Morning Report: First quarter GDP revised downward.

Vital Statistics:

			Last	Change
S&P futures			2695	-8.5
Eurostoxx index			376	-3.9
Oil (WTI)			72.39	-0.39
10 Year Government Bond Yield				2.83%
30 Year fixed rate mortgage				4.53%

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

The third estimate for first quarter GDP came in lower than expected, as an upward revision in the price index and a downward revision in consumer spending lowered the third and final estimate from 2.2% to 2%. The price index was revised upward from 1.9% to 2.2%, while consumer spending was revised downward from 1% to 0.9%. Housing was actually a negative in the first quarter. I may sound like a broken record, but from 1959 to 2002, housing starts averaged 1.5 million per year, with a much smaller population. Post-bubble, we have averaged around a million per year. Just to get supply and demand into balance probably requires 2 million starts, which would do wonders for GDP. Incidentally, yesterday's inventory figures prompted the Atlanta Fed to take up its tracking estimate for second quarter GDP to 4.5%. 

The drop in the 10 year yield has probably been influenced by the Fed Funds futures, which have been inching towards one more hike this year as opposed to 2. Current probability levels:

• No more hikes: 11%
• One more hike 44%
• Two more hikes: 42%
• Three hikes 2%

While the US economic data probably supports more hikes in interest rates, wage growth remains muted, and the sell-off in emerging markets is being viewed as a canary in the coal mine for global growth. Finally fears of a trade war are bearish for the economy, which would give the Fed another excuse to hold off in either September or December. 

Initial Jobless Claims increased to 227k last week, which is still an astoundingly low level. Meanwhile corporate profits were revised upward in the first quarter from 0.1% to 2.7%. 

Ben Carson testified in front of the House Financial Services Committee yesterday, where he laid out some of the changes he has implemented at HUD. He has made some changes with the Home Equity Conversion Mortgage program (aka reverse mortgages) to put the insurance fund on sounder footing. He is emphasizing the removal of lead paint and other hazards in HUD housing, and has suspended the Obama-era scheduled cut in the FHA mortgage insurance premium. HUD is concerned about the number of FHA cash-out refinances, which have increased from 45% of refis to 60% in the last year. (As an aside, since rate / term refi opportunities are largely gone, so you would expect to see an increase in the percentage of cash-outs). 

Why socially responsible investing sounds like a nice idea, but isn't a free lunch. You can "do good" but you should be prepared to underperform. 

Morning Report: Job Openings equal the number of unemployed

Vital Statistics:

			Last	Change
S&P futures			2680	9.75
Eurostoxx index			390.81	0.81
Oil (WTI)			70.9	1.84
10 Year Government Bond Yield				3.00%
30 Year fixed rate mortgage				4.63%

Stocks are higher this morning after the US pulled out of the Iran deal. Bonds and MBS are down, with the 10 year trading over 3% again. 

The Iran deal was never ratified by the Senate, so it never reached the level of "treaty." It was basically a deal with the Obama Admin and Iran. 

Oil had a volatile day yesterday and is rallying again. China is the biggest customer of Iranian oil, so in theory it shouldn't affect the US all that much, but WTI will follow Brent on the relative value trade. Note that a sustained oil price over $70 is estimated to be about a 0.7% drag on GDP growth. 

Inflation at the wholesale level moderated last month, with the producer price index rising 0.1% MOM and 2.6% YOY. Ex-food and energy, the index rose 0.1% / 2.3% and the core rate rose 0.1% / 2.5%. 

Job openings hit 6.6 million last month, which is a new record for the index, which goes back to early 2000. The quits rate increased to 2.3%. The quits rate has been stuck in a 2.2% - 2.3% range for what seems like forever. Fun fact: The number of job openings has hit the number of unemployed for the first time. 

The labor shortage is particularly acute in construction, which is part of the reason why housing starts have been short of demand. This shortage has extended to home remodeling as well. 

While everyone seems to focus on the CPI / PPI / PCE inflation measures and imagines that a single point estimate accurately reflects the cost of living, it doesn't. First the relative weights of different goods and services differ. For example, PCE and CPI will weight healthcare differently, as well as owner-equivalent rent. The St. Louis Fed notes that the differences in inflation between regions of the US can be substantial as well. 

Mortgage Applications fell 0.4% last week as purchases fell 0.2% and refis fell 1%. Tough times for the smaller originators. 

