Morning Report: Gary Cohn resigns

Vital Statistics:

	Last	Change
S&P Futures	2703.3	-21.0
Eurostoxx Index	371.3	-2.4
Oil (WTI)	62.1	0.5
US dollar index	83.5	-0.3
10 Year Govt Bond Yield	2.86%
Current Coupon Fannie Mae TBA	102.25
Current Coupon Ginnie Mae TBA	102.5
30 Year Fixed Rate Mortgage	4.4

Stocks are lower this morning on the prospect of a trade war. Bonds and MBS are up.

White House Economic Adviser Gary Cohn has resigned after losing the argument on tariffs. Cohn, a Democrat, was one of the more moderate voices in the Trump Administration, and his resignation cements the idea that the Administration is turning away from globalization, which has marked Washington establishment for decades.  

So far the potential trade war hasn't had much of an effect on the Fed Funds futures, which are handicapping a 86% chance of a hike in May and have centered on 3 hikes for the full year. The impact of a trade war will be an interesting question for the Fed. On one hand, they raise prices, which should translate into higher inflation. On the other, they depress economic activity which should translate into slower growth and higher unemployment. The first effect is more near term, while the second order effect is longer-term. 

Bolstering the Administration's case for tariffs is the fact that the trade deficit rose to a 9 year high last month. 

Atlanta Fed President Raphael Bostic says that the Fed should take a "wait and see" approach to a trade war. While the Trump Administration may be pushing back from globalization, Congress has not, and the courts provide another speed bump to tariffs. Note as well, that the US "ask" in trade negotiations usually centers on intellectual property protection, and that means Hollywood and Big Tech. Their partisanship will probably come back to haunt them. Think Trump is going to care about the Chinese pirating the latest Michael Moore flick? Or the latest left-wing Netflix "documentary?"

The economy added 235,000 jobs in February, according to the ADP Employment survey. The Street is looking for 205,000 jobs in Friday's jobs report. The ADP report has been coming in higher than the BLS reports lately, so this should have a muted effect. Secondly, the focus on the jobs report (at least from the Street's perspective) has shifted from payroll growth to wage inflation. 

Mortgage Applications rose 0.3% last week as purchases fell 1% and refis rose 2%. The average 30 year mortgage rate rose 1 basis point to 4.65%, the highest since early 2014. 

Nonfarm productivity for the fourth quarter was revised upward to flat, while unit labor costs were revised upward to 2.5% from 2.0%. Compensation costs drove the increase. So far, companies have been unable to pass on higher costs in the form of higher prices, which should mean profit margins will come in, making stocks vulnerable.  This should translate into lower interest rates at the margin.

A real estate startup called Knock is looking to disrupt the real estate industry by acting as a market maker for homes. They will buy a seller's home, move them into a new one, and then sell the old home. The benefit for the home seller is that they will now be able to compete in bidding wars without having any sort of home sale contingencies. That said, this is clearly a bull market phenomenon, and in this market the tough part is not selling your current house - it is getting (and winning) your new one. Still an interesting idea. 

Morning Report: Discussing the mortgage interest deduction

Vital Statistics:

	Last	Change
S&P Futures	2582.0	-1.0
Eurostoxx Index	396.3	0.3
Oil (WTI)	56.0	0.3
US dollar index	87.9	0.0
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.95

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

It should be a quiet week with respect to market-moving data and Fed Speak. New York Fed Governor William Dudley speaks at noon today, and that is it for the week. William Dudley is set to retire in mid-2018.

Work on tax reform continues, with both the House and the Senate drafting their own bills. Blue state Republicans (especially in CA, NY and NJ) are fighting to save the state and local tax deductions. The House hopes to vote on the bill next week. My sense is that the path to passage is so narrow that it will be a largely symbolic bill designed more to achieve a legislative victory than to reform taxes. I also think the estate tax will survive in order to save the state and local tax deduction. 

