Morning Report: No surprises in the FOMC minutes

Vital Statistics:

			Last	Change
S&P futures			2858	-2.75
Eurostoxx index			384.09	0.07
Oil (WTI)			67.46	-0.4
10 Year Government Bond Yield				2.81%
30 Year fixed rate mortgage				4.58%

Stocks are flattish this morning on no real news. Bonds and MBS are flat.

The FOMC minutes didn't offer anything too surprising. Most participants said it would be appropriate to raise rates soon, which wasn't a surprise - the Fed Funds futures have a Sep hike as pretty much a sure thing. They worried about how trade could be a downside risk to the economy, especially if it affects business sentiment, investment and employment. They mentioned that in the "not too distant future" monetary policy will no longer be viewed as accomodative. This statement seems to hint that rate hikes should wind up next year, provided inflation remains around these levels. Note that the head of the Dallas Fed suggested that the tightening cycle might be done once we get 75 - 100 basis points higher on the Fed Funds rate.  Bonds didn't react to the minutes at all, and the Fed Funds futures didn't budge either. 

There wasn't much talk about reducing the size of the balance sheet, which is more or less on autopilot right now. As the yield curve flattens, you would think the Fed would consider getting more aggressive on the balance sheet unwind. Maybe not on the mortgage backed securities side, but on the Treasury side. If credit is still widely available and the demand is there, why not? If the ducks are quacking, feed 'em. 

Central Bankers are meeting in Jackson Hole today. There usually isn't much in the way of market-moving statements out of these things, but just be aware. 

Initial Jobless Claims fell to 210,000 last week. We are bumping around levels not seen since 1969. When you consider the fact that the US population was only 200 MM back then (compared to 325 MM today), it is even more impressive. It certainly has economists scratching their heads. 

Home prices rose 0.2% in June and 1.1% for the second quarter, according to the FHFA House Price Index. The second quarter's pace was the slowest increase in 4 years, which shows that higher interest rates are beginning to have an effect on prices. Prices did rise in all 50 states and 99 out of 100 MSAs. 5 states (NV, ID, DC, UT, and WA) had double digit increases. The Las Vegas MSA had the biggest increase - almost 19%. The laggards were CT, AK, ND, LA, and WV. 

Heidi Heitkamp, a moderate Democrat from North Dakota says she will not support Kathy Kraninger to run the CFPB. She said she was inclined to vote yes, however she is concerned about Kraninger's experience in consumer protection and also felt she "lacked empathy" for consumers and didn't believe in the Bureau's mission. Heitkamp has been supportive of regulatory relief, which means she was a gettable vote. Kraninger's nomination looks largely to fall along partisan lines now. 

New Home Sales fell 1.7% MOM to 627,000, which was below the Street estimate of 649,000. It is up 12.8% on a YOY basis however. The new home inventory situation is getting more balanced, with 5.9 month's worth of supply. As always, the question is whether that inventory represents the oversupplied luxury market or the undersupplied starter market. 

Morning Report: Goldilocks jobs report and the FOMC minutes

Vital Statistics:

			Last	Change
S&P futures			2740	2
Eurostoxx index			381.23	-0.36
Oil (WTI)			42.31	-0.63
10 Year Government Bond Yield				2.82%
30 Year fixed rate mortgage				4.52%

Stocks are flattish this morning as a good jobs report offsets the new tariffs that went into effect this morning. Bonds and MBS are up.

Jobs report data dump:

• Payrolls up 213,000 (street was looking for 190,000)
• Unemployment rate 4% (.2% increase, street was looking for 3.8%)
• Labor force participation rate 62.9% (.2% increase)
• Average hourly earnings +.2% MOM / 2.7% YOY (in line with expectations)

Overall, a good report - strength in payrolls, and an increase in the labor force participation rate. The labor force increased by 600k, where the number of unemployed increased 500k and the number of employed increased 100k. Of those 500k added to the ranks of the unemployed, 200k were re-entrants to the labor force. The achilles heel (at least as far as those looking for wage growth) has been the reservoir of the long-term unemployed. This will help ease some of the labor shortage, which has been a constraint on growth. It will also raise the non-inflationary growth rate for the economy overall, which is kind of like a speed limit. For the Fed, this is a bit of a Goldilocks report - it gives them the breathing room to lift rates gradually which limits the risk of a recession. 

The FOMC minutes didn't really reveal much new information. Most pointed to the strong labor market and cited several statistics (JOLTS, unemployment rate, regional Fed surveys) to point to a tight labor market. "Several" members (i.e. a minority) thought that there was still some slack in the market as the long term unemployed are re-entering the labor market. Note this morning's jobs report bears that out. The members also discussed the slope of the yield curve, and whether the flattening was telling them anything. Interestingly, only "some" participants thought that the Fed's asset purchase program (i.e. QE) was affecting the shape of the yield curve, and therefore distorting the information sent from it. Kind of begs the question - if QE didn't affect the shape of the yield curve, then what was the point? Or even more importantly, why do they still have $4.5 trillion worth of bonds on the balance sheet? 

