Morning Report: GDP revised upward

Vital Statistics:

	Last	Change
S&P Futures	2410.5	-3.0
Eurostoxx Index	380.9	-1.3
Oil (WTI)	48.8	-0.2
US dollar index	88.8
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	4

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

Today looks to be a relatively slow day ahead of the 3 day weekend. Markets should become illiquid in the afternoon as most of the Street will be on the LIE by noon. 

First quarter GDP was revised upward from 0.7% to 1.2% in the second revision. Consumption was revised upward from 0.3% to 0.6% and PCE inflation was revised downward from 2.3% to 2.2%. The upward revision to GDP was higher than expected. The current tracking estimate for Q2 is around 3%. 

Durable Goods orders fell in April by 0.7%. The core index, which excludes volatile transportation components fell 0.4%. Capital Goods expenditures were flat. 

Corporate profits rose 12% YOY in the first quarter. For all of the handwringing over stock market valuations, the underlying profitability of Corporate America remains strong. 

After this morning's data, the implied probability of a June hike increased 4% to 87%.

Larry Summers is sticking with his "secular stagnation" thesis. He views secular stagnation as the defining economic issue of our times, and believes that governments aren't doing enough fiscally to break out of it. He does raise a good point about the early 2000s: We had a huge trade deficit, tax cuts, super-easy credit, mid single digit unemployment, and a housing bubble. Yet all the economy could manage was adequate growth. With all of that stimulus, the economy should have been roaring like the late 90s. What is causing secular stagnation is anyone's guess, but his Rx is infrastructure spending and fiscal stimulus. 

Morning Report: Manufacturing improves in December

Vital Statistics:

	Last	Change
S&P Futures	2250.5	15.0
Eurostoxx Index	366.1	3.0
Oil (WTI)	54.9	1.2
US dollar index	93.7	0.4
10 Year Govt Bond Yield	2.51%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.28

Stocks are starting the year on an up note on overseas optimism. Bonds and MBS are down. 

The highlight of the week will be the jobs report on Friday and the FOMC minutes from the December meeting on Wednesday. We have no Fed-speak until Friday.

Home prices rose 7.1% YOY, according to CoreLogic. They are forecasting an increase of 4.7% for 2017, as higher rates and prices affect buyers. Home prices in 27 states are now above their pre-crisis peaks. Remember, these are nominal prices, not inflation-adjusted prices. 

Delinquency rates ticked up slightly in November, from 1.21% to 1.23%. On a year-over-year basis they were down from 1.58%. The peak DQ number was in early 2010 when it hit 5.59%. 

Manufacturing improved in December, according the Markit PMI Index and the ISM Manufacturing Index.  New orders and pricing drove the increase. Pricing had been an issue for years. This may simply be a blip, however it does hint at inflation beginning to stir. The current level for the PMI Manufacturing Index (54.7) historically corresponds with GDP growth of 3.6%. 

Construction spending rose 0.9% in November and is up 4.1% YOY. Residential Construction rose 1% and is up 3% YOY. 

Barry Ritholz has his advice for 2017. His take: the secular bond bull market is over, however inflation is the real risk to bond investors, not mark-to-market losses. He also believes that secular bull markets in stocks aren't measured from where they bottom, but from where they break out of their bear market range. This would put the beginning of the secular bull (assuming we are in one) around early 2013, not 2009. We had a secular bear market from 1966 to 1982, a secular bull market from 1982 to 2000 and a secular bear from 2000 to 2013 (if this is in fact a change of trend). 

Note that corporate tax reform is a priority for the new administration. If you cut corporate taxes, then that means earnings are increasing, and the current forward P/E ratios of the S&P 500 are overstated. Of course higher interest rates, a higher dollar, and increasing wages will offset that somewhat. 

Doug Kass has his surprises for 2017. This is usually a fun read and these should be looked as improbables that the markets are assigning a too-low probability to. The punch line is that the year starts off strong, however Trump's inexperience begins to take its toll on politics and the markets, and the Administration devolves into chaos. Stocks peak in January and end the year down 15%. The 10 year shoots through 3% before falling back to 1.5% as the Fed begins QE unlimited to hold the 10 year at a specific level. Overall, it is a pessimistic take, but remember these are all "go out on a limb" sort of predictions - they aren't base case scenarios. 

