Morning Report: Wholesale inflation remains muted

Vital Statistics:

	Last	Change
S&P futures	2888.5	-0.25
Eurostoxx index	376.66	1.28
Oil (WTI)	70.21	0.93
10 year government bond yield		2.97%
30 year fixed rate mortgage		4.64%

Stocks are flat this morning as the East Coast braces for Hurricane Florence. Bonds and MBS are flat.

Mortgage Applications fell 1.8% during the Labor Day week as purchases increased 1% and refis fell 6%. The refi index is now at an 18 year low. We saw a 5 basis point increase in rates, which drove the drop in refis. As rates rise, cash-outs, fixed-for-ARM, and FHA for conventional are about the only game in town. 

Despite tariffs and increases in raw materials prices inflation at the wholesale level remains under control. The producer price index fell 0.1% last month but rose 2.8% on an annualized basis. Ex-food and energy, the number was down 0.1% MOM and up 2.3% YOY. So, despite the increase in wages we saw in the jobs report, inflation overall remains subdued. 

Yesterday's JOLTs report showed the quits rate (which is considered a leading indicator for wage inflation) hit the highest level since early 2001. Construction job openings increased to set another post-bubble high. Hurricane Florence will only exacerbate the labor shortage as workers get drawn into repair jobs. This probably means disappointing housing starts numbers for the rest of the year. 

Below is a chart which shows that average hourly earnings and the quits rate tend to correlate pretty closely.

Here are some things that homeowners in the path of Florence can do in order to prepare for impact. Note that the hurricane is expected to stall out once hit hits land, so you should expect some flooding inland. Servicers should prepare for an uptick in delinquencies. 

Redfin has a good retrospective on the top lasting impacts from the financial crisis. Probably the biggest surprise was that a leftist president presided over a huge jump in inequality. Given that Fed policy in the aftermath of the crisis was aimed at supporting asset prices, this shouldn't be a surprise. The other big surprise was the complete drop off in housing construction despite a tight housing market. 10 years down the road, it is still a head-scratcher. Everyone has a theory about the driver, from gun-shy builders, to labor shortages, to zoning restrictions. The places where the demand is greatest (CA and Seattle) have tight restrictions on building, and such an expensive market that businesses are relocating somewhere cheaper. On the other side of the coin, the Rust Belt is growing again, and that area has a surfeit of housing already built. 

Morning Report: Wage pressures building

Vital Statistics:

	Last	Change
S&P futures	2872	-8.25
Eurostoxx index	373.62	-1.89
Oil (WTI)	67.66	0.12
10 year government bond yield		2.97%
30 year fixed rate mortgage		4.62%

Stocks are lower this morning on trade and weather fears. Bonds and MBS are continuing their post jobs-report sell-off. 

Job openings hit a record high in July, hitting 6.9 million, according to the JOLTS survey. Job openings increased in finance and insuring, but fell in retail and government. The quits rate increased to 2.4%, the highest level since 2001. 

Small business optimism set a record last month, hitting 108.8 and beating the previous high set in July 1983. The number of businesses saying it is a good time to expand hit a high, and plans for capital expenditures and inventory investment also hit pre-crisis highs. The NFIB index had a discontinuous jump upward starting in late 2016, but that was primarily driven by expectations of hiring and investment. Now the index is being driven higher by actual hiring and investment and that is driving GDP growth. Labor shortages continue to be a problem. 

Same store sales continued their recent strength, rising 6.3% last week. All of this points to a strong Q4. 

Signs of building wage pressures? Leaders for the United Steelworker's Union are demanding pay increases as steelmakers get a profit boost from tariffs. They are targeting US Steel and Arcelor Mittal. Steel prices are up 30% - 40% this year, which is boosting profits. This issue of course is that these increases will probably prove to be temporary as the tariffs are a negotiating tool. That said, expect to see more of this as the labor market tightens. US Steel has offered the union a 4% wage increase next year, and 3% the following two years. After that, base pay will increase by 1%, but profit-sharing bonuses will be implemented. 