The Fed also thought about the possibility of a trade war and how that would end up slowing down the economy. They also thought that they might have to raise the Fed funds rate further than they had anticipated earlier: "With regard to the medium-term outlook for monetary policy, participants generally judged that, with the economy already very strong and inflation expected to run at 2 percent on a sustained basis over the medium term, it would likely be appropriate to continue gradually raising the target range for the federal funds rate to a setting that was at or somewhat above their estimates of its longer run level by 2019 or 2020."

The Fed Funds futures turned slightly more hawkish on the minutes, with the probability of a Sep hike increasing from 75% to 80% and the chance of a Sep and Dec hike hitting 53%. 

In other economic news, the trade deficit fell to the lowest level in 18 months. Not sure how much of that is due to tariffs already in place. 

Tariffs (especially lumber) are wreaking havoc on the entry-level new housing market. Builders generally have to purchase things like land and materials up front before they build and get paid for the construction. When materials prices are artificially supported by tariffs, that increases their risks, and makes them pull back. 

Morning Report: Gen X hit hardest by the Great Recession

Vital Statistics:

			Last	Change
S&P futures			2733	19.7
Eurostoxx index			382.97	2.89
Oil (WTI)			74.32	0.2
10 Year Government Bond Yield				2.85%
30 Year fixed rate mortgage				4.54%

Stocks are higher this morning on rumors that the Trump Administration is dialing back its plans for tariffs on European autos. Bonds and MBS are flat.

The minutes from the June FOMC meeting are coming out at 2:00 pm today. Be careful locking around then since they could be market-moving. 

The service economy continues to plow ahead, according to the ISM Non-Manufacturing Survey. Higher input prices, tariffs, and labor shortages are the biggest worries. Trucking shortgages are increasing prices, and that has the potential to push up inflation since it touches just about every business, at least indirectly. 

The economy added 177,000 jobs last month according to the ADP Survey. This was a touch below street estimates. Note that ADP numbers have generally been higher than the government's for the past several months. The Street is looking for 191,000 jobs in tomorrow's payroll report. While the payroll number will be important, for the bond market, it will all come down to the average hourly earnings number. 

Initial Jobless Claims ticked up to 231,000 last week. Separately, outplacement firm Challenger, Gray and Christmas noted there were 37,000 announced job cuts in May. 

Tariffs on about $34 billion worth of Chinese exports are set to go into effect tomorrow. Beijing has announced it will retaliate with more tariffs the "instant it goes into effect." Trade fears have been weighing on the stock market, and we are seeing some effects in commodity prices. Today's minutes will probably discuss the issue at length. On one hand, this trade war is pushing up commodity prices, which is inflationary and should encourage the Fed to lean hawkish, at least at the margin. On the other hand, trade wars are an economic drag, which should encourage more dovishness. The Fed generally considers commodity inflation to be transitory, so on net trade wars should encourage dovishness, at least at the margin. 

Oil prices have been a problem for while now, as WTI crude now trades close to $75 a barrel. Oil prices have been rising due to Venezuela issues and pressure on Europe to not buy Iranian oil. Trump tweeted that OPEC should increase production, which caused Saudi Arabia to announce it would increase output and Iran to announce that his pressure on them have added about $10 to the price of oil in the first place.  At the end of the day however these issues affect North Sea Brent prices, which really only matter to East Coast refineries. The rest of the country uses US domestic oil. Higher gas prices do make consumers surly and the Administration wants to see them down ahead of midterms this fall. 

Here are the hottest real estate markets in June, according to Realtor.com. Note it isn't the names you would think. 

Interesting chart in today's Journal about which breaks down the labor force participation rate by age cohort. The press keeps harping on the job market for entry level workers (essentially the Millennial Generation) however if you look at the labor force participation rate for that cohort, it is lower than the year 2000, but not by much. Nor is the problem the 55+ cohort (baby boomers). They are close to all-time highs. It is Gen X that is the issue - their cohort peaked around 83% in 2000 and now is closer to 80%. It is this generation that was hit hardest by the Great Recession (nailed right during the peak earnings years) and has yet to recover. 

Morning Report: 10 year trades below 3% on slightly dovish FOMC minutes

Vital Statistic:

			Last	Change
S&P futures			2726	-4
Eurostoxx index			392.54	-0.07
Oil (WTI)			71	-0.84
10 Year Government Bond Yield				2.98%
30 Year fixed rate mortgage				4.61%

Stocks are lower after Trump threatened more tariffs on autos. Bonds and MBS are up on the dovish FOMC minutes.

Initial Jobless Claims ticked up to 234,000 last week.

Existing home sales fell 2.5% in April, according to NAR. Sales fell to an annualized pace of 5.46 million, down from 5.6 million in March, which was also the Street estimate. Lawrence Yun, NAR chief economist, says this spring’s staggeringly low inventory levels caused existing sales to slump in April. “The root cause of the underperforming sales activity in much of the country so far this year continues to be the utter lack of available listings on the market to meet the strong demand for buying a home,” he said. “Realtors® say the healthy economy and job market are keeping buyers in the market for now even as they face rising mortgage rates. However, inventory shortages are even worse than in recent years, and home prices keep climbing above what many home shoppers are able to afford.”

