Morning Report: Seattle home prices rise 13%

Vital Statistics:

	Last	Change
S&P Futures	2433.8	-2.3
Eurostoxx Index	386.3	-2.7
Oil (WTI)	44.0	0.6
US dollar index	88.4	-0.3
10 Year Govt Bond Yield	2.17%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.91

Stocks and bonds are lower this morning as we have a lot of central bankers speaking today. 

Home prices rose .5% in April and are up 5.7% YOY, according to the Case-Shiller Home Price Index. Seattle home prices rose almost 13%, while Portland and Dallas rose over 9%. They ask the question whether we are in another bubble, which we are not. Bubbles are fundamentally psychological phenomenons, where both investors and lenders view an asset as "special" and argue that it cannot fall in price. While home prices may be reaching unsustainable levels, the lending side of the business is emphatically not exhibiting bubble-like behavior. Credit is still tight for anything that doesn't fit in the government / GSE box. In fact, the government would like lenders to take more risk than they are willing to take at the moment. 

Consumer confidence rose in June, while the Richmond Fed Manufacturing index improved. 

Fannie Mae's latest Housing Outlook is out, and they are predicting 2% GDP growth for 2017. For Q2, they are forecasting 2.9%. Housing will continue to be held back by labor and land shortages, however mortgage rates will remain supportive of the housing market in general. 

Senators Bob Corker and Mark Warner are working on a plan to break the Fannie / Freddie duopoly. The plan would split the single-family and multi-family lines and break the single family up into more independent firms. The broad guidelines are to increase competition, reduce barriers to entry, reduce risk to the taxpayer, and to maintain the 30 year fixed rate mortgage. The most difficult part will be dealing with low-to-moderate income support, where there are genuine philosophical differences between Republicans and Democrats. 

The bloom is off the rose for the post-election surge in confidence, according to Gallup. The economic confidence index stayed at 3 last week, off of its March high of 15, but still above the pre-election level of -11. Much of this breaks down along partisan lines, with Democratic voters the most gloomy about the economy and Republican voters most confident. Before the election, this dynamic was reversed - with Democrats optimistic and Republicans pessimistic. 

Morning report: Hard vs soft data

Vital Statistics:

	Last	Change
S&P Futures	2345.5	-10.5
Eurostoxx Index	378.7	-0.6
Oil (WTI)	50.5	0.3
US dollar index	90.5
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	103.41
Current Coupon Ginnie Mae TBA	103.7
30 Year Fixed Rate Mortgage	4.09

Stocks are lower this morning after auto sales disappointed. Bonds and MBS are up. 

Factory orders rose 1% last month, in line with expectations.

US economic confidence decreased last week, according to Gallup, however confidence is still strong. Meanwhile, consumer spending was flat. 

These data points (economic confidence, consumer spending, and auto sales) illustrate the conundrum we have been seeing for the past few months: soft data like confidence and ISM reports show a strong economy, while the hard data like sales have been showing a mediocre economy. Much of this is Washington-driven as investors realize that Trump will have a difficult time pushing through his agenda in the face of unified Democratic opposition and a Freedom Caucus that wants less government, period. Unrealistic expectations are being brought back to Earth. Despite gridlock, much is being done on the regulatory front and with executive orders which don't require Congressional approval. That will help. But there seems to be a shift in the psychology of investors: the markets seem to be worrying less about the Fed and worrying more about tepid growth. Bonds have noticed as well, with the 10 bond yield down about 30 basis points over the past 3 weeks. 

Home prices rose 7% YOY in February, according to CoreLogic. We are seeing the highest price appreciation at the lower price points. The first time homebuyer is getting hit with a double-whammy of higher prices and borrowing costs. 

Housing's share of GDP came in 15.6% in the fourth quarter. Historically, that number has been around 18%. Housing continues to punch below its weight, as evidenced by tight inventory. It is hard to know exactly why homebuilding continues to be weak - credit is an issue, as is the general post-bubble caution, along with local land use regulations. 

Morning Report: Optimism remains in short supply

Vital Statistics:

	Last	Change
S&P Futures	2152.8	-6.0
Eurostoxx Index	342.3	0.3
Oil (WTI)	51.0	-0.3
US dollar index	87.9	0.3
10 Year Govt Bond Yield	1.77%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Stocks are up small on no real news. Bonds and MBS are down. 

Alcoa kicked off Q3 earnings season with a miss. Earnings season gets into full swing next week when all the big banks announce. 

While bond yields rose pretty dramatically during September, there are still $10.7 trillion worth of negative bond yields worldwide. Half of it is from Japan. The German Bund is now trading at a yield of 6 basis points.  A years' interest on a 1 million euro Bund would cover one night at the Bayerische Hof hotel in Munich. Happy Oktoberfest.

Small business optimism dipped in September, according to the NFIB. Sentiment came in at 94.1, well below the historical 98 average. The bright spot was an improvement in economic expectations (basically improving to neutrality) while job openings and inventories fell. Small business is also firmly in maintenance capital expenditure mode, choosing not to deploy capital for expansion. The election is probably having a negative effect on sentiment as well. 

Meanwhile, the US economic confidence index continues to languish in negative territory. Historically, you would see a jump in confidence around election times, as candidates promise to make things better. Not this time around, however. This also makes the Fed's job more perilous, as they don't want to depress what little animal spirits are out there at the moment. 

Tim Duy argues that Friday's jobs report is bad news for Fed hawks who want a December tightening. He sees November as a long shot, and December as not a foregone conclusion. Lots of wonky labor economics, but he does give you a good idea on how the Fed thinks. 

Goldman is out with a "be cautious" call for the rest of the year. A vulnerable European economy, combined with high US stock prices means the market could be looking at a 2% decline over the next couple of months.