Morning Report: Strong ADP number offsets trade fears

Vital Statistics:

			Last	Change
S&P futures			2576	-38
Eurostoxx index			365.5	-3.53
Oil (WTI)			62.56	-0.95
10 Year Government Bond Yield				2.75%
30 Year fixed rate mortgage				4.41%

Stocks are lower this morning on trade war fears. Bonds and MBS are up.

While the drop in the futures is pretty dramatic, the market is basically just giving back the end-of-day ramp yesterday after the Administration said there is nothing imminent with Amazon. We are coming out of a long period of low volatility in the stock market, and volatility begets volatility. The silver lining is that Treasuries love stock market volatility, so they stand to benefit at the margin. 

Mortgage Applications fell 3.3% last week as purchases fell 2% and refis fell 5%. "Heading into the holiday weekend, mortgage application volume fell a bit both for purchase and refinance volume," said MBA Chief Economist Mike Fratantoni. "Mortgage rates were little changed for the week, despite the increase in financial market volatility. Potential homebuyers may be a little rattled by the swings in the stock market the past few weeks, but the job market continues to strengthen, which should power demand through the spring season. The main uncertainty remains whether enough listings will be available to meet this demand."

Factory orders increased 1.2% in February, a bit lower than the Street estimate of 1.7%. 

The ISM Non-Manufacturing Index dipped in March to 58.8 last month. Interesting comment from a builder: "The unbelievable amount of market volatility in construction-related materials that started with lumber continues with the tariffs on steel and aluminum. Accurate, long-term planning has become incredibly difficult, as distributors that historically held costs for at least 30 days are now, in some cases, committing to only seven days, as prices can change drastically in that time."(Construction). Increasing housing starts has been a manana story forever, and it looks like that might be the case again this year. 

Street estimates for Friday's payroll number might be too low, at least if you look at the ADP number, which came in way stronger than expected at 241,000. The Street is looking for an increase of 175k in Friday's report. While the ADP number doesn't track the BLS number as tightly as you think it should (it actually tracks the revised number, not the preliminary one), it does indicate that trade issues haven't affected employment, at least not yet. Manufacturing payrolls increased by 29k (strongest in 3 years), but remember that there are winners and losers in a trade war with China. For every steelworker, there are many more who work for a manufacturer that uses steel as an input. Construction employment was up smartly as well.  

Wilbur Ross said that the US may end up negotiating with China on trade. In other words, all of this is simply a negotiating tactic. 

Regardless of the payroll number, the main focus is wage inflation these days, so even if you get a big payroll number you might not see much of a reaction in the bond market if average hourly earnings are only up a little (consensus is 0.3% MOM / 2.7% YOY). Higher wages are fighting to chart below, which is the employment-population ratio. The most striking feature is how dramatic the Great Recession was. Most of the 30 increase in the ratio which was driven by women entering the workforce was given back. 

The Fed has a model which looks at demographics and that ratio, which predicts a drop in the ratio due to the retirement of the baby boomers. In fact, that model shows that we are much closer to full employment than the chart above suggests. 

Lennar reported first quarter earnings this morning. It it hard to read too much into the numbers: there are tax charges from tax reform and a partial quarter for the CalAtlantic deal, so the increases in orders, backlog, average selling prices, etc aren't really comparable to other builders. Lennar also launched a second multi-family fund, while it is looking to sell Rialto, its commercial real estate arm. 

San Francisco Fed Chairman John Williams has been nominated to take over the NY Fed. This makes him Vice Chairman of the FOMC as well. 

Vehicle sales rebounded last month, which should boost Q1 GDP estimates. 

Spotify went public yesterday without the services of an investment bank. Not sure that we are quite ready to write the epitaph for investment banking, but this is a big deal. 

Morning Report: Dovish comments drive 10 year yields to 2017 lows

Vital Statistics:

	Last	Change
S&P Futures	2465.0	5.3
Eurostoxx Index	374.0	0.3
Oil (WTI)	49.2	0.6
US dollar index	85.3	0.0
10 Year Govt Bond Yield	2.07%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.8

Stocks are up this morning on no real news. Bonds and MBS are up on dovish Fed-speak yesterday.

