Morning Report: The Fed maintains rates as expected

Vital Statistics:

			Last	Change
S&P futures			2622	-5.75
Eurostoxx index			385.94	-1.5
Oil (WTI)			67.7	-0.21
10 Year Government Bond Yield				2.94%
30 Year fixed rate mortgage				4.58%

Stocks are lower after the Fed maintained interest rates. Bonds and MBS are up. 

As expected, the Fed maintained its current Fed Funds target yesterday. The money quote: Inflation on a 12-month basis is expected to run near the Committee's symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced. The "symmetric" characterization of their inflation target (as opposed to treating the 2% target as a ceiling) gave markets some comfort that the Fed is going to continue its slow upward march in the Fed Funds rate as long as inflation remains around these levels. Bonds initially fell on the news and then rallied. 

The Fed Funds futures are pricing in a 100% chance of a tightening at the June meeting, and the December futures are pricing in one more tightening this year, with a smaller chance of 2. 

Job cuts fell in April after an unusually strong March, according to outplacement firm Challenger, Gray and Christmas. Retail has accounted for the largest share of job cuts this year, followed by health care. For the year, companies have announced around 175,000 job cuts, while announcing 210,000 job plans. C&G uses press releases to count job cuts and hirings, so it necessarily relate to the payroll numbers being put out tomorrow by BLS. 

Productivity rose 0.7% while unit labor costs rose 2.7% in the first quarter, according to BLS. Weak productivity growth has been an issue for a while and is one of the reasons why wage growth has seemed muted. Increases in standards of living are driven by increases in productivity. The increase in unit labor costs may be related to many of the minimum wage hikes we saw at the beginning of the year. Theoretically, the lower the productivity, the less room the Fed has to maneuver. 

Initial Jobless Claims rose slightly to 211,000 which is still close to 50 year lows. 

The service sector continues to expand, albeit at a slower pace than March according to the ISM Non-Manufacturing Index. The respondents echoed the same trade fears as the manufacturers did. Some snippets:

• “Economy is humming along. [Activity in] both residential and commercial construction [is] apparent. Agriculture sector seems to be moderating at these commodity price levels. The international trade situation appears to be shifting on a minute-by-minute basis, which has folks nervous.” (Finance & Insurance)
• "National shortage of Class-A drivers and the increased demand for logistics is resulting in an increase in the cost of goods." (Accommodation & Food Services)
• Construction activity continues to remain strong in the region, resulting in capacity issues and shortages of labor, materials and subcontractors.” (Public Administration)

Bill Gross thinks the upward move in interest rates is pretty much done, and he doesn't see much more of a move from here. “Supply from the Treasury is a factor in addition to what the Fed might do in terms of a mild, bearish tone for U.S. Treasury bonds,” Gross told Bloomberg TV. “I would expect the 10-year to basically meander around 2.80 to perhaps 3.10 or 3.15 for the balance of the year. It’s a hibernating bear market, which means the bear is awake but not really growling.”Of course Bill is talking his book a little, but he is probably right, with the caveat that inflation remains around the 2% level.

Beware of cult stocks once they lose favor with the Street. Tesla's conference call was supposedly a disaster last night, and Elon Musk decided to take questions from You Tube people instead of analysts who were interested in things like cash burn. Comparisons are being drawn to Enron's conference call in the early 00s when Jeff Skilling blew up at analysts which caused people to take a more critical look at the company. Don't forget TSLA bonds have been getting slammed, and that is toxic for a stock with negative cash flow trading over 4x revenues. 

Fannie Mae results are out. The company made $4.3 billion in the first quarter. 

Big fixed income money managers have not had much of an appetite for MBS as QE pushed down returns. That may be changing, as BlackRock and BNP Paribas are allocating more funds to the sector. One big advantage of MBS is liquidity. What does this mean for mortgage originators? Lower rates, at least at the margin. 