Finally, a note on 9/11

I was on the trading floor at Bear, Stearns in London. It was just after lunch. A headline went across Bloomberg saying a plane had hit one of the WTC towers. CNBC mentioned the story as well, but no one was thinking “terrorism.” I emailed one of my friends at Merrill Lynch (right across the street at the World Financial Center) and he wasn’t even aware of what happened. The European markets were down a bit on the day, but didn’t really react to the first hit.

After a few minutes, CNBC started showing live footage of the fire and then we saw plane 2 hit. Immediately, the world realized what had happened. The Euro markets were collapsing and I was inundated with sell orders. The news of the Pentagon hit came out. People on our floor started freaking out. We were in Canary Wharf (One Canada Square) in the tallest building in the UK. Planes routinely come close to the building as they approach City Airport. The head of Bear Stearns Europe came on the trading floor and told everyone if they were uncomfortable, to go home. No one knew if today was “fly a plane into financial headquarters day” Everyone bailed, and I was one of the last guys on the trading floor, trying to reconcile my book by hand and get flat before I left.

I looked up at CNBC before I left and saw the place I got married at a year earlier collapse on my birthday.

P.S. As I headed to the tube to go home, I passed the Slug and Lettuce (a pub) and found all of the “uncomfortable” Bear Stearns employees having a pint directly below the building they were so uncomfortable being in.

By the way, I am still searching for a senior capital market role at a mortgage bank. If anyone is hearing of anyone looking, I would appreciate the head's up. 

Morning Report: Home prices rise 6.8% in June

Vital Statistics:

			Last	Change
S&P futures			2856	6
Eurostoxx index			391.01	2.35
Oil (WTI)			69.62	0.61
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.58%

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

There were 6.7 million open jobs in June, according to BLS. The all-important quits rate was unchanged at 2.3%. The quits rate is a leading indicator for wage growth and is a stat the Fed follows closely. The quits rate was highest in the South and Midwest, and lowest in the Northeast. If you look at industry groups, one group stands out with a quits rate that is going nowhere. Financial Services.

Home Prices rose 0.7% MOM in June, according to CoreLogic. They are up 6.8% YOY and forecast to rise another 5% over the coming year. Rising mortgage rates and home prices are affecting sales in the high cost markets. They also surveyed renters and found that affordability is the biggest reason why they aren't interested in buying a home. For older renters, affordability isn't the biggest issue - probably convenience is - although a jump in bankruptcy filings in the senior citizen demo is on the rise. We are seeing large pockets of overvaluation on the coasts, but the interior of the country is undervalued.

Freddie Mac is trying a new program to enhance rental affordability: providing low-interest loans to developers who promise to cap rental inflation. This is certainly a less intrusive way to deal with the affordable housing problem. The West Coast is finding that affordable housing mandates are pushing developers to scrap projects entirely and local governments are being pushed to override zoning restrictions. Freddie's program is a way to incentivize the private sector into doing something: “Maybe there’s a way we can help change incentives,” said David Brickman, an executive vice president at Freddie Mac and head of its multifamily division. “We can provide an economic basis for private, profit-oriented developers to pursue a strategy where they didn’t raise rents by quite as much. You’re taking some of the opportunity to hit a home run off the table but arguably making it more likely you can hit a single or a double.”

Washington is hoping to address the affordable housing crisis by allowing tax credits for low-income renters who spend more than 30% of their income on rent. Cory Booker's plan also looks to ease some of the regulatory burden in building new housing as well as introduce a new savings plan for renters.

What is it with tech companies who have a competitive edge wanting to diversify into hyper-competitive low-margin businesses? The latest is Zillow, which has decided it is time to get into the mortgage business. Wall Street panned the move, sending the stock down 20%. Part of the decline was due to lousy earnings, but still....

Morning Report: Job openings equals number of unemployed

Vital Statistics:

			Last	Change
S&P futures			2747	1.75
Eurostoxx index			388.56	0.45
Oil (WTI)			64.56	-0.19
10 Year Government Bond Yield				2.91%
30 Year fixed rate mortgage				4.54%

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

Job openings continue to creep upward, hitting 6.7 million in April, which is just about the number of unemployed people in the country. Job openings increased in manufacturing, but fell in finance. The quits rate was flat MOM at 2.3% and is up about 20 bps since last year. The quits rate is a strong predictor of wage inflation, as it measures people leaving jobs to take new, higher paying ones. Below is a chart of the quits rate versus wage growth. Wage inflation is a bit more volatile, but the correlation is pretty tight. 