Other tidbits from the report: the median home price increased 5.3% to $257,900, inventory of 1.8 million homes represents a 4 month supply, days on market fell to 26 days, and the first time homebuyer was 33% of all transactions.

US house prices rose 1.7% in the first quarter, according to the FHFA House Price Index. On a YOY basis, they were up almost 7%. The West Coast continued to lead the pack with high single-digit growth rates, and the Middle Atlantic showed an acceleration of growth. Over the past 5 years, the Middle Atlantic (NY, NJ, PA) has been the slowest appreciating region, growing just over half the rate of the West Coast.

The FOMC minutes were a bit more dovish than expected - the Fed Funds futures are now handicapping a 37% chance of 4 hikes this year, down from the mid 40% yesterday. The FOMC is worried about a trade war with China depressing economic activity. On inflation, they emphasized the symmetry of the inflation goal. "Most participants viewed the recent firming in inflation as providing some reassurance that inflation was on a trajectory to achieve the Committee’s symmetric 2 percent objective on a sustained basis." Overall, nothing was all that new, just a re-affirmation of symmetry, meaning that the 2% target is not a ceiling.

Dallas Fed Head Robert Kaplan thinks the Fed has about 4 more hikes to go before it is at a "neutral" stance. He also discussed his views of inflation above 2%: "I want to run around 2, and if we got a little bit above it and I thought it would be short-term and not long-term, I could tolerate it"

As anyone who attended the Secondary Conference could tell you, mortgage banking is going through a rough stretch right now. Digitalization of mortgage banking has compressed margins and volumes are down. Even people that want to move are finding a dearth of inventory. What could be the catalyst to turn things around? Buy-side firms ringing the register on the REO-to-rental trade. That would bring back enough purchase activity to allow some of the smaller firms to retrench and get their costs under control. Wishing for falling rates is probably a long shot, although if the 10 year finds a level here, we could see rates come in a little, but probably not enough to bring back refis.

Refi activity is going to be concentrated in two areas: cash out to refinance credit card debt, etc, and FHA refis into conforming once the homeowner has enough equity to get under the 80% LTV threshold and avoid having to pay PMI.

While the mortgage business is going through a rough patch, quarterly profits for banks are spiking (tax reform has some effects here). The banking sector largely sat out the M&A boom that has been common throughout other industries. The US market is still about the least concentrated banking market on the planet. Is it time for some M&A? 

Morning Report: Inflation comes in lower than expected

Vital Statistics:

			Last	Change
S&P futures			2632.25	-22.75
Eurostoxx index			375.86	-2.56
Oil (WTI)			66.25	0.74
10 Year Government Bond Yield				2.77%
30 Year fixed rate mortgage				4.43%

Stocks are lower this morning on tensions in the Middle East. Bonds are up on the risk-off trade.

In political news, House Speaker Paul Ryan will not run for re-election. 

Inflation came in lower than expected in March, falling 0.1% MOM and rising 2.4% YOY. Ex-food and energy, the index rose 0.2% MOM and 2.1% YOY. Bonds are breathing a sigh of relief on the number. 

We will get the minutes from the March FOMC meeting today at 2:00 pm. They usually aren't market-moving, but just be aware. Since this is Jerome Powell's first meeting as head of the FOMC, it might be parsed a little more closely than usual. 

Mortgage applications fell 2% last week, as both refis and purchases fell by the same amount. This was in spite of a 3 basis point drop in the typical 30 year fixed mortgage rate. Refis are at their lowest level in a decade. Refi activity is going to be driven more by home price appreciation these days.

Luxury homes are taking longer and longer to sell, and are trading at bigger discounts to the asking price. This is especially acute in high tax states like New York, where there is an absolute glut of homes above $1 million. Part of it is simple over-pricing. The homes that sat on the market for over 180 days went for 71% of asking price, while homes that went in under 180 days got 93% of the asking price.

The CFPB released its annual review of consumer complaints, and credit / consumer reporting topped the list, which is unsurprising given the Equifax data breach last year. Debt collection was the next biggest issue, followed by mortgages. Richard Cordray's bugaboo - payday lending - failed to garner even 1% of complaints. This is what Mick Mulvaney was referring to when he said "data will drive our decisions."

Rising home prices relative to incomes are pushing up debt to income ratios, which is why this Spring Selling Season is shaping up to be the worst in years. Part of the problem was alluded to above - a dearth of inventory at the low end of the price scale and a glut at the high end.

City grind got you down and you are thinking of moving to the country? Here are some things to consider..

A record 64 million Americans (or about 20%) live in multi-generational households. This is largely driven by younger adults who continue to live with their parents. The ratio bottomed in 1980 and has been moving steadily upward ever since. 

