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: More dovish talk out of the Fed

Vital Statistics:

	Last	Change
S&P Futures	2468.5	-5.8
Eurostoxx Index	374.4	0.2
Oil (WTI)	48.1	0.8
US dollar index	85.4	-0.2
10 Year Govt Bond Yield	2.13%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.86

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

There isn't a much in the way of market-moving economic data this week, but we will have a bit of Fed-speak. Despite the weak-ish jobs report on Friday, the Fed Funds futures are handicapping a bigger chance of a hike in December. We are now at at 43% chance of a rate hike versus 38% last week. 

Historically, September has been a bad month for stocks. Here are some of the things that could upset the apple cart. Geopolitical risk is probably the biggest, followed by a government shutdown. The Fed is out of the picture. Note that the dividend yield on the S&P 500 is higher than Treasuries. 

Factory orders fell 3.3% in July, more or less in line with expectations. The drop was expected due to a big order from Boeing in June. 

Fed governor Lael Brainard said the Fed should slow rate hikes if inflation remains below 2%, where it has been for the past 5 years. Brainard is one of the doves on the FOMC, and the one who probably most resembles Janet Yellen's thinking.

Home prices rose 0.9% MOM and are up 6.7% YOY, according to the CoreLogic Home Price Index. Home prices rose the most in the Pacific Northwest and the mountain states. About a third of the MSAs CoreLogic covers are overvalued. 28% were considered undervalued. 

The Trump Administration is backing off threats to shut down the government over funding the border wall. Given the continuing rebuilding efforts in Houston and the potential for Hurricane Irma to hit Florida, a government shutdown over the debt ceiling isn't going to happen. Trump also said he will rescind the Obama Administration's executive order on immigration in 6 months, which gives Congress time to handle this legislatively. Funding for the wall in exchange for some protection for the Dreamers is probably the deal that will get done. 

Speaking of hurricanes, CoreLogic estimates that about 70% of the flood damage in Houston was uninsured.