Despite the slim pickings out there, mortgage credit has contracted a bit this year. Overall, it was a mixed bag, as government credit contracted on less streamlines while conventional increased as jumbos rose. Government credit has been tightening since early 2017, when the government began to crack down on serial VA IRRRL shops. 

How have things changed at the CFPB or the (BCFP) under Mick Mulvaney? Despite the ululating in the press, not that much. One of the panelists warned industry lawyers not to advise their clients that the CFPB is relaxing its enforcement activities. So far, the biggest change we have seen is that the name has been changed back to the Bureau of Consumer Financial Protection, which was the way it was written into Dodd-Frank. 

Fair Housing groups are suing HUD over Ben Carson's delay of the Obama-era re-interpretation of AFFH - affirmatively furthering fair housing. Their complaint is that HUD didn't provide advance notice before suspending the rule,. which would have required communities to "examine and address barriers to racial integration and to draft plans to desegregate their communities." HUD delayed the compliance deadline until 2024. In practice, this means that HUD wants communities to change or eliminate their zoning ordinances to include more multi-family housing in wealthier neighborhoods. 

Morning Report: Bonds and stocks telling a different story?

Vital Statistics:

	Last	Change
S&P Futures	2379.0	-3.0
Eurostoxx Index	374.5	-1.1
Oil (WTI)	52.8	0.2
US dollar index	91.8
10 Year Govt Bond Yield	2.49%
Current Coupon Fannie Mae TBA	101.72
Current Coupon Ginnie Mae TBA	103.15
30 Year Fixed Rate Mortgage	4.09

Stocks are still taking a breather after a nice run. Bonds and MBS are down. 

The focus today will be all of the Fed-speak, with Janet Yellen and Stanley Fischer speaking around lunchtime. The Fed enters their quiet period ahead of the March FOMC meeting tomorrow. The markets have gone from pricing a March hike as a 30% chance to an almost certainty over the past several weeks. 

The ISM Non-Manufacturing index improved in January, as business activity and new orders (especially exports) led the charge. Employment ticked up slightly. The reading of 57.6 was the highest since October 2015. 

Ben Carson was confirmed as the new HUD Secretary yesterday on a 58-41 vote. HUD probably won't have a lot to do with GSE reform, as that is largely a Treasury function. Ben Carson is a neurosurgeon by trade, and his public record on housing was limited to an editorial criticizing Obama's enforcement of the Fair Housing Act. During his hearing, however he praised the Fair Housing Act as an important piece of legislation. The safety of public housing is a priority for him, and he plans to increase HUD's efforts to eliminate lead paint, mold, etc from public housing. He wants to continue to advance HUD's mission of financing low income / credit / first time homebuyers while introducing private capital and protecting taxpayers. 

Snap priced its IPO yesterday, where it had a 44% gain on the first day of trading. Many IPOs lately have not seen a big pop on day 1, so this is a bit of an anomaly. The lack of big gains from IPOs represents the drop in commission revenue and the balance of power between issuers and the buy side (a big jump in price on the first day means that the IPO was underpriced and the issuer is leaving money on the table). In the past, the banks were more worried about keeping the big mutual funds happy since they were a steady source of commission revenue, while issuers would typically do a deal and then go away for a while. Nowadays, commissions are basically nothing, so banks are more concerned with keeping issuers happy than they are with keeping, say Fidelity happy. When I started in the business, commissions were 5 cents a share, and bid-ask spreads were an eighth. Today, commissions are less than half a penny a share and bid-ask spreads are 1/10 of a cent on big liquid stocks. 

As a general rule, when the stock price is telling you one thing and the bonds are telling you another, go with what the bonds are telling you. We are seeing a bit of that right now with stocks and bonds - as stocks are off to the races on the reflation trade, bonds have been in a range post-election. Bonds are saying either (a) fiscal stimulus is not going to happen or (b) fiscal stimulus isn't going to work. That is certainly a fair take, and I do think rates have gotten a bit ahead of themselves. On the other hand, interest rates have been so heavily manipulated by central banks over the past decade, that the signal-to-noise ratio is lower than normal. Ultimately this is a criticism of monetary policy has gotten short shrift in the public debate: that interest rates are an important signal that the economy uses to allocate capital. When central banks manipulate rates to help goose the economy, those signals are distorted, and the typical effect is a bubble. Keynes and Hayek explain it to you here. 

