Morning Report: The FOMC acknowledges global risks to the economy

Vital Statistics:

	Last	Change	Percent
S&P Futures	1885.0	2.0	0.15%
Eurostoxx Index	3024.6	80.7	2.74%
Oil (WTI)	30.46	0.1	0.12%
LIBOR	0.621	-0.003	-0.48%
US Dollar Index (DXY)	99.34	0.279	0.28%
10 Year Govt Bond Yield	1.99%	0.02%
Current Coupon Ginnie Mae TBA	104.7
Current Coupon Fannie Mae TBA	104
BankRate 30 Year Fixed Rate Mortgage	3.71

Markets are flattish after the Fed maintained interest rate levels. Bonds and MBS are flat.

The statement out of the FOMC was relatively dovish, and the key sentence was: "The Committee is closely monitoring global economic and financial developments and is assessing their implications for the labor market and inflation, and for the balance of risks to the outlook." Stocks initially rallied on the statement and then sold off into the close. Bonds rallied. 

Initial Jobless Claims fell from 294k to 278k last week. 

Durable Goods orders fell by 5.1%, much more than the Street expectation of -0.7%. Capital Goods orders ex defense / air, a proxy for business capital expenditures, fell 4.3%. 

Pending Home Sales rose 0.1% in December and are up 3.1% YOY.

The Kansas City Fed index was unchanged at -9. 

Homebuilder PulteGroup reported better than expected earnings this morning. Orders were up 13%, and backlog increased 26%. ASPs increased 6% to $353k. CEO Richard Dugas had this to say about the state of the housing market: "While heightened global economic concerns have created greater market volatility, the positive trends in jobs, demographics and household formations, along with low interest rates and limited housing inventory, support expectations that housing demand continues to move higher at a measured pace for a number of years." They are seeing weakness in Texas, although Dallas seems to be immune to the drop in energy prices, at least for now. 

The CBO estimates that wage growth will outstrip home price appreciation in 2016. They are predicting 3.3% wage inflation and 2.4% home price appreciation. Given the tight inventory levels, I think that home price appreciation estimate is low. Wage inflation has recently crept up from 2% to 2.5%, but I don't see the catalyst for further wage inflation given the huge reservoir of people who left the labor force for statistical purposes but would gladly take a job if they found one. 

Morning Report - CBO assumes a can opener

Vital Statistics:

	Last	Change	Percent
S&P Futures	1603.4	11.1	0.70%
Eurostoxx Index	2736.0	17.1	0.63%
Oil (WTI)	95.21	1.2	1.30%
LIBOR	0.275	0.002	0.73%
US Dollar Index (DXY)	82.43	0.204	0.25%
10 Year Govt Bond Yield	1.70%	0.07%
Current Coupon Ginnie Mae TBA	106	-0.5
Current Coupon Fannie Mae TBA	104.2	-0.3
RPX Composite Real Estate Index	193.8	0.5
BankRate 30 Year Fixed Rate Mortgage	3.42

Markets are higher this morning after a better-than-expected jobs report. Bonds and MBS got whacked on the number.

Payrolls increased by 165,000 in April and the unemployment rate fell to 7.5%. March was revised upward from 88k to 138k. The labor force participation rate remained at 63.3%, the lowest since the 70s. Retail and business services added jobs, while construction was surprisingly flat. The average workweek fell, while average hourly earnings ticked up by 4 cents.

The CBO has come out with a study saying that principal mods on Fannie and Freddie mortgages could save the taxpayer money by reducing delinquency and foreclosure costs and increasing economic growth. As far as the moral hazard issue - they dismiss the costs of moral hazard as "relatively low," provided the government requires sufficient evidence of financial hardship. The study basically assumes that the government will thread the needle with drafting rules to prevent strategic defaults. The study reminds me of the old joke where an engineer and an economist are stranded on a desert island with an unopened can of soup. The engineer proposes to use a rock to open the can. The economist says "assume a can opener."

Lloyd Blankfein sees the current environment as a parallel of 1994. Borrowers had become so used to low interest rates that they weren't ready when the Fed started hiking rates. Old timers will remember that was when Orange County blew up as mortgage backed securities got clocked.

Morning Report

Vital Statistics

	Last	Change	Percent
S&P Futures	1305.2	-9.6	-0.73%
Eurostoxx Index	2148.5	-44.3	-2.02%
Oil (WTI)	91.15	-0.7	-0.76%
LIBOR	0.467	0.000	0.00%
US Dollar Index (DXY)	81.71	0.218	0.27%
10 Year Govt Bond Yield	1.74%	-0.03%
RPX Composite Real Estate Index	176.2	0.6

Markets are lower this morning on GREXIT (Greek exit) fears and a lousy earnings report from Dell. Euro sovereign yields are generally lower, with the exception of Greece which is 22 basis points higher and approaching 30%. Remember, this is the post-reorg debt that is trading here. Their debt was trading around 35% before Greece did their restructuring about 10 weeks ago. The stress in Europe is pushing down bond yields here and MBS are up as well.

While the migration to tablets is hurting Dell, they also noted corporations are delaying spending.  Is it because IT spending is slowing in general, or is it that corporations have learned not to beta-test Microsoft operating systems (in this case Windows 8)?

The Congressional Budget Office weighs in on Taxmageddon. Punch line: The budget deficit will drop by $560 billion, and real GDP growth will be .5%, with a contraction of 1.3% in 1H and an expansion of 2.3% in 2H. Remember the government operates on a Sep fiscal, so they are predicting recession in the Sep 12 - Mar 13 time period. If we cancel the tax increases and spending cuts, CBO estimates that real GDP growth would be about 4.4% in real (not nominal) terms in CY13. That is an aggressive (with a capital "A") forecast.

DealBook has an interesting article on the possible unintended consequences of breaking up the big banks.

In other news, the NAR has declared the housing recovery to be underway. The MBA reported that mortgage applications increased 3.8% last week. New home sales in April were 343k, an increase of 3.3% MOM. The FHFA House Price index showed an increase of .55% QOQ and .5% YOY.  This is the first increase since early 2007.  Remember the FHFA index only looks at conforming loans, which is more of the "core" housing market.  It has proven to be a much less volatile index than Case-Schiller or RPX.

Chart:  FHFA House Price Index: