Morning Report: New down payment assistance programs

Vital Statistics:

			Last	Change
S&P futures			2728.75	9.5
Eurostoxx index			379.91	3.04
Oil (WTI)			73.39	-0.06
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.52%

Stocks are higher this morning on end-of-quarter window dressing. Bonds and MBS are flat. 

Personal incomes rose 0.4% in May while personal spending rose 0.2%. Incomes were in line with estimates, while spending was lower. The June FOMC statement said that consumer spending was accelerating - no evidence of that in this report. Services spending drove the decline, and we could be seeing evidence that higher gasoline prices is affecting discretionary expenditures. Inflation was in line with expectations at the MOM level, and a hair above expectations on an annual basis. The core PCE index ex-food and energy came in at 2%, which is right where the Fed wants it. April's income and spending numbers were revised downward. Don't be surprised if strategists take down some of their Q2 GDP forecasts on these numbers. 

The Chicago PMI improved to 64 from 62, which is a 5 month high. New Orders and order backlog drove the increase. We are seeing some signs of inflation brewing, with extended lead times, and a 7 year high on the prices paid index. Businesses were asked about how trade was affecting their operations. About 25% said they were having a significant impact, 40% said there was a minimal impact, and the rest were either unsure or insulated from trade issues. 

KB Home reported strong numbers, with a 170 basis point increase in gross margins, 10% revenue growth, and a 50% increase in operating income. ASPs were up 4% to 401,800, and order growth was 3%. Backlog was the second highest on record. The stock is up 7% pre-open. 

Interesting theory about the lack of construction workers: opiods. Between users and those that have been convicted of crimes related to usage, many workers are shut out of the work force. 80% of homebuilders report shortages in subcontractors. 

The Senate will hold hearings on July 12 and 19th for Kathy Kraninger's nomination to run the CFPB. The conventional wisdom is that she is not intended to be confirmed, but is to be an excuse to keep Mick Mulvaney in charge of the agency. 

Deutsche Bank failed its stress test, while State Street, Goldman and Morgan Stanley got dinged. 

Many Millennials are struggling to get a down payment for a home, and now some companies are working to help them get it. One company will supply up to a $50,000 downpayment if the borrower rents out a room on Air B&B and shares the income with the company. These loans are appealing to borrowers who might qualify for a FHA or 3% down Fannie loan but don't want to pay the MI and other costs. While there are fears that we are bringing back the bad old days of the real estate bubble, here is the MBA's mortgage credit availability index. We are a long way away from the days of the pick-a-pay mortgage. 

Morning Report: Market reassessing the post-Trump risk-on trade

Vital Statistics:

	Last	Change
S&P Futures	2264.8	-6.0
Eurostoxx Index	364.0	-0.9
Oil (WTI)	53.3	1.1
US dollar index	91.8	-0.6
10 Year Govt Bond Yield	2.33%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.1

Markets are lower after Trump's press conference yesterday. Bonds and MBS are up

We saw stocks sell off (and bond rally) after Donald Trump's press conference yesterday. He did not address any sort of fiscal stimulus, which the markets were hoping to see. IMO the market may be realizing the huge stock market rally (and bond sell-off) post election was overdone. Trump also fired a shot across the bow of the pharmaceutical industry (which sent the S&P 500 downward), and got into it with a CNN reporter. He also will not divest his business operations. The pivot to a more presidential demeanor doesn't look like it is going to happen. He is also introducing the dreaded "U" word - uncertainty - into the conversation with his tweets directed at specific companies. The markets are in a risk-off mood.

The first act of Congress was to set the stage to repeal Obamacare on a simple majority basis. The Senate passed it yesterday 51-48 and the measure goes to the House today. IMO, if the first legislative act is to repeal Obamacare on a party-line basis without any sort of replacement plan, any sort of bipartisan cooperation of tax reform and infrastructure spending is going to be almost impossible. Given the Fed's forecast of 3 Fed Funds hikes this year was based on the assumption that we will have more fiscal stimulus, we could see a March hike taken off the table rather quickly, and I wouldn't be surprised to see a further decline in overall interest rates. As Morgan Stanley said: Buy the election, sell the inauguration."

St. Louis Fed Head James Bullard said that any of Trump's proposed fiscal stimulus would be a 2018 and 2019 story, not a 2017 story. Infrastructure spending has a long lead time - the idea of "shovel ready" jobs is more or less a myth. Tax cuts would affect things sooner, but even then will be a 2018 story. The best chance for immediate results will be in regulatory reform. 

We have a lot of Fed-speak today, with 3 speakers, so expect some volatility in rates during the day.

Import prices rose 0.4% last month, however if you strip out energy, they fell 0.2% and the YOY rate was flat. The strong dollar is helping keep inflation in check.  

Initial Jobless Claims rose to 247,000 last week. We are still at exceptionally low numbers: employers are hanging on to their employees. 

Ben Carson travels to Capitol Hill today to answer questions about his plans for HUD. Expect Republicans to focus on GSE reform and Democrats to focus on fair lending and affordable housing. There will undoubtedly be questions on his lack of experience in housing. 

KB Home reported fourth quarter numbers yesterday. Revenues increased 21%, while average selling prices increased only 2%. We have been seeing a decline in ASP inflation from most of the builders. Backlog was the highest in 10 years. Deliveries were up 19%, while gross margins decreased to 16.5%. The stock is down about 4% on the open. 

The fall in gross margins is a reflection of (a) increasing inflation and (b) an inability to pass on higher costs through price increases. Inflation is most prominent in increasing raw land costs, higher regulation, and also a tight market for skilled labor.

Foreclosures are at a 10 year low, and we are seeing better performance in many states. 379k people lost their homes to the bank last year. At the height of the crisis over a million people did. Home price appreciation helps as it takes the strategic defaulters off the table. The worst state for foreclosures? New Jersey.

The night of the election, Carl Icahn left the party early to buy S&P 500 futures down 100 points. He ended up taking a $1 billion position overnight and profited handsomely in the subsequent rally. Know who was short the whole time? Soros. Trading and politics are a dangerous mix. Politics is almost pure emotion. 

Morning Report: Good jobs report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1953.6	20.7	1.07%
Eurostoxx Index	3101.4	16.7	0.54%
Oil (WTI)	33.46	0.2	0.57%
LIBOR	0.62	0.003	0.49%
US Dollar Index (DXY)	98.93	0.709	0.72%
10 Year Govt Bond Yield	2.17%	0.03%
Current Coupon Ginnie Mae TBA	104.4
Current Coupon Fannie Mae TBA	103.7
BankRate 30 Year Fixed Rate Mortgage	3.81

Markets are higher this morning after a turn-around in Asian markets and the strong jobs report.

Jobs report data dump

• Nonfarm payrolls +292k vs 200k expected
• Unemployment rate 5% in line
• Average hourly earnings flat vs. 0.2% expected
• Labor Force participation rate 62.6% vs. 62.5% expected

Generally a strong report - only disappointment is lack of wage growth. The labor market continues to improve, and if this trend continues, we are probably going to see another rate hike at the March FOMC meeting. 

Builder KB Home reported a big miss yesterday, which sent the stock down 15%. Revenues and EPS both were shy of expectations. The slowdown in the oil patch is moving buyers down the price curve in Texas. Margins remain under pressure due to lack of available land and increasing labor costs. 

We may have a new most valuable publicly-traded company. Saudi Aramco (the state-owned oil company) is thinking about an IPO, which could value the company over a trillion dollars. With oil revenues falling, the Saudi government is looking at different ways to balance the budget.