One of Donald Trump's plans is to increase defense spending. The proposed increase is anywhere from $20 billion to $54 billion, from the current $582 billion level (or 3.1% of GDP). Here is a chart of defense spending over the past century as a percent of GDP in order to put current levels into perspective:

Solid tips for doing your taxes this year. 

Morning Report: Janet Yellen goes to Capitol Hill this week

Vital Statistics:

	Last	Change
S&P Futures	2318.0	5.3
Eurostoxx Index	369.8	2.4
Oil (WTI)	53.4	-0.4
US dollar index	91.1	0.2
10 Year Govt Bond Yield	2.44%
Current Coupon Fannie Mae TBA	102.1
Current Coupon Ginnie Mae TBA	103.2
30 Year Fixed Rate Mortgage	4.06

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

No economic data this morning, but we will get some inflation data this week with the consumer price index and the producer price index. Janet Yellen also delivers her 2 day Humphrey-Hawkins testimony on the Hill on Tuesday and Wednesday. My hunch is that monetary policy will take a backseat to banking regulation as the main subject of questioning. Note that top Fed banking regulator Daniel Tarullo has announced his resignation. Tarullo was viewed as a tough regulator (and was disliked by the industry for opacity and for changing the rules in the middle of the game. GE executive and former deputy to Hank Paulson David Nason is the front-runner to replace Tarullo. 

Donald Trump will get to fill 3 Federal Reserve Board governorships (maybe 4 as Lael Brainard is rumored to be resigning as well). It is unlikely that he will go with nominees in the mold of Janet Yellen and will choose business leaders instead of academics to fill those seats. While Trump criticized the Fed on the campaign trail as keeping rates too low for too long, there isn't a politician on the planet that likes a hawkish Fed. In fact, if Trump is successful in making big fiscal changes to the fiscal situation in DC, then he may prefer to have a more dovish Fed to keep rates low. 

Foreign investors are dumping Treasuries, although this has been going on for almost a year, so it is hard to characterize it as Trump-related. Foreign selling has been absorbed by US domestic money managers, which has lowered the impact. Ultimately, the Fed is probably driving it: While the Fed sees the light at the end of the tunnel for QE and extraordinary stimulus, the ECB and the Bank of Japan are still in the middle of it. While the US has some of the highest yields in the world, it is at the biggest risk of a big bond market sell-off. The cost to foreign investors in hedging the US currency is also extremely high. For example, a Japanese money manager isn't getting 2.44% when they buy a Treasury. It turns out to be around 90 basis points when you add in hedging costs. 

Treasury Secretary nominee Steve Mnuchin looks like he will get past the Senate today. 

The Washington Post has a good run-down on potential changes to Dodd-Frank. Overall, the reforms center on the Volcker Rule, the CFPB, and small banks. The paper obtained a memo from Jeb Hensarling which discussed some of the reforms. The biggest component is the financial CHOICE act, which allows banks an exemption from some of the Dodd-Frank restrictions (think prop trading) if they raise more capital. The CFPB would continue to be run by a single director who could be fired at will by the President. It will also have some restrictions on rule-making and enforcement, making it look more like the Federal Trade Commission. The CHOICE act probably has enough votes to clear the House, but getting it through the Senate will be a challenge. 

Professional economists are still scratching their heads over the lack of wage growth in the economy. If we are truly at full employment, the laws of supply and demand say that wages should be increasing. This is the biggest driver for the Fed, so getting it right is important. If the Fed tightens in expectation of wage inflation that was never going to arrive in the first place, they could choke off the recovery. The Bank of Japan made the same mistake twice since 2000. My sense is that the term "full employment"is a misnomer. Yes, we are at full employment according to the Bureau of Labor Statistics, but that is because we no longer count the unemployed once they hit 6 months without a job. They are still unemployed, however and that shadow inventory of workers colors the mindset of both workers and employers. 

There is some concern about Ben Carson as the leader of HUD, and what he intends to do with respect to affordable housing. Carson doesn't have a large body of work discussing housing policy, however he has made some contradictory statements, referring once to efforts by HUD to change local zoning laws as "social engineering" yet mentioning local regulatory impediments to housing affordability in his testimony to Congress. What these regulatory impediments are is anyone's guess. They could be zoning restrictions, environmental restrictions, or even things like open space requirements. Obama's HUD was very aggressive in suing localities to change their zoning laws, and we will have to see if that continues. Overall, the Federal government doesn't have a lot of influence over local zoning rules. and has gotten nowhere in ultra-blue Westchester County NY, even with the the carrot of Federal housing money and the stick of lawsuits. 