The ISM non-manufacturing index rose in May to 58.6. The current level historically corresponds to a GDP growth rate of around 3.5%. Tariffs are weighing on many sectors however. 

The House Financial Services Committee will hold a hearing tomorrow to discuss transparency and accountability at the CFPB. This hearing is the result of a memo from Mick Mulvaney, which recommended that the CFPB be subject to Congressional appropriation, that major rules be passed by legislation, that there be an independent Inspector General, and recommended that the agency report to the President. 

Home prices rose 1.2% in April, according to CoreLogic. On a YOY basis, they are up 6.9%. They expect home price appreciation to moderate over the next year and increase about 5%. Much of the country's real estate is becoming overvalued, according to CoreLogic's model - in fact, over half. The valuation metric is based on incomes, which is why an expensive market like San Francisco may appear fairly valued, while areas on the Gulf Coast may seem overvalued. 

The first time homebuyer accounted for almost half the Freddie Mac purchase market, the highest since 2012, when Freddie first started tracking this statistic. The Bloomberg headline is terrible - the first time homebuyer does not account for almost half of mortgages. 40% are refis and the first time homebuyer is about 32% of existing home sales. 

Over the past 2 years, about 4.4 million jobs have been added in the US. How many houses have been built? 2.4 million. Great illustration of just how acute the housing shortage is. 

Morning Report: Job openings at 6 million

Vital Statistics:

	Last	Change
S&P Futures	2651.8	0.8
Eurostoxx Index	389.0	-0.2
Oil (WTI)	57.5	0.2
US dollar index	87.2	-0.1
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.625
30 Year Fixed Rate Mortgage	3.92

Stocks are flat this morning after a bomb went off in New York City's Penn Station. Bonds and MBS are up small. 

This week will be dominated by the FOMC meeting on Tuesday and Wednesday. The markets are forecasting a 25 basis point hike in the Fed Funds rate, but the economic forecasts will be the focus, as well as the dot plot. It will be interesting to see the 2018 GDP forecast. The Fed was consistently high in their GDP estimates during the Obama administration, however their 2.1% forecast for 2017 looks to have been way light, given that the NY Fed just upped its Q4 GDP estimate to 3.92%. That would put 2017 GDP growth just shy of 3% for the year. 

Job openings were largely unchanged at 6 million in October, according to the JOLTS survey. The hires rate increased to 5.6 million. The quits rate was unchanged at 2.2%. The quits rate is the most important number in this release, as increases in the rate usually correspond to increases in wage growth. 

So far, the Fed's tightening has had almost no effect on the market. In the old days, a couple Fed Funds hikes and you would start to see a slowdown. If anything, the economy is accelerating, not decelerating. JP Morgan believes that we won't see a meaningful effect on the economy until we get to a real 1% Fed Funds rate, where "real" means inflation-adjusted. Currently, the Fed Funds real rate is negative (inflation is higher than the Fed Funds rate). Once the Fed Funds rate is 1.5% higher (or around 2.5%, we should see an impact, which makes that a 2019 event, not a 2018 event.

35% of new home sales in October were for homes that hadn't even begun construction, the highest number since 2005. Shortages of skilled labor, along with increasing commodity prices are preventing new home sales and housing starts from being high enough to meet demand. Housing will almost certainly be the engine to propel US economic growth over the next few years. 

Last week, a news story suggested that the Trump CFPB would back off the banks, referring mainly to Wells Fargo. He then tweeted that the story is false, and if anything, he would increase penalties on the banks for bad behavior. 

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: Small Business Optimism at 12 year highs

Vital Statistics:

	Last	Change
S&P Futures	2490.0	4.3
Eurostoxx Index	381.8	2.4
Oil (WTI)	48.3	0.2
US dollar index	85.2	0.1
10 Year Govt Bond Yield	2.15%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.73

Stocks are higher this morning on overseas strength. Bonds and MBS are down. 