Another one of Kass's predictions is that Trump's security advisors finally convince him to stop Tweeting and close down his Twitter account, which causes the stock to drop 20%. Meanwhile this morning, Trump fired a shot across the bow of GM:

GM's stock is down slightly pre-open, however tweets like this could give investors fits. 

Larry Summers is skeptical that any sort of repatriation tax break for companies will find its way into re-investment. His view is that repatriated cash will be used for dividends, buybacks and M&A. Of course if companies don't think there are opportunities for investment, they will return the money to stockholders, however that isn't necessarily a given that there are no investment opportunities. Capital Expenditures have been moribund for a decade. You can only put that off so long. Secondly, if the psychology of CEOs changes from being worried about costs to being worried about missing out on business, then you will see more investment. 

Morning Report: Larry Summers warns about further rate hikes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1929	4.7	0.27%
Eurostoxx Index	3101.4	16.7	0.54%
Oil (WTI)	30.36	0.2	-2.57%
LIBOR	0.62	0.003	0.49%
US Dollar Index (DXY)	98.93	0.709	0.72%
10 Year Govt Bond Yield	2.11%	-0.01%
Current Coupon Ginnie Mae TBA	104.4
Current Coupon Fannie Mae TBA	103.7
BankRate 30 Year Fixed Rate Mortgage	3.83

Markets are higher this morning as oil rebounds a little. Bonds and MBS are up.

Mortgage Applications rose 21% last week as purchases rose 18% and refis rose 24%.

New regulations may require banks to raise up to $550 billion in the bond market by 2019. The bonds will be part of a package that are designed to prevent another 2008 from happening. They will be senior unsecured debt that converts to equity when a bank becomes insolvent. The new regs are open for comment and the ABA is working hard to lower the amount. I have trouble imagining the type of investor that would buy half a trillion of this stuff.

China's troubles are further evidence that whenever a country appears to have "cracked the code" for seemingly perpetual growth, a real estate bubble is usually the culprit. And it always ends badly.

Larry Summers is warning the Fed that the global economy cannot withstand 4 rate hikes this year. The bond market rally is saying the same thing. Since the Fed hiked rates on Dec 16, the 10 year bond yield has fallen 20 basis points.

Boston Fed Chairman Rosengren is also warning about further growth and the effect that overseas weakness will have on the US economy.

The US is starting to require title companies to identify the people who pay cash for properties in NYC and Miami. 

Morning Report: Larry Summers urges the Fed to go slow hiking rates

Vital Statistics:

	Last	Change	Percent
S&P Futures	2084.3	-4.1	-0.20%
Eurostoxx Index	3382.3	51.6	1.55%
Oil (WTI)	38.87	-1.1	-2.75%
LIBOR	0.462	0.010	2.21%
US Dollar Index (DXY)	98.77	0.415	0.42%
10 Year Govt Bond Yield	2.28%	0.01%
Current Coupon Ginnie Mae TBA	104.3
Current Coupon Fannie Mae TBA	103.3
BankRate 30 Year Fixed Rate Mortgage	3.88

Stocks are lower as oil continues to drop. Bonds and MBS are down small. 

The week after the jobs report tends to be data-light and this week is no exception. The highlight will be retail sales on Friday. Other than that, expect markets to be dull as traders position for the FOMC meeting next week. 

The Labor Market Conditions Index fell to 0.5 from 2.2 in November, according to the Fed. This index is a meta-index of 19 different variables. 

The latest Black Knight Mortgage Monitor is out, and they take a look at the high LTV loan universe. FHA has become the go-to high LTV loan product, and they high LTV loans account for 77% of FHA / VA origination. Fannie and Freddie did about 1% in high LTV loans. Home Price appreciation continued in September, with their proprietary home price index up 5.5% on a year-over-year basis. 

Larry Summers makes the case that the Fed should go slow with raising interest rates. His main point: that the "neutral interest rate" has been declining and will continue to decline due to the changing allocation of savings versus consumption tilts more towards savings. (More savings = more demand for bonds, which pushes bond yields lower). Of course this argument focuses primarily on the baby boomers, who are retiring and ignores the millennials, which are bigger and will enter the workforce (and spend) over the next decade or so. He makes another point: some of the economic indicators are pointing towards a slowdown, and we don't want to have monetary policy acting as a drag on an economy that is already weakening. FWIW, I think the body language out of the Fed is that they will take it slow, and I cannot see how an extra 25 or 50 basis points on the Fed Funds rate is going to be that material of a drag on the US economy. In reality, a sub-1% Fed Fund rate is still incredibly accomodative. 