White House economic advisor Gary Cohn says that he doesn't think eliminating the mortgage interest deduction will affect the housing market. “The ability to deduct interest is a component that allows you to buy a bigger house, not what drives you to buy a house,” Cohn said during a Bloomberg Television interview Friday. It will affect the luxury market (especially in areas like the Northeast, where the luxury market is already weak),  but with the median house price around $245,000 limiting the mortgage interest deduction to $500,000 won't affect most MSAs. If you wanted to eliminate the MID at a point where it will cause the least amount of pain, now would be the time to do it, simply because low interest rates are making the interest portion of the typical mortgage payment small by historical standards. Back when interest rates were super high in the early 80s, almost 100% of your first year's mortgage payment went to interest. Today, about 70% is interest. 

The National Association of Realtors weighed in on the mortgage interest deduction as well, and they are against changes to it, as you would expect. They commissioned a study earlier this year that predicted a 10% drop in home prices and that homeowners with incomes between $50,000 and $200,000 would see an average increase in taxes of $815. 

One wrinkle to the change in the MID is that it applies to newly-purchased homes. So, if you haven't moved, your existing MID would not change. That will make depress existing home sales at the margin, but I can't see people staying put simply because of tax treatment of mortgage interest. People move for various reasons, but tax treatment usually isn't one of them. Regardless, if this provision stays, the death of the MID will have a much less dramatic effect than people are forecasting. 

Morning Report: MBA GSE reform plan shouldn't affect mortgage pricing much

Vital Statistics:

	Last	Change
S&P Futures	2472.5	-1.0
Eurostoxx Index	379.5	-0.2
Oil (WTI)	49.8	0.2
US dollar index	86.0	0.0
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.94

Global stocks are lower after the Bank of England cut its growth forecast. Bonds and MBS are up. 

Initial Jobless Claims fell by 5,000 to 240,000 last week. Employers are holding on to their employees. Separately, Challenger and Gray reported that there were 28,307 announced job cuts in July, which is the lowest level since November last year. 80,000 hiring announcements were also made in July, which is the highest July reading on record. 

The ISM non-manufacturing index slipped in June, which appears largely driven by seasonal factors. 

Goldman Sachs alum Gary Cohn is reportedly the front-runner to replace Janet Yellen at the Fed when her term expires. He would be the first non-economist to run the Fed since the disastrous tenure of G. William Miller during the Carter Administration. 

Fannie Mae reported net income of $3.2 billion in the second quarter. It paid a $2.8 billion dividend to Treasury in June. Fannie is returning to its roots as well: "Fannie Mae has transitioned from a portfolio-focused business to a guaranty-focused business. Income from the company’s guaranty business accounted for more than 75 percent of the company’s net interest income in the first half of 2017. Fannie Mae expects net interest income from the company’s guaranty business to account for an increasing portion of net interest income as its retained mortgage portfolio continues to shrink." Fannie Mae drew $116B from Treasury during the crisis, and has paid $163B in dividends back. Those dividend payments have been used to shore up Obamacare. 

The MBA concludes that its plan for housing going forward will have little impact on consumer borrowing costs. Some of the proposals will lower costs, while others will increase costs. The biggest change would cement the explicit guarantee for GSE MBS by the government. This will push down rates and also increase demand, assuming that bank regulatory capital requirements will treat the new GSE MBS the same as GNMA MBS. In other words, banks can treat GNMA MBS as Treasuries and require no capital against them. FNMA MBS have a 20% hit. On the other side of the coin, there will be additional fees earmarked for affordable housing and possibly increased guaranty fees to protect the taxpayer. There will have to be a debate over how big the credit box will be, and affordable housing types will argue it should be bigger while taxpayer advocates will want it smaller. Overall, MBA thinks it will be a wash when it comes to mortgage pricing. 

Luxury home price appreciation outpaced the rest of the market for the first time since 2014, according to Redfin. Much of this was driven by homes being taken off the market. The average luxury home price was 1.79 million, which means we really are talking about the rarified top end of the market. The number of luxury homes on the market fell 9.4% YOY. 1.7% sold above list. The rest of the market averaged $336k and 26% traded above list. 

The debt ceiling is looming, and Mitch McConnell and Paul Ryan are advocating for a hike without spending cuts, which is sure to anger many in the GOP. 

10 years ago, the Jim Cramer rant that unofficially heralded the start of the financial crisis.