Small Business optimism remained strong in August, according to the NFIB Small Business Optimism Index. Increases in capital spending and higher sales expectations drove the increase. The index now matches the 12 year high set earlier this year. Interestingly, small business cited "quality of labor" as their second biggest problem, behind higher taxes. 59% reported trying to hire, and of those 88% reported few or no qualified applicants. In fact, both manufacturing and construction reported low labor quality as their biggest problem. Compensation is on the rise, as a net 28% of small businesses reported increasing comp. So, even though we aren't getting much in the way of legislation out of DC, the drop in new regulations are helping sentiment. A net 9% of firms reported an increase in average selling prices, which is good news to the Fed. 

Job openings totaled 6.17 million in July, according the JOLTs report. The quits rate, which is a leading indicator of increasing wages, was steady at 2.2%, and has been in a tight 2.1% to 2.2% range. The Fed watches this indicator closely. 

Delinquencies continue to fall, driven by job growth and home price appreciation, according to CoreLogic. 30 day + DQs were 4.5% in June, down from 5.3% a year ago. The foreclosure rate was 0.7%, the lowest level in 10 years. The foreclosure rate varied between 0.1% in Denver and 2.2% in New York - Newark - Jersey City MSA. 

Trump is planning on hitting the road to pitch tax reform. He was criticized for not doing more to sell the repeal of Obamacare, so he is trying not to repeat that mistake. Congress has yet to determine the particulars over what individual and corporate rates will be, but the purpose of these rallies is to make the case that we need tax reform to improve our competitiveness. Business friendly groups are also going to spend money on ads pushing for reform. 

Banks with exposure to Florida are breathing easier after the damage from Irma turned out to be lower than expected. CoreLogic estimated that uninsured flood losses from Harvey could turn out to be $18-$27 billion. 

Morning Report: Fannie getting into Mannies

Vital Statistics:

	Last	Change
S&P Futures	2397.5	2.5
Eurostoxx Index	396.1	2.0
Oil (WTI)	46.4	-0.1
US dollar index	90.5
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	4.05

Markets are flattish on no real news. Bonds and MBS are flat as well. 

Bond yields have been moving higher after the French election. Given that the result was not really a surprise there shouldn't be too much in the way of follow through, but Euro bonds are selling off, which will translate into rising yields in the US on the relative value trade. 

Job openings were flat in March at 5.74 million, which was slightly above estimates. The quits rate, which is a key indicator was up slightly YOY at 2.4% or about 3.1 million workers. 

Small Business Optimism slipped in April, according to the NFIB Small Business Optimism Index. We are still at historically high readings, but the dimming prospect of tax reform in DC has hit the future expectations components of the index. The bright spot was hiring, as firms added .19 workers on average in April. 33% of respondents reported job openings they could not fill, which is the highest since 2000. Finding quality workers is a significant concern for many employers, although sales and regulatory issues are the biggest problems. 

Radian's Green River unit, which provides broker price opinions on residential real estate is the subject of a SEC probe. The feds are looking to see if BPOs were inflated on some bond deals where the interest was paid from the REO to rental trade. BPOs are cheaper than appraisals and are based on "drive by" evaluations. Many bond ratings agencies haircut BPO values in their assessments. If it turns out BPOs are inflated, it will probably have a dampening effect on bonds used to finance the activity. The plus side is that if private equity firms begin to unwind the trade, it will add some much needed supply to the market, especially at the lower price points. 

Seriously delinquent loans and and foreclosure rates continue to fall, according to CoreLogic. The past due percentage dropped to 5%, the lowest level in 10 years. This is a decline from 5.5% a year ago. While rates have dropped nationally, they remain elevated in New York and New Jersey as well as some Mid-Atlantic states. We are seeing the biggest increases in the oil states. 

Fannie and Freddie are looking at lending to borrowers with manufactured homes. FHFA needs to approve the program which is intended to increase credit to low-income borrowers, especially in rural areas. 

The Fannie Mae Home Sentiment Index increased in April. Respondents are more constructive on real estate prices and the stability of their job situation, which was the catalyst to push the index up. The number of people who though now was a good time to buy increased by 5 percentage points. Respondents are also forecasting a 3% increase in home prices over the next 12 months. 

