing starts came in below forecasts for June - rising an anemic 0.9% to 1.17 million. They are down 1.4% on a YOY basis. Most areas showed modest increases, except for the West, which fell substantially. Permits were a little better, rising 1.5% MOM and 4.2% YOY. These numbers echo the drop in homebuilder sentiment, which is being driven by rising construction costs and labor shortages. "The solid economic expansion and firm job market should spur demand for new single-family homes in the months ahead," NAHB Chief Economist Robert Dietz said in a statement. "Meanwhile, builders continue to monitor how tariffs and the growing threat of a trade war are affecting key building material prices, including lumber. These cost increases, coupled with rising interest rates, are putting upward pressure on home prices and contributing to growing affordability challenges."

In the wake of the residential real estate bubble, the government has focused on regulatory solutions to fraud in the single family market. However, multifam was largely left alone, and it looks like the government is in the process of investigating an upstate NY developer which has about $1.5 billion in loans backed by the GSEs which may have been made under fraudulent circumstances. Apparently things like tenant income go unverified on these sorts of loans, and it is a systemic problem. 

Here are 3 misconceptions about credit scores: First, carrying a balance on revolving credit does not increase your score. Second incomes do not factor in a credit score (they aren't even tracked) and finally, your spouse's credit score and your own are completely independent. 

The Trump Administration is looking to tweak the Volcker rule in order to give banks a brighter line on what constitutes proprietary trading. The banks are not interested, surprisingly. Currently, the rule says banks need to hold a security for longer than 60 days in order to prove they aren't proprietary trading. The proposal would track the "available for sale" securities account and test it that way. From the bank's standpoint, brighter lines are better, but having spent a lot on internal controls to ensure compliance with the new rules, they don't seem anxious to re-do it. 

At the end of the day, market-making is largely dead, having been done in by declining bid-ask spreads, electronic trading, regulations, and declining brokerage fees. It simply is a money-losing business any more. The next crash is going to be an eye-opener when large swaths of the markets simply go no-bid. 

Morning Report: Mortgage delinquencies continue to fall

Vital Statistics:

			Last	Change
S&P futures			2824	-16.5
Eurostoxx index			380.78	-4.14
Oil (WTI)			66.49	-0.55
10 Year Government Bond Yield				2.86%
30 Year fixed rate mortgage				4.58%

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

Kind of a mixed bag with economic data this morning. 

Retail Sales came in well above expectations in July, with the headline number rising 0.5%. The control group, which excludes autos, gas, and building materials was up the same amount. While July's numbers were strong, June's estimate was revised downward, so expect to see a downward revision on Q2 GDP from the first estimate of 4.1%.

Mortgage Applications fell 2% last week as purchases fell 3% and refis were flat. The typical mortgage rate fell 3 basis points, which helped push refis up to 37.6% of all mortgages. 

Productivity increased 2.9% as output increased 4.8% and hours worked increased 1.9%. Compensation costs increased 2%, so with the productivity gain, unit labor costs fell 0.9%. This will certainly make the Fed happy, as higher productivity leads to higher non-inflationary wage growth and higher standards of living. This is the preliminary estimate for the second quarter and will be subject to revision. 

Industrial production only managed a 0.1% gain in July, and manufacturing production was up 0.3%. June numbers were revised sharply higher, so that offset the weakness. Capacity Utilization was flat at 78.1%. 

Homebuilder confidence slipped last month to the lowest in a year as labor shortages and higher material prices dampen sentiment. “The good news is that builders continue to report strong demand for new housing, fueled by steady job and income growth along with rising household formations,” said NAHB Chairman Randy Noel, a homebuilder from LaPlace, La. “However, they are increasingly focused on growing affordability concerns, stemming from rising construction costs, shortages of skilled labor and a dearth of buildable lots.”

Despite the strong economic news, we are starting to see a bit of a risk-off trade in the structured credit market. Bank of America has gone negative on structured products and agency MBS. This means that mortgage spreads are widening which will either lead to higher mortgage rates or lower profit margins (probably a bit of both). That said, B of A is calling for a flattening of the yield curve, which will offset the wider spreads at least somewhat. 