We had two doves speaking yesterday (Lael Brainard and Neel Kashkari). Brainard suggested that the Fed had more work to do on getting inflation up to its target level, while Kashkari mused that the Fed's rate hikes may have damaged the economy. Congress will try and get tax reform done this year, however that is probably a long shot. Absent tax reform, it is hard to see how rates don't gradually drift lower to pre-election levels. Growth is better than 2016, but not that much better. 

The ISM Non-manufacturing index (a survey of the services industry) rose in August to 55.3. Business Activity, new orders, and employment drove the increase. We are seeing some positive comments in the construction sector as well. 

Mortgage Applications rose 3.3% last week as purchases rose 1% and refis rose 5%. Yesterday, bond yields touched a 2017 low and are back at levels immediately after the election. The 30 year fixed rate mortgage went out yesterday at 3.8%. 

Hurricane Irma is expected to hit Florida this weekend and could be a bigger storm than Hurricane Katrina. Between Harvey and Irma (and Jose who is a few days behind Irma) FEMA will run out of money. Irma is going to be much more dangerous than Harvey, which was largely a slow-moving flood event. Expect a quick resolution to the debt ceiling. Nobody is going to be grandstanding over the national debt with this going on. 

US economic confidence increased in August, according to Gallup. We are starting to see a small divergence between current conditions and future conditions. For most of these confidence indices, we have been seeing higher future confidence than current confidence. In the Gallup index, future confidence is lower. Not sure if this is a one-off, or the current sturm and drang in Washington DC is beginning to have an effect. Business and consumers have generally been ignoring politics. 

Confidence will probably take a hit over the next month as Harvey increases gasoline prices. Hurricane Irma is expected to hit other commodity markets like sugar, orange juice, and natural gas. The consumer confidence indices are generally inversely correlated with the energy indices - in other word, prices and the pump increase and consumer confidence falls. 

The commercial mortgage backed securities market is having a good month, with $16 billion in the pipeline for September. The new Dodd-Frank risk retention rules kicked in at the end of last year and issuers are becoming more comfortable with them. Hopefully this will translate into more residential MBS issuance. The private label MBS market remains dormant. 

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. 

Morning Report: FOMC minutes show uncertainty over Trump

Vital Statistics:

	Last	Change
S&P Futures	2262.5	-2.0
Eurostoxx Index	365.1	-0.2
Oil (WTI)	5375.0	0.5
US dollar index	92.6	-0.4
10 Year Govt Bond Yield	2.42%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.18

Stocks are down small on no real news. Bonds are up on the FOMC minutes from yesterday. 

The private sector added 153,000 jobs in December, according to the ADP jobs report. This is below the 172,000 consensus figure. The Street is looking for 175,000 jobs in tomorrow's payroll report. As the labor market tightens, job growth should slow. 

Announced job cuts increased slightly in December, according to outplacement firm Challenger, Gray and Christmas. 

Initial Jobless Claims came in at 235k last week, which is the lowest level since 1973. People that have jobs are generally keeping them. 

Consumer comfort slipped last week, according to the Bloomberg Consumer Comfort Index.

The ISM Non-Manufacturing Index was flat in December, and came in above estimates. New Orders and pricing drove the increase, however employment fell. 

The FOMC minutes didn't reveal much from the December meeting, aside from the fact that the interest rate forecast was based on the assumption that we would see more fiscal stimulus out of Washington, either via an infrastructure build or a tax cut. If we don't get that, then the growth estimates, (and the assumed path of interest rate hikes) are probably too high. Note that Congress seems to be settling on repealing Obamacare as the first order of business. If so, that would probably poison the well for any sort of infrastructure spend and / or tax cuts. Which means interest rates should be heading downward, all things being equal. Bonds initially rallied on the minutes, gave back the gains, and then started rallying again this morning. Note that the Fed Funds futures are predicting two rate hikes next year, with a possibility of a third. 

Note that the Fed has been consistently high in its estimates for GDP growth. The chart below looks at the Fed's forecast for 2016 GDP growth at different points in time, starting with the June 2014 estimate. 