5 things your appraiser wishes you knew. A big one is that the return on some home improvement projects are relatively low. A new kitchen will help, but you will be lucky to see a fraction of that expenditure translate into a higher home price. Pools are even worse. The biggest one? Finishing a basement. Most appraisers aren't allowed to even count that square footage so that investment is valueless, at least as far as the appraisal is concerned. 

Fear in the market is the lowest since 1993. The VIX index, which measures the price of options protection has been in the single digits lately. Does that portend anything? The old saw is "VIX is low, time to go. When VIX is high, time to buy." VIX can stay low for extended periods, so the first part of that adage probably isn't the greatest advice. Earnings growth has generally been good so far, which supports markets. 

Want to really measure complacency in the market? Remember the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) which were the ne'er do wells of the European sovereign market? You can now lend money to the Greek government for the princely rate of 5.5%. They peaked at 27% or so. That said, German Bund continues to experience higher yields, and you can now get 44 basis points for tying up your money with Angela Merkel for the next 10 years. Gotta pay her 66 for two though. 

The mortgage interest deduction is being targeted by the left, who claim it increases inequality. This debate will get interesting as it creates an unusual alliance between limited government flat tax types, and social justice types. IMO, the mortgage interest deduction is simply too popular to eliminate but we could see a cap on it, which would probably hit homes at the high end the most. 

Morning Report: The fed hikes, but markets are calm

Vital Statistics:

	Last	Change
S&P Futures	2384.5	4.0
Eurostoxx Index	377.3	2.2
Oil (WTI)	49.2	0.3
US dollar index	90.7
10 Year Govt Bond Yield	2.53%
Current Coupon Fannie Mae TBA	101.53
Current Coupon Ginnie Mae TBA	102.87
30 Year Fixed Rate Mortgage	4.29

Stocks are higher this morning after the Fed hiked rates. Bonds and MBS are up.

As expected, the Fed hiked rates yesterday. The statement was taken as relatively dovish, and the dot plot showed a slight increase in the 2017 Fed funds rate projection, however it was only about 4 basis points from December. In the press briefing, Yellen's main message was that the economy is doing well. The dovish language and the modest increase in the dot plot caused bonds to rally, which pushed the 10 year below 2.5% yesterday.  We saw a similar reaction in the 2 year, which went from a 1.4% yield to a 1.3% yield. The economic projections were pretty much unchanged from December. You can see a comparison of the dot plots below, where the central tendency (or average of the 2017 dots) increased from 1.49% in December to 1.53% in March:

Housing starts came in at 1.29 million in February, slightly better than expected. This is 3% above January, and 6% higher than last year. Single family starts increased to 872k, which was 3% above last year. Building Permits came in at 1.21 million which is up 3% YOY, but below January's numbers. Housing starts are still surprisingly depressed given the dearth of inventory.

Job openings increased to 5.6 million in January, according to the JOLTS data. The quits rate (which usually leads wage growth) inched up to 2.2%. The quits rate is a big number to the Fed and one they watch closely. 

In other economic data, initial jobless claims fell to 241k, while the Philly Fed fell from 35 year highs. Consumer comfort edged up as well. 

Donald Trumps's proposed budget increases defense, while cutting discretionary spending pretty much everywhere else. Entitlements stay untouched. HUD will see a decrease, although it appears (at least as of now) that Ginnie Mae and the mortgage area will not feel it. It is too early to tell if it has much support. If he can't get a budget deal, then we continue to fund the government on continuing resolutions, which more or less means the first Obama budget. 

Morning Report: Confidence up, affordability down

Vital Statistics:

	Last	Change
S&P Futures	2291.5	5.0
Eurostoxx Index	363.3	1.7
Oil (WTI)	52.7	-0.4
US dollar index	90.9	0.6
10 Year Govt Bond Yield	2.43%
Current Coupon Fannie Mae TBA	102.1
Current Coupon Ginnie Mae TBA	103.2
30 Year Fixed Rate Mortgage	4.13

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

Job openings were largely unchanged MOM at 5.5 million, according to the BLS's JOLTS report. On a year-over-year basis, they were up 4.2%. Hires ticked up slightly, while separations fell. The quits rate ticked down to 2.0% from 2.1% in November and 2.2% last year. This will give some comfort to bond investors as well as the Fed, as an increase in the quits rate usually leads an increase in wage growth. 