Morning Report: Ben Carson travels to Capitol Hill

Vital Statistics:

	Last	Change
S&P Futures	2266.0	2.5
Eurostoxx Index	364.4	1.9
Oil (WTI)	52.7	-0.3
US dollar index	92.0	-0.1
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.1

Markets are higher this morning as bank earnings come in. Bonds and MBS are down.

Inflation at the wholesale level remains under the Fed's target rate, according to the Producer Price Index. The PPI was up 0.4% MOM and 1.2% YOY. Ex-food and energy, it was up 0.3% MOM and 1.4% YOY. 

Retail sales increased 0.6% in December, however if you strip out autos and gasoline, they were flat. The control group rose by 0.2%, which missed expectations. For all the post-election increase in confidence, it didn't translate into spending. 

Business Inventories rose sharply (increasing 0.7%) in November, while sales increased 0.1%. The inventory to sales ratio came in at 1.38x, which is an improvement, but is still elevated. That said, inventory build is not the driver of the business cycle that it was 20 or 30 years ago. 

Consumer sentiment slipped slightly to 98.1 from 98.6. This is the preliminary January reading. 

We are getting bank earnings this morning. Wells missed estimates as mortgage revenue fell 15%. Issues with hedges drove down servicing revenue 73%. JP Morgan beat estimates, while Bank of America missed. 

Ben Carson testified in front of the Senate yesterday. Here are his prepared remarks. He spent the a lot of time discussing the state of government housing and the role of housing to help the poor move up the economic ladder. He addressed regulations in several instances. First, he took aim at local zoning regulations that inhibit multifamily housing. Second, he mentioned that regulations have added 24% to the cost of a new house, and finally he discussed them with respect to credit. 

Here are his comments with respect to origination: "Loans are now bifurcated: the well-off have their pick of loans and lenders while many others without solid credit or stable incomes are locked out – one of the reasons the economic recovery was slower than many would have liked. Homeownership rates have fallen on a year-over-year basis in every quarter for the last 10 years, and a surge in renting has dropped the homeownership rate to a 50-year low. Banks are loath to participate in low-down payment programs through FHA for fear of getting sued if the borrowers default. (emphasis mine) So we need to make sure HUD and FHA are fulfilling their missions to help people build up an asset, like a home, which will help them climb up the rungs of the economic ladder."

On the subject of private capital, he supported more private capital in the mortgage market to displace government capital (which is a completely non-controversial sentiment). He also thinks that a government backstop is not necessary to keep a 30 year fixed rate mortgage, however he supports government involvement to keep it. Note that while the typical American considers a 30 year fixed rate mortgage to be their birthright, they are largely a US phenomenon. Everyone else has some sort of adjustable rate. Of course you could still have a 30 year fixed rate mortgage without the government backstop, however the rate will reflect the added risk. 

Finally, he was asked about the recent decrease in FHA annual MIP and only said he would look at it. So, it looks like we aren't going to see a wholesale change from the Obama administration, although GNMA may become a little more forgiving, at least at the margin. For the mortgage origination business, HUD isn't the big driver - it is Treasury via the GSEs and the CFPB with enforcement. 

NAR has a good wrap-up of the testimony. Here are the objections from the left.

Overall, Trump's nominees have come across as relatively mainstream, so much so that Dick Durban (D-IL) commented on it. Trump's response was that he wanted them to be themselves and to say what they thought, not what he thinks. Interestingly, the biggest difference between Trump's cabinet and Obama's is his lack of lawyers. Obama's cabinet was dominated by them. 

Builders are encouraged that a new administration will ease the shortage of buildable land caused by increased environmental regulations. They may be overoptimistic about what can be done, however. Many of these laws are local, which the Federal Government can't do much about. Changing regulations takes a long time, with comment periods, and environmental groups have lawsuits at the ready if they sense the administration is no longer enforcing existing laws. 