Morning Report: FOMC statement and government pricing

Vital Statistics:

	Last	Change
S&P Futures	282.0	-2.8
Eurostoxx Index	395.1	-0.4
Oil (WTI)	65.4	0.7
US dollar index	83.3	0.0
10 Year Govt Bond Yield	2.74%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.19

Stocks are down small on earnings. Bonds and MBS are down small as well. 

The Fed left interest rates unchanged, and released a somewhat hawkish statement. The changes weren't really all that major, and they confirmed what we pretty much already know: the economy continues to strengthen, the labor markets remain tight, and inflation remains below target. The Fed Funds futures pushed up their probability estimate for a March hike by a few percentage points and the market is now handicapping a 77% chance of a 25 basis point hike in March. Bonds sold off a couple of basis points on the statement. 

Initial Jobless Claims came in at 230,000 last week, a drop from the downward-revised 231,000 the week prior. Meanwhile, the Challenger Job cuts report increased to 44,500 as retailers shed jobs after the holidays. 

Nonfarm productivity declined 0.1% last quarter as output increased 3.2% and hours worked increased 3.3%. Unit labor costs increased 2.0%, with compensation increasing 1.8%. Manufacturing productivity really took off, as output increased over over 7% while hours worked increased 1.5%. Productivity is incredibly hard to actually measure, but it is the secret to increasing living standards. A lack of productivity growth since the late 90s has acted to depress wage growth. 

Some loan officers have noticed that FHA and VA pricing has been lousy lately higher up in the rate stack. This is an industry-wide phenomenon. For some reason, there is not much demand for the higher coupon Ginnie Mae TBAs, which means borrowers aren't seeing the pickup in lender credit they would expect as they go up in rate. It has been so bad, that we are seeing state downpayment assistance programs suspend pricing until things work themselves out. I am not sure what is driving this - the knock on Ginnie mortgage backed securities has always been prepayment speeds. Between FHA streamlines and VA IRRRLs, the prepay speeds have been much higher than trading desks have been modeling. Ginnie has issued new guidance and regulations in order to prevent serial refinancings. So far, that hasn't translated into demand for the higher note rate TBAs. Loan officers, don't be afraid to contact us with pricing issues - we will do what we can to try and help. 

The DC appeals court yesterday affirmed the CFPB's structure, largely along partisan lines. The Court also lowered the penalty to PHH, so it isn't necessarily a given that this will go to SCOTUS. 

Construction spending increased 0.7% MOM and is up 2.6% YOY. Residential construction was up 0.4% MOM and 6.2% YOY. 

D.R. Horton's affordable home program targeted to the first time homebuyer is growing, and it seems like this segment is becoming the focus of the homebuilding industry, especially since demand in general (and tax law changes) are affecting the luxury end of the market. D.R. Horton started the unit in 2014, and was bucking the trend in building of buying up urban land and focusing on renters. Instead, they bought land in the less-fashionable suburbs and focused on entry-level homes. You are starting to see other builders attack this segment as well. 

Morning Report: The Fed stands pat

Vital Statistics:

	Last	Change
S&P Futures	2159.5	-1.0
Eurostoxx Index	341.6	-1.2
Oil (WTI)	42.0	0.1
US dollar index	87.5	-0.2
10 Year Govt Bond Yield	1.56%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.52

Stocks are lower this morning after the FOMC statement yesterday. Bonds and MBS are down small. 

The FOMC statement from yesterday was relatively upbeat about the economy, but gave none of the signals that a September rate hike would be in the cards. They noted that May's exceptionally weak jobs report was offset by the improvement in June. There was none of the "risks to the economy balanced" "risks to the economy tilted to the upside" language that would have been taken as a signal that they were contemplating a September hike. Note historically the Fed has tried to stay out of the way during election years, particularly in September, for fears of appearing political. With inflation well contained, they will probably maintain that posture. No reason not to. 