Part of the problem with the Fed's forecast has been that this recovery is different from the typical cyclical slowdown. In those, the issue is excess inventory, which causes companies to lay off employees. Once the excess inventory is liquidated and sufficient pent-up demand is created, the expansion begins. This time however the issue is bad debt from the bubble years, and that takes longer to work off. Instead of a V-shaped recession and recovery, we have more of a bathtub-shaped recovery. The effect of the bubble years also has a scarring effect on both consumers and business leaders (what Keynes called the animal spirits) which causes caution. That is why capital expenditures have been weak and why we are only building about 1.3 million new houses a year when we probably need 2 million a year. 

Holiday sales (at least for the bricks and mortar retailers) seem to be disappointing as same store sales come in. Kohl's and Macy's both warned this morning and are down double digit percentages. Macy's is cutting 10,000 jobs. Given that online is cannibalizing bricks and mortar, it is tough to draw too many conclusions from this, however it is probably helping bonds at the margin. We will get the government's estimate of retail sales next Friday. 

Mortgage Performance improved in the third quarter, according to the OCC. 94.8% of first lien mortgages were current and performing as of 9/30 compared to 93.9% last year. Foreclosure starts were down 25%.

Morning Report: The Fed stands pat

Vital Statistics:

	Last	Change
S&P Futures	2096.8	5.0
Eurostoxx Index	333.8	0.7
Oil (WTI)	45.5	0.1
US dollar index	87.8	0.0
10 Year Govt Bond Yield	1.82%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.64

Stocks are mixed this morning after the Fed maintained interest rates. Bonds and MBS are down.

The Fed maintained interest rates at current levels yesterday. The meat of the statement: The labor market continues to strengthen, household spending is improving while business spending remains a weak spot. Inflation is ticking up but remains below the target rate. Esther George and Loretta Mester dissented, wanting to hike at this meeting. Bonds rallied maybe a basis point on the statement. 

This morning the Bank of England said that it doesn't plan on cutting interest rates this year, which is causing a global sell-off in sovereign debt. 

Announced job cuts fell 31% to 30,740 according to outplacement firm Challenger Gray and Christmas. This report looks at press announcements of job cuts, which may or may not ever materialize. Regardless, it does make the case that companies are holding onto their workers. In fact, this was the lowest October since 1999. Job cuts were most in the computer industry (largely related to HP), while cuts in the energy patch are slowing down considerably from earlier this year. 

Initial Jobless Claims ticked up to 265k last week, which is still an extraordinarily low number. Separately, the Bloomberg Consumer Comfort Index ticked up.

The ISM Non-Manufacturing Index dropped to 54.8 from 57.1 in September. This means the service economy is growing, however growth is decelerating. Transportation and Construction is leading the charge, while mining and educational services are lagging.

Productivity broke out of its long slump with a 3.1% increase in the third quarter. Output increased 3.4% and unit labor costs increased 0.3%. Increasing productivity is good news as it means wages can increase without generating inflationary pressures. Productivity has been disappointing ever since the economy bottomed, however. 

Both Republicans and Democrats look back wistfully on the 50s and the 60s. These years were an economic glory time, where unemployment was extraordinarily low, jobs were plentiful and high paying, and a single income was sufficient to support a family. The Third Quarter of the 20th Century basically began with the end of the Korean War and concluded with the oil shocks of the early 70s. Both parties want to bring back those times. Is that realistic? Probably not. The postwar decades were an extraordinary period where the US had no international competition, and not only had to satisfy its own demand, it had to satisfy the demand of Europe and Asia. The US earned what economists call "economic rents" and they were split between organized labor and government. By the late 70s, Europe was back on its feet and both old and new competitors were emerging from Asia. These economic rents were competed away (as they inevitably are). While this was good news for consumers and stockholders, it was bad news for union workers in general. Anyone who wants to bring back the salad days of the 50s and 60s needs to come up with a plan to get Angela Merkel to invade Poland. Donald Trump's vision of pre-free trade America won't get you there. Neither will the left's vision of an "smart" paternalistic regulatory state and 90%+ marginal tax rates. 

Morning Report: The 10 year bond yield approaches 2013 levels

Vital Statistics:

	Last	Change	Percent
S&P Futures	2037.6	-19.9	-0.98%
Eurostoxx Index	2920.0	-85.0	-2.83%
Oil (WTI)	37.05	-1.3	-3.36%
LIBOR	0.625	-0.006	-0.91%
US Dollar Index (DXY)	94.63	0.048	0.05%
10 Year Govt Bond Yield	1.71%	-0.05%
Current Coupon Ginnie Mae TBA	105.6
Current Coupon Fannie Mae TBA	104.9
BankRate 30 Year Fixed Rate Mortgage	3.62

Markets are lower for the second day in a row on global growth concerns. Bonds and MBS are up.