Morning Report: FOMC minutes mildly bearish for bonds

Vital Statistics:

	Last	Change
S&P Futures	2704.0	5.3
Eurostoxx Index	378.5	-2.6
Oil (WTI)	61.8	0.1
US dollar index	83.8	-0.1
10 Year Govt Bond Yield	2.92%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.4

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

The FOMC minutes were surprisingly upbeat on the economy, which pushed up bond yields yesterday afternoon. The part that got everyone's attention:

"A number of participants indicated that they had marked up their forecasts for economic growth in the near term relative to those made for the December meeting in light of the strength of recent data on economic activity in the United States and abroad, continued accommodative financial conditions, and information suggesting that the effects of recently enacted tax changes—while still uncertain—might be somewhat larger in the near term than previously thought. Several others suggested that the upside risks to the near-term outlook for economic activity may have increased. A majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate." (emphasis mine)

Separately, Bullard and Quarles cited the strength in the economy and the need to continue to raise interest rates. 

This language caused some strategists to increase their forecast to 4 hikes this year from 3. Surprisingly, the Fed Funds futures reacted in an opposite manner on the minutes, but reversed course later to become unchanged on the day. The 10 year treasury sold off throughout the day, and hit 2.94% in the late afternoon. 

Part of the movement in bonds is being driven by Europe. European governments have been increasing their bond issuance at the same time the European Central Bank is decreasing its demand for paper. The market for government bonds is a global market, and if there is excess supply, it will hit interest rates across the board. This is why you will sometimes see bonds move lower without any particular catalyst. The catalyst may exist, however it is something overseas that the US business press is either ignoring or covering lightly. 

Initial Jobless Claims fell to 222,000 last week. We remain at lows not seen since the Vietnam War and the days of the military draft. Still have yet to see widespread wage inflation however. Until that happens, the Fed will go slowly. 

The Index of Leading Economic Indicators improved in January, increasing 1%. It will be interesting to see if February's number is affected by the recent stock market volatility. 

Interesting map from GeoFred which shows the economic growth in different parts of the country. The thing that jumps out at me is how bad the NY-NJ-CT area is. I guess the fact that that area is somewhat levered to the financial industry is an issue, although I wonder how much of it is due to people who have been fleeing high taxes, though if that was the case you would expect to see it in CA as well and you don't. 

Morning Report: Existing home sales fall

Vital Statistics:

	Last	Change
S&P Futures	2715.3	1.3
Eurostoxx Index	379.1	-1.4
Oil (WTI)	61.8	0.1
US dollar index	83.8	0.2
10 Year Govt Bond Yield	2.88%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.4

Stocks are flattish this morning on no real news. Bonds are lower after a tough auction yesterday. 

Mortgage Applications fell 6.6% last week as purchases fell 6% and refis fell 7%. Higher mortgage rates are beginning to bite. 

Existing Home Sales fell 3.2% in January, according to the National Association of Realtors. Lawrence Yun, NAR's Chief Economist said: “The utter lack of sufficient housing supply and its influence on higher home prices muted overall sales activity in much of the U.S. last month. While the good news is that Realtors® in most areas are saying buyer traffic is even stronger than the beginning of last year, sales failed to follow course and far lagged last January’s pace. It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.” The median home price rose 5.8% to $240,500. Inventory rose, however it still remains extremely tight at 3.4 month's worth of supply. The rise in prices and scant inventory may be scaring away the first time homebuyer which dropped to 29% of sales. Historically, that number has been closer to 40%.

The FOMC minutes from the January meeting are scheduled to be released at 2:00 pm EST today. Investors noted a slight change in the January FOMC statement, where the need for "gradual adjustments" in interest rates was changed to "further gradual adjustments" in interest rates. They hope to get more clarity on what message the Fed intends to send with that change of language, however we probably will have to wait until the March meeting when the Fed releases their new dot plot of expected interest rate movements. As of now, the consensus seems to be a total of 3 hikes this year, at least according to the Fed Funds futures. New York Fed Chairman William Dudley said in an interview that the statement was meant to reflect further strength in the economy. 

Homeowners will be able to deduct mortgage insurance premiums on their 2017 returns thanks to a last-minute change in the budget. Borrowers must have adjusted gross income below $100k and the insurance must apply to their principal residence. No word on whether this will continue, and it will probably be a moot point anyway as taxpayers with AGIs under 100k will probably be better off taking the standard deduction most of the time. The tax liability on principal forgiveness also was extended for another year. This would apply to homeowners who get principal forgiven in loan modifications, short sales, and foreclosures. The tax code treats forgiven debt as ordinary income, and the people who go through mods or foreclosures are usually in such financial trouble to begin with that the last thing they need is an additional tax bill. 

The Supreme Court yesterday declined to hear a lawsuit brought by Fannie Mae shareholders which challenges the government's sweep of all of Fannie's profits into the Treasury. This isn't the end of the road for the investors however - they have one more claim pending in the U.S Court of Federal Claims in DC. Fannie Mae stock is down about 5% pre-open. 

Merger mania in the mortgage banking space continues. Mr. Cooper has been bought by WMIH in a cash and stock transaction worth $3.8 billion in cash, stock and assumed debt. Mr. Cooper and WMIH are the new monikers for old stalwarts Nationstar (or IndyMac) and Washington Mutual. Separately, Flagstar has bought the mortgage warehousing operations of Santander Bank. 