There wasn't much reaction to the statement yesterday. Stocks had been down on the day, rallied on the announcement and then suffered a late day sell-off that took them right back to where they were pre-announcement. The two year bond yields fell 2 basis points and the 10 year fell 4. The Fed Funds futures are now pricing in a 100% chance of a rate hike by next year this time. 

Initial Jobless Claims rose to 266k last week. Consumer comfort was flat. 

Where is the most expensive place to buy a starter home? Honolulu, where the income required to buy a starter home is over 6 figures and the median income is somewhere around $75k. Unsurprisingly, the West Coast dominates the unaffordable area. On the other side of the coin, if you make just over minimum wage, you can afford a starter home in Pittsburgh. 

Meanwhile, here are the top 20 hottest real estate markets in July this year, according to Realtor.com. Interesting mix of West Coast high flyers and Rust Belt bottom fishing.. 

Morning Report - FOMC statement

Vital Statistics:

	Last	Change	Percent
S&P Futures	1549.2	0.1	0.01%
Eurostoxx Index	2687.4	-21.5	-0.79%
Oil (WTI)	93.4	-0.1	-0.11%
LIBOR	0.284	0.000	0.00%
US Dollar Index (DXY)	82.77	-0.014	-0.02%
10 Year Govt Bond Yield	1.95%	-0.01%
RPX Composite Real Estate Index	191.8	-0.5

Markets are flat this morning after Oracle's miss.  Initial Jobless Claims came in at 336k, more or less in line with last week. The Markit PMI came in a little better than expected. Bonds and MBS are up small.

Nothing earth-shattering came out of the FOMC statement or the press conference yesterday. In the projections section, they have taken down the GDP estimate for 2013 slightly, moving the top end of the range from 3.0% to 2.8%.  They also have decreased 2013 unemployment estimate a little, taking the range midpoint from 7.55% to 7.4%.  Whether that is being driven down by a pessimistic labor force participation rate or optimistic hiring plans is unclear. Overall, it was a "steady as she goes" sort of statement. People who want to compare this statement with the previous one can do so here. Bernake's body language suggested that he isn't interested in staying on after his term expires in Jan 2014. Early favorite to replace The Bernank:  Geithner. Janet Yellen and Larry Summers are the other names mentioned.

The FHFA House Price Index increased .6% in January, just missing the +.7% estimate. New England fell .7%, while the Pacific division rose 1.6%.  The index focuses solely on houses purchased with conforming loans, so in some ways, it is more of a "central tendency" index in that distressed and jumbos are excluded.

Chart:  FHFA House Price Index:

Ellie Mae's Origination Insight Report showed that the purchases increased from 27% to 32% of all originations as interest rates backed up last month.  FHA increased its share to 20% while conventional fell to 71%.  Days to close fell from 54 days to 50, and it appears that credit is starting to ease up a bit as the average FICO fell from 749 to 745. Pull-through increased to 56.8% from 55% in January.

Signs of life in the private label market:  JP Morgan is marketing a $616MM prime RMBS offering, its first post-crisis deal.  Everbank is marketing a $308.4MM offering. I don't see anything on EDGAR yet, so I'll try and get a flavor of what they are selling and pass it on.

The Senate passed a continuing resolution to keep the government funded through the end of its fiscal year. The House is expected to vote on it today. Some of the sharp edges of the sequestration were filed down in the process. No one is expecting a government shutdown. On to the debt ceiling in August.

Market darling Lululemon has a transparency issue.  No not that kind..

Morning Report - New Government Refi Programs

Vital Statistics:

	Last	Change	Percent
S&P Futures	1494.0	-1.3	-0.09%
Eurostoxx Index	2710.9	-21.2	-0.78%
Oil (WTI)	97.69	-0.2	-0.26%
LIBOR	0.298	-0.001	-0.17%
US Dollar Index (DXY)	79.31	0.026	0.03%
10 Year Govt Bond Yield	1.97%	-0.02%
RPX Composite Real Estate Index	193.3	0.2

Markets are down small as the earnings reports continue to stream in.  Economic bellwether UPS missed analyst estimates. Initial Jobless Claims came in at 368k.  Incomes and spending rose.  Bonds and MBS are continuing to rally after the FOMC statement yesterday.