The strong economy is lowering delinquencies, according to CoreLogic. The 30 day + DQ rate fell from 4.5% to 4.2% in May. Seriously delinquent rates are lower overall, except for the hurricane hit states of Florida and Texas. The California wildfires have the potential to goose up DQ rates in the coming months. 

Morning Report: Small business confidence soars

Vital Statistics:

			Last	Change
S&P futures			2833	7.5
Eurostoxx index			385.12	0.21
Oil (WTI)			67.99	0.79
10 Year Government Bond Yield				2.88%
30 Year fixed rate mortgage				4.58%

Stocks are higher this morning after the Turkish Lira rallied 6%. Bonds and MBS are flat. 

Import prices were flat in July but were up just under 5% on a YOY basis. This was pretty much all driven by oil prices which are inherently volatile and self-correcting. 

Small business optimism is near record highs according to the NFIB. Availability of workers remains a big concern, and we are seeing record levels of compensation increases. Note that many of these comp increases are planned, so there will be a 9 month lag before it shows up in the government data. Credit availability is a non-problem. The biggest headache for small business is availability / quality of labor, not the cost of labor. I don't know that we have cost-push labor inflation quite yet, but if that is the case, then it won't be good for mortgage rates as it will primarily affect the long end of the curve. 

HUD is electing to discontinue the Obama Administration's controversial interpretation of the AFFH rule from the 60s, which means it no longer will be suing towns to force them to change their zoning codes to allow multi-family housing. HUD will focus on eliminating regulatory impediments to building more housing, and will tie grants to measures which increase building. In other words, The Obama Admin used a stick approach, while the Trump Admin will use a carrot approach. 

Home prices rose 0.7% MOM and 6.8% YOY in June according to CoreLogic. They are forecast to rise 5% over the next year. Sales in the red-hot markets are down double digits as affordability issues and lack of inventory crimp activity. 

The Despot reported better than expected earnings as homeowners choose to fix up their existing place instead of trying to move in a tight real estate market. Better weather helped the company rebound from their sales miss in the first quarter. 

Morning Report: Turkish situation continues to degenerate

Vital Statistics:

			Last	Change
S&P futures			2836	-0.55
Eurostoxx index			384.89	-0.96
Oil (WTI)			67.37	-0.26
10 Year Government Bond Yield				2.88%
30 Year fixed rate mortgage				4.58%

Stocks are lower as the Turkey situation snowballs to other emerging markets. Bonds and MBS are up on the flight to quality trade. 

Financial markets are being driven by the situation in Turkey, with the Turkish Lira continuing to depreciate. This has spread to other emerging markets currencies like the South African Rand. The Chinese currency has hit the lowest level in a year, which is bound to increase trade tensions with the US. There is the potential for this to affect the balance sheets of some European banks, however the US will be pretty much insulated from it. The most likely effect is that it will cause a flight to quality to the US dollar which will keep a lid on interest rates.

The Turkish crisis hasn't affected the Sep Fed Funds futures, which are handicapping a 94% of a hike, but they have tempered the probability of a follow-on hike in December. It isn't a dramatic move, but we have slipped from 66% to 61%. 

We won't have much in the way of market-moving data this week - retail sales on Wednesday will be the only one that matters. We will also get housing starts on Thursday. Other than that, it should be a dull week. 

Ben Carson is changing the way HUD encourages multifamily real estate development. The Obama HUD used the stick approach - suing local governments to force them to change their zoning rules, based on demographic analysis. The Carson HUD will use the carrot approach - tying grants to changes in zoning restrictions. 

Conventional financing accounted for 69% of all financing last year. Of the non-conventional types of financing, FHA loans led with 12%, followed by cash with 10% and VA with 4%. 

Elon Musk clarified his tweet regarding taking Tesla private. He decided to use Twitter in order to notify the public of his intention to take the company private. Most companies file an 8-K with the SEC and do a press release, but Elon decided to use Twitter. Second, his "funding secured" comment was based on a conversation with the Saudi Sovereign Wealth Fund who asked if Tesla was interested in selling to the fund. Musk then looked at the assets of the fund, concluded they had the money, and then tweeted that funding was secured. One thing is for sure, if this deal ever happens, the background section of the proxy statement is going to make for some entertaining reading. 

