Morning Report: China stops supporting its market

Vital Statistics:

	Last	Change	Percent
S&P Futures	1973.3	-16.4	-0.82%
Eurostoxx Index	3254.1	-32.5	-0.99%
Oil (WTI)	44.11	-1.1	-2.45%
LIBOR	0.329	0.005	1.42%
US Dollar Index (DXY)	95.95	-0.156	-0.16%
10 Year Govt Bond Yield	2.15%	-0.03%
Current Coupon Ginnie Mae TBA	104.3	0.1
Current Coupon Fannie Mae TBA	103.9	0.1
BankRate 30 Year Fixed Rate Mortgage	3.83

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

China has given up on using state funds to support its stock market. The government has spent about $200 billion trying to support the stock market. 

The highlight of the week will be the jobs report on Friday. This will be the last jobs report ahead of the September FOMC meeting. After last week's market sell-off, the Fed Fund futures contracts took their assessment of a Sep hike from around 50% to about 30%. 

Aside from the jobs report, we have some important economic data this week with the ISM surveys and construction spending. That said, the jobs report will be the big event. 

The ISM Milwaukee Index came in at 47.67, a bit lower than expectations. 

The Chicago Purchasing Manager's index was almost flat at 54.4. 

Stanley Fischer made some hawkish comments in Jackson Hole on Friday, which is what stopped the rally in stocks. 

I had a long interview with Louis Amaya on his Capital Markets Today show. You can access it here. I discuss the economy, real estate, the Fed and China. The interview starts at the 3 minute mark.  

Morning Report - Endgame for Greece

Vital Statistics:

	Last	Change	Percent
S&P Futures	2112.5	-2.2	-0.10%
Eurostoxx Index	3469.3	18.9	0.55%
Oil (WTI)	59.35	-1.1	-1.82%
LIBOR	0.286	-0.001	-0.19%
US Dollar Index (DXY)	94.34	0.312	0.33%
10 Year Govt Bond Yield	2.29%	-0.05%
Current Coupon Ginnie Mae TBA	101.2	0.1
Current Coupon Fannie Mae TBA	100.1	0.2
BankRate 30 Year Fixed Rate Mortgage	4.04

Markets are lower after the ECB increased the size of its emergency liquidity program to Greece. Bonds and MBS are up.

No economic data today

We are getting to crunch time with Greece. Euro-area leaders are meeting Monday to try and hammer out some sort of gameplan. The ECB's emergency liquidity package expires on June 30, which is also the day a big payment is due to the IMF. It is looking more and more likely that Greece is going to exit the Euro. While most Greek debt is owned by the Greek banking system, some is owned by the big European banks as well. Some could see a hit to their capital. This will probably be dollar (and Treasury) bullish. 

Chinese stocks have been selling off, and have entered correction territory (defined as down 10%). The Chinese stock market has been in bubble territory for a while, and it looks like it is finally bursting. This market is being fueled by a toxic cocktail of margin debt and dumb money. Current margin debt is $368 billion. The market increased over 150% in one year (or about $6 trillion). While the index was higher in 2009, the Shanghai Composite P/E is currently about 95x earnings, versus 68x at the height of the 2009 market.

The bursting of the Chinese stock and real estate bubbles is going to complicate the Fed's job of trying to normalize interest rates by causing a flight to quality in US Treasuries. The biggest headache for the Fed will be when China begins to export deflation. Inflation is still too low as far as the Fed is concerned. The biggest fear? Interest rates are already at the zero bound throughout the world, and central banks are largely out of ammunition.

Morning Report: FOMC day

Vital Statistics:

	Last	Change	Percent
S&P Futures	2092.0	3.0	0.14%
Eurostoxx Index	3437.7	-16.4	-0.47%
Oil (WTI)	61.14	1.2	1.95%
LIBOR	0.283	-0.003	-0.98%
US Dollar Index (DXY)	94.84	-0.161	-0.17%
10 Year Govt Bond Yield	2.33%	0.02%
Current Coupon Ginnie Mae TBA	100.9	-0.2
Current Coupon Fannie Mae TBA	99.56	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.07

Stocks are flattish this morning ahead of the FOMC decision. Bonds and MBS are down small. 

The FOMC rate decision is scheduled for 2:00 pm EST today, so beware of volatility around that time. We will be getting a new set of economic projections and a new dot graph. Yellen will also hold a press conference afterward. What will investors focus on? the dot graph.

Mortgage Applications fell 5.5% last week. Purchases fell 4.2% while refis fell 6.9%. 

It is looking like there might not be a deal with Greece, as Tsipras said Greece was willing to live with the consequences of saying "no" to their creditors. Bloomberg provides this helpful graph of where we are in the tug-of-war between creditors and Greece: The ouzo is definitely running out of the glass at this point

"Sell in May and Go Away" meets "Don't fight the Fed." A record number of investors have told BOA / Merrill Lynch that they have bought downside protection in stocks ahead of rate hikes. FWIW, I am not sure that a 50 basis point or 75 basis point Fed Funds rate is going to do that much to pull back the economy, and I think the Fed is going to take it very, very slow. This is not a typical tightening, where the Fed is trying to cool off the economy. The last thing they want to do is choke off the recovery. Second, if (when) China's stock market bubble bursts, we could see a massive flight to quality (in other words, investors buying Treasuries) that would probably offset at least some of the effect of higher short term rates. 

Barclay's is exiting the US MBS market, following Royal Bank of Scotland's lead. They will still trade risk sharing bonds and might still trade agency paper, but they are out of the market making business in pre-crisis paper.