Morning Report: A tell in the mortgage REITs

Vital Statistics:

	Last	Change
S&P Futures	2346.0	8.8
Eurostoxx Index	377.5	1.1
Oil (WTI)	52.4	0.0
US dollar index	89.7
10 Year Govt Bond Yield	2.20%
Current Coupon Fannie Mae TBA	103.15
Current Coupon Ginnie Mae TBA	104.3
30 Year Fixed Rate Mortgage	3.97

Stocks are rebounding this morning after yesterday's big sell-off. Bonds and MBS are down small. 

Mortgage applications fell 1.8% during a holiday-shortened week. Purchases were down 3% while refis rose .2%. Note that the 10 year yield fell 15 basis points last week, so we should continue to see follow through in refis. 

The 10 year bond yield slipped below 2.2% yesterday, hitting the lowest point since the immediate post-election rate rise. The Trump reflation trade is unwinding as the market reckons that nothing is going to get done in Washington, which is probably a safe bet at this point. 

While the rest of the world frets about what will happen when the Fed starts shrinking its balance sheet (can we call it quantitative tightening?), there is one sector that is surprisingly sanguine: the mortgage REITs. American Capital Agency and Annaly Capital are both up some 18% since rates peaked in December. Yes, some of that is simply the natural correlation between MREITs and bond prices, however this also comes as the Fed discusses unwinding its balance sheet. If REIT investors were worried that decreased demand for mortgage backed securities would affect the value of their portfolios, you would expect to see it in their stock prices. So far, they are shrugging it off. For originators, this means that mortgage spreads to Treasuries should be safe as well, which is good news. Meanwhile, the homebuilders continue to move higher, despite the disappointing housing starts we have been seeing. Building permits are still depressed as well, so there isn't any indication the tight inventory situation is going to change. 

CFPB Chairman Richard Cordray is supposedly pondering a run for the Governor of Ohio. If so, his days at the CFPB could be numbered. 

The digital mortgage is only going to become more and more common. Here is how lenders should approach it. Punch line: the programmers need to focus on the consumer experience as much as the back end functionality. 

Since housing prices bottomed, condo price appreciation has outstripped single family residence appreciation. Historically that has not been the case, as there is generally more demand for SFR. My guess is that condo prices are more volatile than SFR prices, and that they declined more in the sell-off and are now increasing faster in the rebound. There probably isn't any secular change going on, although many are quick to point out that the Millennials (so far at least) prefer living in urban areas. 

Morning Report: The Bank of England cuts rates, pushing Treasuries higher

Vital Statistics:

	Last	Change
S&P Futures	2160.0	3.0
Eurostoxx Index	336.9	1.0
Oil (WTI)	40.8	0.0
US dollar index	86.5	-0.5
10 Year Govt Bond Yield	1.51%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.5

Stocks are higher this morning after the Bank of England cut rates and instituted QE. Bonds and MBS are up. 

In response to Brexit, the Bank of England cut rates and introduced a bond-buying program for corporate and sovereign debt. This is causing global sovereigns to rally, and the German Bund is now trading at -7 basis points again. The US 10-year seems to correlate the most with the German Bund lately, so if it continues to rally, look for lower rates in the US. 

Job cuts increased in July to 45,346, which is up 19% from last month, but is down 57% from a year ago. Military discharges and continued cuts in the energy sector drove the increase. Texas and California bore the brunt of the job cuts. 

Initial Jobless Claims ticked up to 269k last week, however we have been below 300k for months, which is a very low level. 

The Bloomberg Consumer Comfort index ticked up slightly last week to 43 from 42.9. 

Factory Orders fell 1.5% from a downward-revised -1.2% in May. The manufacturing sector continues to exhibit a slowdown. 

The ISM Services Index ticked down to 55.5 from 56.5 last month. The ISM Services index has been much stronger than the manufacturing index. 