Morning Report: Median home ages climb

Vital Statistics:

			Last	Change
S&P futures			2842	-11.5
Eurostoxx index			386.37	-3.68
Oil (WTI)			67.28	0.48
10 Year Government Bond Yield				2.90%
30 Year fixed rate mortgage				4.58%

Stocks are lower this morning on overseas weakness. Bonds and MBS are up on the risk-off trade. 

Inflation at the consumer level remains under control, with the Consumer Price Index rising 0.2% MOM and 2.9% YOY. Stripping out food and energy, it rose 0.2% / 2.4%. A big driver of the increase was shelter, adding 0.3%. Food rose slightly while energy declined.

The EU and the US are scheduled to meet to discuss ways to bring down tariffs. The US would like to see more soybean and energy exports to the Continent, and is hoping to derail a potential pipeline of natural gas from Russia to Germany. 

The Turkish Lira is in freefall, and there is discussion of how that will affect Euro banks, specifically BBVA, BNP Paribas, and Unicredito. Yields on the Turkish 10 year bond have hit 20%. This is causing a flight to quality which is benefiting US bonds. While Turkey is probably not big enough to cause any sort of contagion, it could cause the ECB to go a little slower on policy normalization. Note Trump is stirring the pot, threatening to double tariffs. 

Fannie Mae has also announced forbearance policies for borrowers affected by the California wildfires. Borrowers can get up to 12 months forbearance without penalty if they live in FEMA-designated disaster areas. 

The average age of a home is 37 years old, according to the American Communities Survey. This really speaks to how weak housing starts have been since the real estate bubble burst. Pre-bubble they averaged 1.5 million a year. 

Slower delivery times are beginning to affect manufacturers (and their earnings reports). Ultimately, bottlenecks are usually inflationary. This is also the downside of making supply chains elongated and lean - capacity is maxed so meeting incremental demand requires investment that many firms are reluctant to make. The good news is that demand is strong, but the downside is that this is yet one more inflationary issue. The odd thing is that capacity utilization is sitting at 78%, which is about the historical average. 

Morning Report: Despite good labor news, more people worried about their jobs

Vital Statistics:

			Last	Change
S&P futures			2859	3.5
Eurostoxx index			389.41	-0.28
Oil (WTI)			67.29	0.35
10 Year Government Bond Yield				2.94%
30 Year fixed rate mortgage				4.58%

Stocks are higher this morning on decent earnings. Bonds and MBS are up.

Very slow news day. 

Initial Jobless Claims fell to 213,000 last week, an exceptionally low level. The 4 week average is sitting at 45 year lows. 

Inflation at the wholesale level was surprisingly weak in the first of two inflation readings this week. The Producer Price Index was flat MOM and rose 3.3% YOY. Ex-food and energy, it rose 0.1% MOM / 2.7% YOY. Tariffs explain some of it, but freight and packaging costs pushing prices higher too. 

Freddie Mac has extended mortgage forbearance measures due to the wildfires in California. Borrowers in FEMA-declared disaster areas may be allowed to suspend mortgage payments without penalty for up to a year. Fannie Mae is expected to do something similar. 

Fannie Mae's Home Purchase Sentiment Index fell in July for the second consecutive month as inventory and affordability issues weighed on homebuyer moods. The net number of respondents who think it is a good time to buy fell by 4 percentage points and the number who think it is a good time to sell fell by 6. Most respondents think mortgage rates and home prices will rise over the next year. One interesting data point: a big jump in the number of people who are worried about their job. The net number of people (% who are concerned less the % who are not concerned) fell by 11 percentage points. This certainly flies in the face of the data out there, and sentiment surveys are usually not very predictive, but it is a surprise. 