The FOMC statement broke little new ground with the exception that they may have walked back their plan to end QE this year.  Recall from the minutes of the Dec meeting, the consensus seemed to be that purchases of Treasuries and MBS would end sometime in 2013, probably towards the end of the year. That was unexpected and caused a sell-off in bonds.  Yesterday, they said that if the outlook for the labor market does not improve substantially, they will continue to purchase Treasury and agency MBS.  That caused a rally in bonds yesterday.  Aside from that, the minutes contained nothing new.

As the sequestration approaches, defense contractors are relatively sanguine. Typical corporate optimism or do they know something the rest of us don't?  Regarding the sequestration the latest amount for spending reduction is $85 billion.  The requested increase in spending from 2012 to 2013 is $74 billion.  So we are really talking about flat YOY spending (it really is a drop of $9 billion in the context of a $15.8 trillion economy).  The most likely outcome is that the sequester happens and no one notices.

Another underwater refi program is in the works, which would allow underwater borrowers in private label securitizations to refi into a government loan.  Another pilot program would have Treasury buy mortgages out of private label pools and mod the rates.  A backup plan would have Treasury cut the rates and pass on the difference between the old and new rate to the investor for 5 years.  If Washington comes up with a robust plan, the refi boom (which was thought to be over) could still have some legs.

Opposition to Obamacare is coming from an unlikely source:  unions.

Morning Report - QE4EVA

Vital Statistics:

	Last	Change	Percent
S&P Futures	1427.7	0.5	0.04%
Eurostoxx Index	2625.6	-4.8	-0.18%
Oil (WTI)	86.29	-0.5	-0.55%
LIBOR	0.308	-0.002	-0.48%
US Dollar Index (DXY)	79.87	0.058	0.07%
10 Year Govt Bond Yield	1.71%	0.01%
RPX Composite Real Estate Index	191.3	0.5

Markets are flat after a mixed bag of economic data.  Retail sales increased .3% in November vs an expectation of .5%.  Initial Jobless claims fell to 343k and were well below the 369k expectation. The Producer Price Index showed inflation running lower than anticipated. The Bloomberg Consumer Comfort Index fell.  Bonds are down a few ticks and MBS are flat.

As expected, the Fed announced a Treasury buying program in its FOMC statement. $45 billion per month, until unemployment drops below 6.5% and inflation stays below 2.5%.  Bernake was careful not to characterize the 6.5% unemployment rate as NAIRU - or the non- accelerating inflation rate of unemployment. They took down their GDP projections from September, with their 2013 GDP forecast falling to a range of 2.3 - 3.0 from a range of 2.5 - 3.0.  They also took down unemployment as well, to a range of 7.3% to 7.7% from a range of 7.6% - 7.9%.  Inflation forecasts were lowered as well. Here is a video of the press conference.  Bonds reacted negatively to the announcement.  Biggest takeaway - the Fed has the pedal to the metal and they are writing the book as they go along.

Looks like no progress so far on the fiscal cliff. A recent poll shows overwhelming support for increasing taxes on the rich.  Business execs have been lobbying for a deal. Liberals are fighting spending cuts. Bernake mentioned in his press conference that the Fed does not have the ability to offset the negative effects to the economy if we go over.

A delay in BofA's jumbo deal shows just how hard it is to bring private capital back into the mortgage market. Private Label Securitizations were $3.5 billion this year, versus $1 trillion in 2006. Blame Dodd-Frank's proposed "skin in the game" rules, which combined with accounting and other requirements would require banks to hold capital against all of the underlying loans.