Morning Report: JPM kicks off earnings season

Vital Statistics:

	Last	Change
S&P Futures	2549.3	-3.8
Eurostoxx Index	389.9	-0.3
Oil (WTI)	50.6	-0.7
US dollar index	86.5	0.1
10 Year Govt Bond Yield	2.35%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.9

Stocks are lower as third quarter earnings season begins with results from the banks. Bonds and MBS are flat. 

JP Morgan reported better than expected earnings this morning, posting a 7% increase in net income. Higher lending revenues offset lower trading revenues. Mortgage origination was flat YOY, but revenue dropped 17%, which means margins are falling. The stock is flat pre-open.

Initial Jobless Claims came in at 243k last week, historically a very low number. For those wondering about places like Puerto Rico, their number is estimated. 

Wholesale inflation remains close to the Fed's target rate of 2%, according to the Producer Price Index. The PPI rose 0.4% MOM and 2.6% YOY, however if you strip out food, energy, and trade services, it rose 0.2% MOM and 2.1% YOY. 

The FOMC minutes really didn't provide much in the way of additional information. There was some discussion that low inflation might not just be a temporary phenomenon, which was interpreted as dovish by some observers. The 10 year didn't react to the minutes, but the dollar sold off a tad. The December Fed Funds futures decreased the implied probability of a rate hike by a couple points.

Kevin Warsh is now the favorite of economists to run the Fed after Janet Yellen's term. He is a Wall Street type who worked for Morgan Stanley during the crisis and has been critical of monetary policy since then. He is generally regarded as more hawkish than Yellen, and will definitely be less of a regulatory hawk than she is. Paul Krugman (Dr. Cowbell) threw a little shade Warsh's way.

Donald Trump is re-thinking the state and local tax deduction after it turns out that about 30% of people making between 50k and 150k a year could be hit with a tax increase under the new plan. The state and local tax deduction (along with the mortgage interest deduction) are two immensely popular deductions which have managed to survive numerous assaults over the years. House Republicans in blue states, like Peter King of NY, will not support tax reform if it means giving many of their constituents a tax hike. If the state and local tax deduction remains, something else has to give, which will probably mean the estate tax (something loathed by the right) remains. 

Congress is preparing legislation to subject the credit bureaus to Federal cybersecurity inspections, and to end the use of social security numbers in credit reporting by 2020. The bill will also require the credit agencies to provide free credit freezes. 

How tight is the housing market? So tight that people will put up with living in haunted houses. 

Morning Report: Awaiting the FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2545.8	-2.8
Eurostoxx Index	389.4	-0.8
Oil (WTI)	50.9	-0.1
US dollar index	86.5	-0.1
10 Year Govt Bond Yield	2.35%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.9

Stocks are lower this morning as we await the FOMC minutes. Bonds and MBS are flat.

There were 6.1 million job openings at the end of August, little changed from the prior month. The quits rate (which is a number the Fed watches closely) was unchanged at 2.1%. The quits rate is a leading indicator for wage growth. 

Chicago Fed President Charles Evans said yesterday that a December hike is not a sure thing, and that he hoped for an "honest discussion" on whether it was time to hike rates again. He said the Fed should not treat the 2% inflation target as a ceiling, and should be comfortable with higher than 2% inflation given that it has undershot the target for so long. He was also bullish on the economy in general: “Global growth has really solidified,” which has helped the U.S. economy, he said. “I suspect the wage story is improving.”

The FOMC minutes will be released at 2:00 PM EST today. They probably won't be market-moving, although we could see some adjustment in the December rate hike probabilities, which currently stands at a 93% chance of a rate hike. 

Mortgage applications fell 2.1% last week as purchases fell .1% and refis fell 4%. Mortgage rates increased 4 basis points to 4.16%. 

Donald Trump plans to adjust his tax reform plan over the next few weeks. With Democrats uniformly in opposition, Republicans have a narrow path to get this across the line. The issue with the tax plan is that it could raise taxes for people in the $50k-$150k range who live in high tax states. There are enough Blue State Republicans in the House to kill it. In the Senate, Trump has a strained relationship with Bob Corker and John McCain, which means he has no margin for error. Rand Paul has also said that any tax hikes on middle and upper middle class incomes is unacceptable. Tax reform is looking like a long shot, especially since 2018 will be all about posturing for midterms. 

Blackrock's Larry Fink said that his biggest fear is an over-aggressive Fed. He considers this to be a low-probability event, however. His fear is that we could see an inversion of the yield curve, which happens when longer-term interest rates are lower than shorter term interest rates. Historically, that has been a recessionary signal. It is more than a theoretical possibility: the yield curve almost always flattens during a tightening cycle, and the technical mechanics of unwinding QE also would encourage the curve to flatten. What does that mean for mortgage rates? Probably nothing, but at the margin it would favor 30 year fixed rate mortgages over ARMs. 

CoreLogic estimates that 172,000 homes could be at risk from the wildfires in Napa and Santa Rosa. Mother Nature has made life miserable for servicers this fall, however the effects probably won't begin to be felt until the end of the year.