Morning Report: Refinance applications hit an 18 year low

Vital Statistics:

			Last	Change
S&P futures			2857	-2.75
Eurostoxx index			389.8	-0.69
Oil (WTI)			68.41	-0.76
10 Year Government Bond Yield				2.99%
30 Year fixed rate mortgage				4.58%

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

Mortgage applications fell 3% last week as purchases fell 2% and refis fell 5%. Activity overall has fallen to a 19 month low. The refi index has is at an 18 year low. 

Mortgage credit availability increased in July, although it tightened for government loans. The MBA's MCAI increased 1.7%, which is a post-crisis high, but nowhere near what it was during the bubble years.  "Credit availability continued to expand, driven by an increase in conventional credit supply. More than half of the programs added were for jumbo loans, pushing the jumbo index to its fourth straight increase, and to its highest level since we started collecting these data. There was also continued growth in the conforming non-jumbo space, which reached its highest level since October 2013," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. Note that some observers think the MCAI understates how loose credit is, when you look at things like LTV and credit scores. 

Separately, US banks eased lending standards for business loans. The report noted increased demand for business loans, and decreased demand for commercial real estate loans. As mortgage lending dries up, banks are competing more for small business loans, although increased liquidity in the secondary market for these loans also helped. 

Elon Musk proposed the largest LolBO ever on Twitter yesterday, saying he was thinking of taking Tesla private at $420 a share. He claims he has funding secured, which is quite the statement. Even in this market, raising $71 billion isn't the easiest thing in the world, especially for a negative cashflow company trading with an EV / EBITDA in the 150s.  Perhaps the price should have tipped people off that this was a joke, but apparently it isn't. 

The NAHB conducted a survey of potential homebuyers, and only 14% are planning to buy a home in the next year. That number was 24% in the fourth quarter of 2017. Of those planning to buy a home, 61% are first time buyers, of which 71% are Millennials. Most are noting that the number of homes for sale with the desired features and price point are smaller than they were 3 months ago. 

Morning Report: Home prices rise 6.8% in June

Vital Statistics:

			Last	Change
S&P futures			2856	6
Eurostoxx index			391.01	2.35
Oil (WTI)			69.62	0.61
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.58%

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

There were 6.7 million open jobs in June, according to BLS. The all-important quits rate was unchanged at 2.3%. The quits rate is a leading indicator for wage growth and is a stat the Fed follows closely. The quits rate was highest in the South and Midwest, and lowest in the Northeast. If you look at industry groups, one group stands out with a quits rate that is going nowhere. Financial Services.

Home Prices rose 0.7% MOM in June, according to CoreLogic. They are up 6.8% YOY and forecast to rise another 5% over the coming year. Rising mortgage rates and home prices are affecting sales in the high cost markets. They also surveyed renters and found that affordability is the biggest reason why they aren't interested in buying a home. For older renters, affordability isn't the biggest issue - probably convenience is - although a jump in bankruptcy filings in the senior citizen demo is on the rise. We are seeing large pockets of overvaluation on the coasts, but the interior of the country is undervalued.

Freddie Mac is trying a new program to enhance rental affordability: providing low-interest loans to developers who promise to cap rental inflation. This is certainly a less intrusive way to deal with the affordable housing problem. The West Coast is finding that affordable housing mandates are pushing developers to scrap projects entirely and local governments are being pushed to override zoning restrictions. Freddie's program is a way to incentivize the private sector into doing something: “Maybe there’s a way we can help change incentives,” said David Brickman, an executive vice president at Freddie Mac and head of its multifamily division. “We can provide an economic basis for private, profit-oriented developers to pursue a strategy where they didn’t raise rents by quite as much. You’re taking some of the opportunity to hit a home run off the table but arguably making it more likely you can hit a single or a double.”

Washington is hoping to address the affordable housing crisis by allowing tax credits for low-income renters who spend more than 30% of their income on rent. Cory Booker's plan also looks to ease some of the regulatory burden in building new housing as well as introduce a new savings plan for renters.

What is it with tech companies who have a competitive edge wanting to diversify into hyper-competitive low-margin businesses? The latest is Zillow, which has decided it is time to get into the mortgage business. Wall Street panned the move, sending the stock down 20%. Part of the decline was due to lousy earnings, but still....