Transunion is forecasting mortgage delinquency rates to fall to 5.06% at the end of 2013 from 5.32% today. RealtyTrac reported foreclosure starts are at a 71 month low.

From the Department of Irony:  it turns out that the government's exit from GM hinges on the success of its newly-unveiled full size Silverado pickup.  I could have sworn I heard many in Washington claim that the reason GM hit the wall was because they were making these huge vehicles that "nobody wants."

Morning Report - 12^3 edition

Vital Statistics:

	Last	Change	Percent
S&P Futures	1433.3	1.8	0.13%
Eurostoxx Index	2629.5	5.4	0.21%
Oil (WTI)	86.35	0.6	0.65%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	79.95	-0.116	-0.14%
10 Year Govt Bond Yield	1.66%	0.00%
RPX Composite Real Estate Index	191.1	0.4

Markets are up slightly this morning ahead of the FOMC statement this afternoon. Mortgage Applications were up 6.2% last week. Right to Work was passed in Michigan. Bonds and MBS are flat.

The FOMC statement is due out at 12:30, and at 2:15, the Bernank begins his press conference. Things to look for:  New Treasury purchase plan to replace Operation Twist, 2013 GDP forecast, any comments on its outlook for housing. The WaPo speculates that the Fed will shift more buying to Treasuries than mortgages, and it looks like Bill Gross concurs, as he is lightening up his MBS position.

Looks like FHFA Acting Director will be out of a job soon. This will undoubtedly pave the way for a mass principal forgiveness / underwater refis on Fannie and Freddie loans. Mortgage-Backed securities will be vulnerable to news of more interventionist policies out of FHFA, so beware as you could have Treasury pricing and MBS pricing diverge.

While individual tax rates are going up as part of the fiscal cliff, corporate tax rates may be going down. Obama earlier this year proposed lowering the corporate tax rate to 28% from its current 35%.  The lower rates would be offset by eliminating some deductions and the net revenue would be the same. I would argue that we are at the point on the Laffer Curve where lowering rates would actually raise revenues as it would eliminate some of the transfer-pricing games companies play to declare as much income as possible overseas. The poster child of these transfer pricing games is GE, which paid no US income taxes in 2010. Or Google, which shifted $9.8 billion in revenues to a Bermuda shell company, which allowed it to avoid paying roughly $2 billion in taxes.

Dodd-Frank implementation could stall for a while after Mary Schapiro steps down as Chairman of the SEC, leaving the commission deadlocked with 2 democrats and 2 republicans.  Politically divisive issues like prop trading and restrictions on executive pay will have to wait until a fifth commissioner is nominated and confirmed.  Fun fact:  The SEC has finalized just 32 of the 95 rules that the 2010 law required.

The Fed has been quietly telling the big banks:  No more mergers. Banks that hold 10% of US deposits are already capped in size, but now it looks like the biggest banks just below that threshold are now prohibited from growing by acquisition. Fed Governor Dan Tarullo gave a speech which discusses the TBTF problem and examines various alternatives (re-instate Glass Steagall, capping non-deposit liabilities, etc.)

Morning Report - No Good Deed Goes Unpunished

Vital Statistics:

	Last	Change	Percent
S&P Futures	1413.5	8.2	0.58%
Eurostoxx Index	2500.1	9.5	0.38%
Oil (WTI)	86.63	0.9	1.05%
LIBOR	0.313	-0.001	-0.32%
US Dollar Index (DXY)	79.82	-0.091	-0.11%
10 Year Govt Bond Yield	1.84%	0.05%
RPX Composite Real Estate Index	194.1	-0.1

Markets are stronger this morning after a strong durable goods report and a good UK GDP number. Initial Jobless Claims came in at 369k and last week was revised upward to 392k.  Capital Goods orders were flat. We had a slew of decent earnings reports this morning, and Apple will report after the close. Bonds are getting clocked on the durable goods number, with the 10 year down a point and mortgages down 10 ticks.