Home prices rose 0.8% MOM and are up 7.2% YOY according to CoreLogic. They foresee a deceleration of home price appreciation in 2017, with a 4.7% increase. The action was in the Pacific Northwest and Mountain states, with Washington, Idaho, Oregon, Colorado, and Utah leading the charge. Here is a map of the overvalued (red) and undervalued (green) MSAs:

Rising home prices and mortgage rates have hit affordability, which is the lowest in 7 years, when you use the metric of mortgage payment on the median house to median income ratio. Much of the hit took place towards the end of last year as as rates spiked post-election. Tight inventory is driving the price increases, not incomes, which means current prices are vulnerable if wages don't increase. Eventually builders will start more construction, but as of now they are still holding back. 

Economic confidence improved last week according to the Gallup Economic Confidence Index. January was the highest month since 2008. More people are feeling engaged at work, but future expectations drove the index. Despite all the sturm and drang out of Washington, Americans are shrugging it off. Other indices like the VIX, as well as gold prices (despite what the article below says) are confirming this. Separately, Fannie Mae's Home Purchase Sentiment Index improved two points last month. Most notable in that survey: the net share of people reporting significantly higher household income growth in the past 12 month increased by 5 percentage points. Also, bankruptcy filings are the lowest since 2006. 

On the other hand, Washington insiders and journalists (especially) are not feeling that way. Donald Trump has upset the traditional way things are done, and that has a lot of pros spooked. That said, I think creating a confidence index based on the use of the word "uncertainty" in business articles speaks more towards the predilections of journalists than it does to the markets as a whole. 

Fixing Dodd-Frank will take some time, along with repealing and replacing Obamacare. Democrats are vowing to go to the mattresses on both, although I think Obamacare will be where the war is going to be fought. As I have said before, I suspect there is enough bipartisan agreement to do something on Dodd-Frank, at least with regards to small bank regulation. Reforming the CFPB is expected to cleave down partisan lines, although the Courts may be forcing Congress's hand there. Much of the change is going to be done non-legislatively, in how the agencies interpret and enforce the law. Democratic Party priorities like disclosing the pay difference between CEOs and the rank and file are simply going to go by the wayside. 

Rob Chrisman mentioned iServe in this morning's blog, talking about our own John McDade's VA tour, where he visits our branches and talks about what a great product the VA loan is. 

Morning Report: Small Business Optimism jumps

Vital Statistics:

	Last
S&P Futures	2264.5
Eurostoxx Index	363.6
Oil (WTI)	52.1
US dollar index	92.7
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.11

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

Job openings increased to 5.5 million, according to the JOLTS report. This is at levels not seen since 2000. The quits rate has been steady at 2.1%, and that is the ultimate measure of labor market strength and a leading indicator for wage growth and inflation. As long as that number is steady, the Fed can be reasonably comfortable that inflation is going to stay low. 

Small business optimism rocketed in December, according to the NFIB. The index rose 7.4 points to 105.8, the highest level since December 2004. The lion's share of the gain was due to improving expectations, so it probably will be given back if big changes in the regulatory and tax environment don't materialize. Job creation plans did hit a 9 year high, and capital expenditure plans jumped as well. That said, actual hiring in December was virtually unchanged from a month ago. That said, competition remains tight for skilled workers and a net 26% of respondents reported increasing compensation. 

Despite the improvement for small business, some in Corporate America (the automakers) are not sure what to think. Trump's jawboning over outsourcing has caused automakers general uncertainty, as the industry recovers from the worst slump since the Great Depression. The ultimate trade may in fact turn out that Trump will let Obama's new fuel efficiency standards die in return for more production in the US. 

Rising rates are hurting buyer sentiment, according to Fannie Mae. Their Home Purchase Sentiment Index fell for the fifth month in a row. The survey predicts that home prices will increase 2.1% next year, however the survey has been consistently lower than the professional forecasts, let alone actual price appreciation. Respondents also believe it is easier to get a mortgage than it was two years ago. Their view of the economy has improved dramatically, with roughly the same percentage of people thinking the economy is on the right track versus the wrong track. Note this optimism was reflected in the Gallup data as well. 