Finally, perspective is everything:

Morning Report: Ben Carson will run HUD

Vital Statistics:

	Last	Change
S&P Futures	2200.0	8.0
Eurostoxx Index	341.6	2.2
Oil (WTI)	52.2	0.5
US dollar index	91.3	0.0
10 Year Govt Bond Yield	2.41%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.14

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

Slow news day, for the most part. 

The week after the jobs report is usually pretty data-light and this week is no exception. Today is the last day of Fed-Speak until the FOMC meeting next week. Bonds will probably be driven more by overseas developments than anything going on the US. 

The Markit PMI Services index slipped in November to 54.6 from 54.8 the month before. The ISM Non-Manufacturing PMI improved as well to a strong reading of 57.2.

Donald Trump will nominate Dr. Ben Carson as the Secretary of Housing and Urban Development. Carson is expected to reverse the Obama Administration's aggressive enforcement of fair housing laws, including the use of disparate impact. Suffice it to say, fair housing is going to take a backseat to reforming the GSEs and the mortgage market. 

Tight credit remains a driving factor in today's mortgage market as credit is loose for some people at the high end and tight for everyone else. In fact, PIMCO estimates that between 1 and 1.4 million people who were eligible for a mortgage in 2002 (before the big subprime explosion) are unable to get a mortgage today under the new rules and regulations. The knock on effects (like tight inventory and lackluster homebuilding) remain as headwinds to the economy as a whole. This not only includes mortgage credit to borrowers, but also bank credit to small homebuilders etc. 

Bond funds continue to experience withdrawals in the biggest bond bust since the Taper Tantrum. 

Morning Report: 3rd quarter GDP revised upward

Vital Statistics:

	Last	Change
S&P Futures	2200.8	0.0
Eurostoxx Index	340.0	0.2
Oil (WTI)	45.3	-1.8
US dollar index	91.7	0.3
10 Year Govt Bond Yield	2.34%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.14

Stocks are flat this morning as GDP surprises to the upside but oil falls as OPEC appears unable to cut production. Bonds and MBS are down.

Third quarter GDP was revised upward to 3.2% from the advance estimate of 2.9%. We will get one more revision to this number in a few weeks. Upward revisions in consumption drove the increase, while residential investment remains a drag. Business capital investment remains weak as well. The PCE Price index rose 1.4%, which means inflation remains below the Fed's target rate. We have had a meaningful rebound in GDP after a run of 3 weak quarters.

The Case-Shiller index (considered to be the Dow Jones Industrial Average of real estate indices) surpassed its July 2006 peak in September. The index is up 5.1% YOY. The press release includes a cool table that shows the returns on real estate versus the returns on the stock market and compares those to income growth. Since 1975, real estate has increased almost 5%, and stocks have increased 8%. Since 2000, real estate has outperformed stocks. While stocks have have been a higher returning investment overall, they are typically much more volatile, and you can't live in an ETF. Also, the press releases doesn't address the tax benefits of real estate, which would certainly affect the analysis and improve the relative performance of real estate. 

Corporate profits rebounded in the third quarter, rising 5.2% YOY after a 3 consecutive negative quarters. The divergence between stock prices (rising) and profits (falling) was creating an untenable situation in the stock market. 

Ben Carson is reportedly going to be the next Secretary of HUD. Realtor.com has the potential implications. Though his background is in medicine, Carson does appear to follow housing: here is an editorial he wrote just over a year ago. The editorial covers fair housing issues, however and doesn't address the state of the mortgage market, and how to bring private capital back into the market. At the moment, the taxpayer bears the credit risk of the vast majority of new mortgages. Suffice it to say it doesn't look like fair housing issues will be front and center at the new HUD, the way they have for the past 8 years. 

Donald Trump named Georgia Congressman Tim Price as secretary of health and human services. Trump is meeting with Mitt Romney again for the Secretary of State position.

Consumer confidence rose sharply in November, according to the Conference Board, increasing to 107.1 from 100.8 in October. This index is back to pre-recession levels. Separately, Cyber Monday sales look to have increased 9.4% YOY. 

Foreclosure starts fell to 56,500 in October, the lowest level in 12 years, according to Black Knight Financial Services. Delinquencies had a small uptick MOM, but are down YOY. Prepay speeds ticked down, but are still up markedly YOY. 

Demand for houses fell in October, according to Redfin. The number of people requesting tours and submitting offers fell. Tight inventory remains the biggest issue - the number of homes listed was down almost 10% from a year ago.