With the latest bond market rally, the 10 year bond yield is a stone's throw away from the 2013 "taper tantrum" when the Fed began its withdrawal of QE. Part of the reason for the bond rally is the flight to safety in Europe. The German Bund now yields under 10 basis points. Talk about a all-risk/no reward trade. Falling global bond yields are pulling US Treasury yields lower as investors sell European and Japanese bonds to buy US Treasuries. For the mortgage industry, it should mean more refi volume. Since the Fed hiked rates in December, the 10 year yield has fallen 58 basis points. Who'd a thunk?

The ISM non-manufacturing index improved in March, after decelerating for most of last year and this year. Employment continues to be neutral. 

Job openings fell in February to 5.445 million from 5.6 million the month before. These are still boom-time levels, which begs the question as to why the labor market continues to have such a low labor force participation rate. Many would argue it is a skills gap - the labor people need isn't what is out there there right now. 

Good article on how hard it can be for Millennials to get a mortgage these days if you have bad credit, given the regulatory shelling that has been going on for the past 8 years. There is definitely a cognitive dissonance in DC over the competing goals of increasing access to credit and slugging "unregulated" financial system even harder.

Ever wonder why a government guaranteed mortgage backed security trades for a much higher yield than the corresponding Treasury? The credit risk is the same - i.e. zero - so what is the reason for the difference. I discuss the reason in Rob Chrisman's blog. Note there is some bond geek math going on in the explanation.

Former Fed Head Narayana Kochlerakota discusses the way we use the financial system for social engineering, and suggests if the government thinks college and housing needs to be subsidized, the answer is to subsidize it directly instead of subsidizing borrowing. FWIW, I have always thought the issue with college tuition inflation is that college is a good with inelastic demand. Colleges don't compete on price and parents will pretty much pay whatever is asked. When the government subsidizes an inelastic good, the subsidies accrue to the producer, not the consumer. Which means the net effect is that the more the government subsidizes college education, the more colleges raise tuition. 

Morning Report: How's that working for you?

Vital Statistics:

S&P Futures	1909.9	12.5	0.66%
Eurostoxx Index	2933.6	-18.2	-0.62%
Oil (WTI)	30.73	0.9	2.84%
LIBOR	0.619	0.006	0.98%
US Dollar Index (DXY)	98.32	-0.555	-0.56%
10 Year Govt Bond Yield	1.88%	0.04%
Current Coupon Ginnie Mae TBA	105.4
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.71

Stocks are higher this morning after oil rebounds overnight. Bonds and MBS are down. 

Mortgage Applications fell 2.6% last week as purchases fell 7% and refis rose 0.3%. 

The ISM Non-Manufacturing Index fell to 53.5 from 55.8 in January

The ADP Employment Change report came in at 205k. The Street is forecasting 190k in Friday's jobs report. 

Bill Gross's latest Investment Outlook takes some shots at central bankers, and asks why we think negative interest rates are going to generate growth. As he says "How's that working for you?" While the consumer has deleveraged over the past 10 years, corporate america has not. That said, corporate america has taken advantage of record-low interest rates to refinance and extend high coupon debt with lower coupon debt. When people are willing to lend you money at 2% for 20 years, why not take it?

Speaking of negative interest rates, it seems the only nation anymore that isn't playing the beggar thy neighbor devaulation game is the US. Exports are falling, while imports are rising. This is the reason why we are seeing everyone - from Republicans to Democrats - willing to take potshots at free trade. Of course foreigners can accept one of two things in payment for their imports: goods and services from the US or IOUs (Treasuries). So far, they seem to want the IOUs. Which means interest rates are lower than they ultimately would be. Still manufacturing job losses are easy to point to versus interest rates and the benefits of cheaper imports. 

Another day, another settlement with the banks: Wells is paying FHA $1.2 billion over "failure to properly review early payment defaults in 2010-2012." And the government is scratching its head wondering why banks like JP Morgan are reducing / exiting FHA lending... At what point do these constant suits and settlements become simply a surtax on banking?