There were 26,000 completed foreclosures in November, according to CoreLogic. The seriously delinquent rate was 2.5%, which is the lowest since August 2007. Foreclosure inventory remains concentrated in the judicial states of New York, New Jersey, and Florida. The seriously delinquent rate remains highest in NY and NJ as well, with rates of 5% and 5.6% on average. 

Yesterday's change in FHA MIP caused some strange activity in the TBA market which affected pricing. Bonds were up yesterday and pricing was generally better for most products, except for higher-coupon FHA and VA loans. That pricing actually worsened. Why? Because the change in annual MIP caused investors to bump up their prepayment assumptions for higher coupon Ginnie securities (generally those with 4% coupons and up). This makes those higher coupon mortgage backed securities worth less than last week, all things being equal. So if you priced out a FHA loan on Friday expecting to see better pricing, only to get an unpleasant surprise, the MIP change was the reason. On the bright side, refinancing just got more attractive. 

Quicken CEO Dan Gilbert accused the Department of Justice of conducting a shakedown operation. 

Goldman's Dan Hatzius is handicapping a 35% of a March hike this year, while the Fed Funds futures are handicapping a 25% chance. Goldman is much more hawkish than the Fed in general, and they foresee a more linear hiking of rates while the Fed (and the futures markets) are forecasting a more gentle increase. 

Morning Report: Increase in rates has cut refinanceable population in half

Vital Statistics:

	Last	Change
S&P Futures	2209.0	-1.0
Eurostoxx Index	346.3	2.0
Oil (WTI)	50.4	-0.5
US dollar index	91.1	0.0
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.1

Markets are flattish this morning on no real news. Bonds and MBS are up small as global bonds rally on speculation the ECB will continue buying bonds into next September.

Mortgage applications fell 0.7% last week as purchases rose 0.4% and refis fell 1%. 

Job Openings were little changed at 5.5 million last month, according the JOLTs job openings report. Job openings are more or less at the all-time highs of the index, which goes back to 2000. The quits rate is the key to the report: an increasing quits rate foreshadows wage inflation. So far, the quits rate is pretty much stuck at 2.1%. 

Appraisals are coming in light for about 10% - 13% of all contract prices. This is mainly a problem in the hot markets where low inventory is creating bidding wars and buyers overpay. 

Sentiment surveys are partisan to some extent. Prior to the election, Republicans were bearish on the housing market and Democrats were bullish. Now that Donald Trump has won, the parties have switched outlooks. It shows why you should generally take these sentiment surveys with a grain of salt. That said, the fundamentals of the housing market are strong with tight inventory and low rates (despite the Fed being in a tightening cycle). 

Gallup's Job Creation Index ticked up last week to 33, which means the percentage of firms planning to increase hiring minus the percentage of firms planning to cut jobs is 33%. Note that this is based on a telephone survey of workers, who may or may not know what their company's actual plans are. 

The post-election sell-off in the bond market has cut the refinanceable population in half, according to Black Knight Financial Services. The last time the refinanceable population was this small, refis were 37% below last quarter's. The new rules on VA IRRLs will exacerbate that drop in refi volume. Going forward refi volume will be driven more by home price appreciation as people with mortgage rates from they heyday regain the home equity to refinance at today's rates. Also, with the Fed tightening, now is a good time to look at swapping out from an ARM to a 30 year fixed. If the 35 year bull market in bonds is really finally over, locking in a low rate makes sense. 

Mortgage credit availability improved last month according the the MBA. Credit availability increased for all 4 buckets: government, conventional, conforming, and jumbo. While the index has doubled since 2012, it is still at about 20% of the level set during the height of the bubble. It probably won't increase meaningfully until either (a) the private label market returns, or (b) the government and GSEs increase the credit box. 

It is no secret that the real estate sector is still largely done the way it has been for the past 50 years, with agents representing buyers and sellers, along with a largely manual loan process. Now a new firm is looking to use technology to disintermediate realtors. They pay realtors a 1% fee, and the company has just raised $20 million in Series B financing. Its name is Roofstock. It is a niche market - targeting sellers of tenant-occupied properties - however it could catch on. 