Canada is trying to figure out what to do with their housing bubble. The median house price in Vancouver is currently at 1.6 million (or about 20x income). To put that number into perspective, the US bubble peaked at 4.8x. Vancouver's market is probably tied most closely to China's and will burst once that one does. 

Morning Report: FOMC minutes slightly dovish

Vital Statistics:

	Last	Change
S&P Futures	2460.8	-6.5
Eurostoxx Index	378.5	-0.6
Oil (WTI)	46.6	-0.2
US dollar index	86.5	0.2
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.88

Stocks are lower this morning after WalMart missed earnings. Bonds and MBS are up.

The FOMC minutes from the July meeting showed that some member are still worried about inflation being too low, while some are worried about overshooting the inflation target. "Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside. Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored. One participant pointed to the stability of a number of measures of inflation expectations in recent months, but a few others suggested that continuing low inflation expectations may have been a factor putting downward pressure on inflation or that inflation expectations might need to be bolstered in order to ensure their consistency with the Committee’s longer-term inflation objective." This statement was taken as dovish and bonds rallied a few basis points on it. The rest of the minutes were uneventful as nothing much had changed economically from the June meeting. There were a few members who wanted to announce the change in balance sheet policy at this meeting but most wanted to wait. That probably means that we will get no hike and an announcement on balance sheet reduction at the September meeting. We didn't see any reaction in the Fed Funds futures either, with December still a toss-up. 

Initial Jobless Claims fell to 232k last week, which remains near historical lows. The last time we were at similar levels, the population was much smaller and there was a military draft going on. 

Industrial Production rose 0.2% last month, while manufacturing production fell 0.1% Lower auto production drove the decline. Capacity Utilization was unchanged at 76.7%. There is still a lot of slack in manufacturing, which is why capital expenditures have been so low. Separately, the Philly Fed Manufacturing Survey increased. 

Average home sizes grew in the aftermath of the housing boom, as only the luxury end of the sector was working. With Millennials not in a position to buy, aging boomers were the only game in town. From the bottom, average square footage increased from 2388 square feet to 2,622 square feet. However we are seeing this reverse as builders pivot to selling more starter homes. Average and median home size is still above the 2006 peak however. 

Household debt increased in the second quarter to $12.84 trillion, which is up about 15% from the post-bubble trough. Mortgage balances increased, however new origination fell as higher interest rates took a bite out of refis. Auto loans increased, as incredibly easy financing is being used to sell cars these days, and credit card balances increased as well. 90 day delinquencies declined to 1.5% of all mortgage loans outstanding. 

Morning Report: Housing starts disappoint

Vital Statistics:

	Last	Change
S&P Futures	2468.0	4.3
Eurostoxx Index	379.3	2.8
Oil (WTI)	47.7	0.2
US dollar index	86.7	0.1
10 Year Govt Bond Yield	2.28%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.88

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

The big event of the day will be the release of the FOMC minutes at 2:00 pm EST. The Street will be looking for more info on how the Fed plans to wind down its QE portfolio. Investors will also be parsing the statement for clues regarding the Fed's stance on the current status of low inflation. While inflation remains low if measured against the Fed's inflation target, we are starting to see wage inflation. The hawks on the Committee will push to get ahead of that, while the doves (like Yellen) will prefer to let the labor market "run hot" for a while. The minutes will probably not be market-moving, but just be aware if you are locking around that time. 

The minutes will be interesting given the recent GDP forecasts out of the Atlanta Fed, which have Q3 growth coming in at 3.7%, and are predicting a much stronger second half to the year. You could really start to see a battle between the hawks and the doves. The Fed Funds futures contracts are still predicting no move in September and a 50-50 chance of a hike in December. 

Mortgage Applications fell 0.1% last week as purchases fell 2% and refis increased 2%. Mortgage rates continue to tick lower, with the 30 year fixed rate mortgage down to 4.14%, the lowest since November. 

Housing starts disappointed last month, coming in at 1.15 million, down 4.8% MOM and 5.8% YOY. The notoriously volatile multi-family segment drove the decrease, as single family starts were more or less unchanged. The Street was looking for 1.22 million units. Building permits came in at 1.22 million, lower than estimates as well. They were down 4% on a MOM  basis but were up 4% on a YOY basis. 

Where is the growth in housing construction? Texas. Of course Texas didn't really experience the bubble type behavior the way states like California, Arizona, and Florida did. This may be because Texas has more restrictions on cash-out refinances than other states. Here is a chart of where the action is (and is not)

Morning Report: Fed minutes show balance sheet normalization this year

Vital Statistics:

	Last	Change
S&P Futures	2419.3	-8.8
Eurostoxx Index	379.0	-4.0
Oil (WTI)	45.9	0.7
US dollar index	88.3	0.1
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4.06

Stocks are down this morning along with overseas markets. Bonds and MBS are down as European bond markets sell off. 

The German Bund is getting whacked this morning after a lousy French auction and is up 10 basis points in yield to 55 bps. The Bund yield is at the highest level since early 2016, and this is pulling yields higher globally.