The Chicago Fed National Activity Index came in flat, but the 3 month moving average is still negative, indicating the economy is growing below trend.

The FOMC statement yesterday was more or less a rehash of the prior statement.  Bond Traders who were looking for the Fed to add Treasuries to the QE mix were disappointed. The Fed noted that household spending has been advancing, while growth in fixed business investment has slowed.  Today's durable goods and capital goods reports bear that out.

The global slowdown is causing another round of job cuts.  This time, it is more than just Wall Street as Ford, Dow Chemical, Colgate Palmolive, AMD, and HP are all cutting staff.  The number of announced job cuts in the last 2 months is the highest since 2010.

The government is going after Bank of America for the sins of Countrywide. Needless to say, the consumer groups are delighted.  Lenders warn that credit will become even tighter. Certainly the litigation risk will get passed onto borrowers through higher rates and fees. Barney Frank believes the government should lay off JP Morgan for the sins of Bear, and claims that the government asked BOA to buy Merrill, but not Countrywide.

Whatever happened to the San Bernardino eminent domain idea?  This was the plan that involved the county taking performing underwater mortgages from the banks and forgiving principal. It appears the firestorm of criticism has caused the county to quietly table the idea.

Speaking of foreclosures, ABC News has a depressing photo essay of the foreclosure crisis.

Morning Report - QE (Infinity) and flopping

Vital Statistics:

	Last	Change	Percent
S&P Futures	1413.9	-16.2	-1.13%
Eurostoxx Index	2496.3	-34.9	-1.38%
Oil (WTI)	87.39	-1.3	-1.42%
LIBOR	0.315	-0.001	-0.16%
US Dollar Index (DXY)	79.85	0.202	0.25%
10 Year Govt Bond Yield	1.77%	-0.04%
RPX Composite Real Estate Index	193.9	-0.1

Markets are lower this morning on earnings misses.  DuPont is down 5% pre-open after missing estimates badly.  Economic bulls will note that when late cyclicals like Dupont start reporting declines, that is usually an ominous sign for the expansion. UPS noted "uncertainty around the magnitude of the holiday shopping season." Commodities are weaker as well.  Unsurprisingly, bonds and MBS are benefiting from the "risk off" trade.

Today is another light day, economics wise, but tomorrow we get the FOMC announcement. The Street is looking for the Fed to broaden QEIII to include Treasuries.  Federal Reserve Bank of New York President William Dudley acknowledged in a recent speech that current policy "could distort asset allocations and lead to renewed financial asset bubbles. To date, there is little evidence of problems or excesses" Okay.  The 10-year is yielding 1.76%, below your stated inflation target of 2%. It makes you wonder where he would consider the 10-year to be in bubble territory.

Ever heard of "flopping?" It is the new scam where an underwater homeowner sabotages the resale value of a house in a short sale, which gets the bank to lower the asking price. The homeowner partners with a speculator who buys the property on the cheap, cleans it up, and flips it. The homeowner supposedly gets a piece of the action.

The Atlantic surveys the carnage of the lending industry from 2006 to the present.  3/4 of the biggest home lenders in 2006 no longer exist. I always thought the Super Bowl ad distribution is a tell - in the 2000 Super Bowl, the ads were dominated by dot coms.  In 2006, it was dominated by lenders. Hubris before the fall. Employment in the mortgage industry is roughly half of what it was at the height of the boom. Of course, now we have the opposite problem, with capacity constraints in the banking industry.  Of course regulatory uncertainty is playing a role, as Douglas Lebda of Lending Tree notes.

Is it really all just about price?  Financial and tech consulting firm Carlisle and Gallagher conducted a survey which revealed 34% of consumers are willing to pay more for a mortgage if it comes with superior customer service.  52% said they were willing to pay more to complete the mortgage process more easily. Note to Washington, only 23% of US consumers believe regulatory changes will have a positive impact on their next mortgage.