Nationstar reported better than expected earnings in the second quarter, although they took a big hit on their servicing portfolio. That said, while others are running from the servicing business, Nationstar is doubling down, and looks to build their business, with the addition of Seneca and USAA as clients. USAA had used Dovenmuhle in the past. Originations were up 24% QOQ and consumer direct accounted for 60% of the volume. Nationstar was up 12% for the day and is the highest in 9 months. 

Mortgage REIT Annaly Capital reported a drop in book value per share as volatility hurt results. Given the widening of MBS spreads at the end of the second quarter, this is to be expected, although peer American Capital Agency did report a small increase. Annaly just completed its acquisition of Hatteras. Aside from the Fed, mortgage REITs are some of the biggest purchasers of mortgage backed securities, and can move around TBAs which influences mortgage rates, so it pays to keep tabs on how they are doing. 

Separately, Fannie Mae reported a drop in net income. 

Morning Report - Bill Gross sells Bund vol, not Bunds.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2070.3	-3.9	-0.19%
Eurostoxx Index	3550.0	-8.0	-0.22%
Oil (WTI)	60.8	-0.1	-0.21%
LIBOR	0.276	-0.004	-1.38%
US Dollar Index (DXY)	94.44	0.348	0.37%
10 Year Govt Bond Yield	2.23%	-0.01%
Current Coupon Ginnie Mae TBA	101.8	-0.2
Current Coupon Fannie Mae TBA	100.7	0.1
BankRate 30 Year Fixed Rate Mortgage	3.91

Stocks are down small as we get a few mixed signals on the job market. Bonds and MBS are holding in there despite another big sell-off in the German Bund, which now yields almost 65 basis points - this is an increase of 57 basis points in about two weeks. Welcome to the new QE normal, where sovereign debt trades with the volatility of tech stocks. 

Note that the volatility in the Bund has hurt Bill Gross, who considers it "the short of a lifetime." Unfortunately, it looks like Bill sold options against the Bund, betting it would trade in a narrow range, and is now taking some gas on his position given the furious sell-off Euro sovereign debt. Welcome to the wonderful world of negative convexity, which is the bane of mortgage bankers globally. 

The volatility in bonds has hurt the mortgage REITs, the latest of which is Annaly Capital, which missed yesterday. American Capital Agency struggled with the volatility as well. Interestingly, American Capital Agency was responsible for some of the outperformance in FHA / VA pricing at the end of the quarter. Ordinarily, they don't buy Ginnie Mae TBAs as Fannies offer higher returns, but they viewed the Ginnie Mae sell off due to the change in MI was overdone, and took a position the other way. Mortgage REITs are generally most active in the secondary market for MBS, however they do dabble in TBAs and can affect loan pricing at the margin. 

We have some mixed employment data this morning, with Challenger and Gray announced job cuts increasing 53% to 61,582 in April, which is the highest number in 3 years. About a third of these cuts are in the oil patch, as Schlumberger, Baker Hughes, and Halliburton all announced layoffs. The other big category is retail, where you are seeing layoffs as well. Ordinarily, you would expect lower energy prices to translate into higher spending at the mall, but it isn't working out that way this time around. Blame broke Millennials who can't find jobs, Gen-Xers who drew the candy cane card as they were hitting their peak earning years, and Baby Boomers who had to retire a little earlier than they had planned. 

On the plus side, initial jobless claims hit 265,000 last week, which is still flirting with 15 year lows. One thing to keep in mind between the initial jobless claims report and Challenger: Challenger looks at announced job cuts. Often, those cuts end up not happening because the business turns around first. 

The Bloomberg Consumer Comfort Index fell to 43.7 last week as consumers still fret about the state of the economy. An index reading of 50 is considered "normalcy."

Janet Yellen ventured into Alan Greenspan territory yesterday when she remarked stock prices are still "quite high." It didn't have the effect on markets that Alan Greenspan's "irrational exuberance" comments did, as stocks largely ignored the warning. Memo to central bankers: You don't have a bubble in stocks. You have a bubble in sovereign debt.