The FOMC minutes didn't reveal anything market-moving. The Fed still plans to raise interest rates gradually, and there is some disagreement between members over when and how to begin balance sheet normalization (which is their term for letting bonds mature and not re-investing the proceeds). It looks like they will gradually reduce reinvestment activity, not stop all at once. The proposed idea would be to reduce reinvestment of Treasuries by $6 billion a month and increase that in increments of $6 billion every 3 months until they hit $30 billion. For MBS, it will be $4 billion a month, increasing in $4 billion increments every 3 months until they hit $20 billion a month. The FOMC members were divided over timing, with some wanting to move in Q3, while others want to begin in Q4. 

The September Fed Funds futures didn't move in response to the minutes, but the December futures did move more towards a higher probability of a rate hike. December is pricing in a 42% chance of no changes, a 47% chance of a 25 bp hike and a 10% chance of a 50 bp hike. 

The overall economic outlook was positive, however residential investment "appeared to be slowing after increasing briskly in the first quarter." The Fed suspects that weather, along with homebuyers getting ahead of expected interest rate increases drove the bump in Q1. The staff also noted that the market seems to be handicapping a smaller chance of fiscal expansion. 

Mortgage Applications increased 1.4% last week as purchases 3% and refis fell 0.4%. The refi share continues to decline and the ARM share is ticking up slightly, however it is still in the single digits. 

The ADP payrolls number came in lower than expected, at 158,000 versus expectations of 180,000. The consensus for tomorrow's payroll number is 170,000. Note that lately the ADP number has been a lousy predictor of the BLS numbers. 

Employers are hanging on to their employees, according the Challenger and Gray Job Cuts report. While job cuts continue in retail, overall they remain low, at 31k. Note that these numbers come from press releases, where companies announce job cuts they expect to make. They aren't actual job cuts. Meanwhile, initial jobless claims ticked up slightly to 248k. 

Redfin has filed for an IPO. For those keeping score, Blue Apron has been an unmitigated disaster, trading at $8.31 a share after going public last week at $10. 

Morning Report: FOMC minutes today

Vital Statistics:

	Last	Change
S&P Futures	2421.5	1.5
Eurostoxx Index	379.4	-1.3
Oil (WTI)	46.3	1.4
US dollar index	87.7	0.1
10 Year Govt Bond Yield	2.30%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4

Stocks are up small after the long weekend. Bonds and MBS are down.

At 2:00 pm we will get the minutes from the June FOMC meeting. There is the always the possibility of market movement from these things, so just be aware. Here are the things the markets will be looking for. 

Construction spending was flat MOM in May and up 4.5% YOY. Private residential construction was up 11% YOY. 

Manufacturing continues to accelerate, according the ISM PMI report, which hit a 3 year high. The index level would historically correspond with a 4.6% increase in GDP. The average for the first half of the year would correspond to a 4.1% increase in GDP. Of course manufacturing doesn't have the share of GDP it used to, but it is a good indication that things are getting better. 

Bond yields have been backing up, largely on overseas events. Bonds in Europe are selling off and dragging US yields higher on the relative value trade. The current projections for the upcoming FOMC meetings have become slightly more in favor of rate hikes, but we are still looking at no change at the July meeting, and only a 18% chance of a hike in September. The markets are also looking to the September meeting for more clarity regarding balance sheet reduction. 

Home Price appreciation continues to accelerate, as the CoreLogic home price index rose 1.2% MOM and is up 6.6% YOY. Rental inflation rose 3.1%, so the increase in home prices is a bit of a double-edged sword. Those who already own homes are getting the benefit of home price appreciation while the first time homebuyer is squeezed. 

Upcoming changes that will affect mortgage credit. Tax liens and civil judgements will be expunged from credit reports, which could amount to a 20 point increase in FICOs for some people. Second, Fannie Mae is increasing the DTI ratio from 45 to 50 in order to take into account high levels of student loan debt. 

HUD is recommending that Fannie Mae tweak upward its affordable housing goals for 2018-2020. Most goals are unchanged, but a couple were pushed up slightly. 

Morning Report: FOMC minutes mildly dovish

Vital Statistics:

	Last	Change
S&P Futures	2407.0	5.0
Eurostoxx Index	391.9	-0.5
Oil (WTI)	50.7	-0.7
US dollar index	88.7
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	4

Stocks are higher after the FOMC minutes came in a little more dovish than expected. Bonds and MBS are up as well.

The FOMC minutes were mildly bond-positive, as they introduced doubts as to the scope and timing of fiscal stimulus: "Many participants continued to view the possibility of expansionary fiscal policy changes in the United States as posing upside risks to their forecasts for U.S. economic growth, although they also noted that prospects for enactment of a more expansionary fiscal program, as well as its size, composition, and timing, remained highly uncertain." One member (probably Neel Kashkari) also wanted to wait until inflation was closer to 2% before making any further moves. Bonds rallied a few basis points on the minutes, and the implied probability of a June hike dropped from 83% to 78% briefly before returning to 83%. 