Morning Report: Job openings compared to unemployed back to pre-recession levels

Vital Statistics:

	Last	Change
S&P Futures	2159.0	-12.0
Eurostoxx Index	347.1	-2.0
Oil (WTI)	46.7	-0.9
US dollar index	86.4	0.3
10 Year Govt Bond Yield	1.65%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.52

Stocks are lower as emerging markets sell off. Bonds and MBS are down.

Risk-off feel today, but bonds aren't rallying. What is going on? Global bond yields are increasing, especially in Japan where the BOJ is taking a breather purchasing bonds. The German Bund is down as well. Some strategists are beginning to sense that the Japanese bond market could be headed lower. So, despite weak US economic data, a global bond sell-off will affect US Treasuries as well. 

Boston Fed President Eric Rosengren is sounding hawkish, which is not his natural home. His argument is that a campaign of slow, steady rate hikes will prolong the expansion more than waiting and then having to move more aggressively. Of course it all comes down to wage growth, which decelerated in the last jobs report.

Barry Ritholz took a look at the the lack of wage growth and comes up with an interesting chart: the ratio of the unemployed to the number of job openings. This ratio is back down to pre-crisis levels. While we have yet to see much evidence of increased turnover in the quits rate, it does appear at least anecdotally that we are seeing more turnover. Certainly the stage is set for further wage inflation.

Mortgage credit tightened slightly in August, according to the MBA. Apparently, one investor is exiting the correspondent business and that accounted for the tightening. Credit is easing in the jumbo space however. 

Morning Report: European companies get paid to borrow

Vital Statistics:

	Last	Change
S&P Futures	2183.0	-2.0
Eurostoxx Index	350.1	0.7
Oil (WTI)	44.9	0.1
US dollar index	85.7	0.1
10 Year Govt Bond Yield	1.52%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.5

Markets are flattish on no real news. Bonds and MBS are up small.

Mortgage Applications rose 1% last week as purchases and refis rose the same amount.

Job openings hit a record 5.9 million in July, according to the JOLTS data. The quits rate, which is the best indicator of economic strength inched up to 2.1% which was the typical level pre-recession. Note the JOLTS data is older than the more recent employment data, however it continues to indicate either strength in the labor market, or a mismatch of skills. Job openings in construction are about the same level as the go-go years of 2005 - 2007. 

Same store sales increased 0.8% last month, which was the strongest showing since May. This is the back-to-school shopping season, which is the second most important period for retailers. 

There is no doubt that the latest economic data has pointed towards a deceleration of growth. The ISM report from yesterday was the worst in 6 years. Still some strategists see the chance of a September move - Goldman's Jan Hatzius just took down his probability of a Sep hike from 55% to 40% (still pretty high). Given the non-existent inflationary picture, it is hard to make a case that the Fed needs to hike rates now.

Second quarter originations were the highest since 2013, right before the "taper tantrum" killed the refi market, according to Black Knight Financial Services. Total first lien originations were 512 billion, of which 58% were refis. 

Distressed sales are falling as a percent of home sales, and the discounts appear to be narrowing slightly. The biggest discounts are still in the judicial states where foreclosures sit and depreciate during the elongated timelines. Compare New York's 40% with Texas's 14%. 

Aside from raising the Fed Funds rate, the next shoe to drop with the Fed will be dealing with the assets it purchased during quantitative easing. Pre-2008, the Fed's balance sheet stood at something like $800 billion in assets. Today, it is about $4.5 trillion. The Fed intends to eventually return its balance sheet to pre-2008 levels. Ben Bernanke argues that the Fed should maintain its balance sheet at current levels for the long term. 

File under "things that will astonish people some day:" In Europe, you are starting to see negative yields in the corporate bond sector. Yesterday, Germany's Henkel and French pharma giant Sanofi sold 1.5 billion euros of 0% corporate bonds above par. Astonishing that people would pay to take credit risk and interest rate risk, but there you go.  With the ECB buying corporate bonds as well as sovereigns maybe the thought is that they will flip them to the ECB a couple of basis points higher? I don't know. IMO, this is the equivalent of buying eToys at 40x revenues of iVillage at 2x pageviews in the hopes that the daytraders will ramp them so you can exit.