Morning Report: Fears of a trade war easing

Vital Statistics:

	Last	Change
S&P Futures	2727.3	9.0
Eurostoxx Index	373.3	2.4
Oil (WTI)	63.1	0.5
US dollar index	83.5	-0.3
10 Year Govt Bond Yield	2.89%
Current Coupon Fannie Mae TBA	102.25
Current Coupon Ginnie Mae TBA	102.5
30 Year Fixed Rate Mortgage	4.4

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

The EU proposed tariffs on some US goods if Trump follows through on his plan to institute higher tariffs on steel and aluminum imports. White House Gary Cohn is working with business leaders in an attempt to change the President's mind. Think about that. An economic advisor is reaching out to administration outsiders to try and get the President to change his mind. Imagine Austan Goolsbee soliciting the input of the financial industry in 2009 in an effort to derail Dodd-Frank. Supposedly Cohn plans to resign if Trump doesn't relent on a trade war. House Speaker Paul Ryan has also come out against tariffs. Despite Trump's warning that he "won't back down" on tariffs, the markets are starting to bet that a trade war isn't going to happen, which is probably why futures are up. 

Don't forget that we already have tariffs on Canadian softwood lumber. Prices are at record levels. This is yet one more reason why we have such an affordability problem - not enough (cheap) new construction. 

House prices rose 0.4% MOM from December to January, according to CoreLogic. Prices are up 6.6% YOY. They are forecasting prices to rise 5% this year. The fastest appreciation is at the lower price points, where prices are increasing 9% for homes at the 75% of the area's median home price, while appreciating only 5% for homes at 125% of the area's median home price. This demonstrates the struggle that the first time homebuyer is facing: rising rates and higher home price appreciation. Below is a chart of where home prices are overvalued and undervalued

Factory orders fell 1.4% in January reversing a string of gains. This is interesting simply because most of the regional Fed reports and the ISM data are showing strength in new orders, which was the weakness in this report. 

Morning Report: Don't believe the Chinese stock market indices

Stocks are lower this morning as the sell-off continues in Asia. Bonds and MBS are up small.

Mortgage Applications increased 4.6% last week as purchases increased 6.6% and refis rose 2.7%. Good numbers considering last week was only 4 days.

We will get the FOMC minutes later this afternoon. The items of interest will be the big downward revision in GDP forecasts, and of course any references to Greece. The China situation really was not ripe at that point, so I don't expect any mention there.

The EU put Greece on the clock, giving them until Saturday to come up with an agreement to stay in the EU. Europe has “a Grexit scenario prepared in detail,” European Commission President Jean-Claude Juncker said last night. Risk arbitrageurs have a term for this: showing them the downside. That is exactly what the EU is doing. The Greek ATMs are limiting withdrawals, however the Greeks have been taking out money for over 6 months, so most of them have an adequate cushion of cash at least for the time being. It won't last forever, and the EU is pushing the Greeks to make the necessary reforms to stay in the EU. While we haven't hit Venezuelan type shortages of goods, they are probably a month away.

Fun Chinese stock market fact: Last night the Shanghai composite fell 6%. Between the 1,331 stocks that are suspended, and the 747 shares that fell their daily 10% limit, approximately 72% of the index is non-tradeable. The A share index (which only Chinese can invest in) is down 33% since mid-June. The B share index (which foreigners can trade) is down around 43%. So when you hear someone point out that we are really only back to March levels, point out the index level is meaningless right now because 72% of the stocks aren't trading. Oh, and the Chinese government ordered anyone with a 5% position in any company to not sell for 6 months. This is going to be a titanic battle of wills between Mr. Market and Communist Government.

Don't forget, any economic pain in China due to the sell-off is going to be felt in commodity prices, which are already reflecting the sell-off. That will be deflationary, which the Fed fears more than inflation. IMO, unless something changes dramatically, the Fed isn't moving in September. If they truly mean it when they say they are being data-driven, the data is screaming: wait to see what happens first. Even if they do raise the Fed Funds rate a symbolic 25 basis points, just to get off the zero bound, I don't see how the long end of the curve moves all that much, if at all. Which means mortgage rates are probably not going to be affected.

The Obama administration has ordered HUD to re-integrate neighborhoods, using Federal funding as a carrot. LOs start thinking about FHA opportunities in areas that haven't historically been jumbo territory. That said, I don't know how many affluent areas get HUD grants in the first place so not sure how effective that will be. But, it might be an opportunity.