Initial Jobless Claims rose slightly to 234k from 233k last week, which is still extraordinarily low. This is 4 straight weeks below 240. The last time that happened was 1973. When you consider that (a) we still had the Vietnam draft at that point, and (b) population growth since then (52%) it is an extraordinary number. 

Delinquencies rose in April, according to Black Knight Financial Services. The calendar may have played a part however as April ended on a Sunday, and most of the DQs were early-stage. The number fell to 4.08%, a drop of 3.58% YOY. 

Given the big increase in home price appreciation, many FHA loans done at a 97 LTV might have enough new equity to refinance into conventional loans with no PMI. Loan officers, take a look at your past deals, and if you have a FHA loan, take a look to see if you can save some money. 

Morning Report: FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2348.0	1.5
Eurostoxx Index	379.8	-0.3
Oil (WTI)	51.4	0.2
US dollar index	90.5
10 Year Govt Bond Yield	2.35%
Current Coupon Fannie Mae TBA	102.53
Current Coupon Ginnie Mae TBA	103.813
30 Year Fixed Rate Mortgage	4.07

Stocks are lower this morning after the FOMC worried about stock prices. Bonds and MBS are down small. 

Job cuts rose 17% in March, according to outplacement firm Challenger, Gray and Christmas. Telecom and retail were the two main sectors to trim staff. Note that this report only measures announced job cuts (in press releases), not actual job cuts. We are still seeing losses in the energy patch, however it is much slower than the past two years when we lost over 200k jobs. 

On the other side of the coin, hiring announcements continue to hit records, with the Home Despot announcing 80,000 seasonal hires in March. 

Initial Jobless Claims fell to 234k last week, while the Gallup Good Jobs index improved. The drop in initial jobless claims was the most in 2 years. 

The FOMC minutes showed the Fed is beginning to discount the possibility of a big Trump fiscal expansion. The failure of health care reform means that the available resources for a big infrastructure spend or tax cuts is much less. The Fed also discussed what to do with their $4.5 trillion balance sheet, and how to go about shrinking it. The terms "gradual" and "phase out" were used, which means they probably aren't going to stop reinvesting maturing principal all at once and will perhaps take a couple of meetings to see how it goes. The Fed's fear is that the additional contractionary effects of reducing the balance sheet along with rate hikes will be too much and push the economy into a recession. 

The staff also noted that stock values are above historical norms, which is undoubtedly another reason for them to go slowly. The worst-kept secret in financial markets is that the Fed targets asset prices and uses them to guide policy. 

Goldman Chief Economist Jan Hatzius says that reducing the Fed's balance sheet is probably a good step to clear the decks for whoever will be the new Fed President ahead of the end of Janet Yellen's term in early 2018. 

The left has set up a new website to keep track of HUD and what they are doing. They want to ensure that affordable housing targets don't fall by the wayside as HUD works on housing reform. Given the tight housing inventory these days, affordable housing is a huge need. 

Donald Trump economic adviser Gary Cohn supports some sort of return to the Glass-Steagall days, where consumer banking is separated from the underwriting and trading functions of investment banks. Some Senators and policy types were surprised to hear a Wall Street type advising that. The conversation regarding deposits will be further complicated by the emerging fintech sector which wants access to those deposits as well. 

The Senate is expected to exercise the nuclear option today and eliminate the filibuster for Supreme Court nominees. Neil Gorsuch will probably be confirmed on Friday. 

Morning Report: Awaiting the FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2361.0	4.5
Eurostoxx Index	380.8	0.7
Oil (WTI)	51.7	0.7
US dollar index	90.5
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.53
Current Coupon Ginnie Mae TBA	103.813
30 Year Fixed Rate Mortgage	4.07

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

The minutes from the FOMC meeting are coming out at 2:00 pm EST today. Investors will be focused on plans to shrink the balance sheet and also any sort of discussion about DC. Be careful locking around that time - we could see some volatility. 

Richmond Fed President Jeffrey Lacker resigned yesterday for making unauthorized disclosures to a consulting firm owned by the Financial Times. Lacker was a non-voter, so it should make no difference to monetary policy. 

Mortgage applications fell 1.6% last week as purchases rose 1% and refis fell 4%. Refis fell to 42.8%, the lowest since October 2008.

The ADP jobs number came in at 263,000 which means we should expect a strong employment situation report this Friday. The Street is predicting 178,000 jobs were added in March. Construction added 49k jobs while IT lost 10k. This is the third month in a row with more than 240k jobs added:

The Gallup US Job Creation index also hit a new high. The US PMI Services index fell however. The ISM Services index fell as well. 

Don't forget, we are exiting Q1, which for some reason has been a weak quarter for over a decade. If past trends hold, we should be seeing a pickup during the spring and summer. 

Jamie Dimon weighed in on banking regulation in JP Morgan's annual letter to shareholders. The system is much safer today than it was in 2008, however he argues that many of the regulations put in place were hastily drawn up and should be reviewed. He mentioned that new regulations surrounding mortgage lending have raised costs to consumers and restricted lending to people with low credit scores needlessly. Interesting comment since JP Morgan pretty much got out of the FHA business years ago.