Morning Report: Awaiting the FOMC minutes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1979.3	-7.9	-0.40%
Eurostoxx Index	3217.2	-9.2	-0.29%
Oil (WTI)	48.24	0.4	0.90%
LIBOR	0.318	-0.005	-1.61%
US Dollar Index (DXY)	95.49	-0.008	-0.01%
10 Year Govt Bond Yield	2.05%	-0.01%
Current Coupon Ginnie Mae TBA	104.9
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.8

Markets are lower this morning on overseas weakness. Bonds and MBS are up.

Third quarter earnings season starts tonight with the traditional report out of Alcoa. 

Initial Jobless Claims fell to 263k last week, the lowest since July.

The minutes from the September FOMC meeting will be out at 2:00 pm EST. Be aware of possible bond market volatility as the market digests it.

The Bloomberg Consumer Comfort Index rose to 44.8 from 43 last week. 

Fannie Mae is announcing further reps and warranties guidance for loans starting Jan 1. It will include new alternatives to repurchase if the loan has a defect. The government is sick and tired of tight credit, especially at the lower end of the credit spectrum. These are intended to ease credit by giving lenders more certainty. The government is clearly worried given that the big banks like JP Morgan are backing away from FHA originations.  

A case for allowing student loan debt to be discharged in bankruptcy is winding its way through the courts. There is about $1.2 trillion in student loan debt outstanding. 

It looks like a strike at Fiat-Chrysler has been avoided. It sounds like the union got some of what they wanted so we could start seeing the beginnings of increasing wages. 

Larry Summers makes the case for going big on expansionary fiscal policy. His argument is that China's slowdown threatens to drag the global economy into a secular stagnation similar to what Japan has been going through. He argues that monetary policy is pretty much played out: rates are at zero, and the stimulative effect of additional QE with the 10 year at 2% would be de minimus. He argues for a new "New Deal" where the government deficit spends on infrastructure spending. Of course this isn't a new idea in the modern age: Japan has been doing precisely that for 25 years and has nothing to show for it except for a debt to GDP ratio of 2.3x. That would be like the US spending $40 trillion over 25 years. Before we advocate spending that kind of money, we should figure out  why it hasn't worked in Japan.. And if over 1 quadrillion yen is not enough, then what is? We need a better answer than the un-falsifiable "More Cowbell." If the Rx only works in theory, then maybe the answer is to just slug it out until the economy corrects on its own. 

Morning Report: Job openings at another record

Vital Statistics:

	Last	Change	Percent
S&P Futures	1984.9	19.2	0.98%
Eurostoxx Index	3315.0	81.1	2.51%
Oil (WTI)	45.49	-0.4	-0.98%
LIBOR	0.333	0.001	0.30%
US Dollar Index (DXY)	96.34	0.358	0.37%
10 Year Govt Bond Yield	2.23%	0.05%
Current Coupon Ginnie Mae TBA	104	-0.2
Current Coupon Fannie Mae TBA	103.7	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.84

Stocks are higher this morning on overseas strength in equity markets led by Japan. Bonds and MBS are down. 

Mortgage Applications fell 6.2% last week, with purchases falling 0.9% and refis falling 9.9%. 

Job openings hit a record in July, with the JOLTS job openings hitting 5.7 million. Compare that number with the number of unemployed at 8 million. The quits rate (which is a measure of economic strength) has been unchanged for the past year however at between 2.7 million and 2.8 million. It seems surprising to see a labor force participation rate at 38 year lows, job openings at highs, an unemployment rate at boom time levels, and almost  no real wage growth. It speaks to a mismatch between what business wants and who is available. 

Chart: JOLTS job openings:

Citi is forecasting a better than 50% chance of a global recession in the next couple of years. This will be led by emerging markets and China. While that doesn't necessarily mean the US will head into a recession, it does mean that there will be little to no upward pressure on interest rates. The biggest risk to the US is a sharp increase in the US dollar, which will hurt exporters. The policy response to a recession will be limited - monetary policy is already at pretty much full stimulus. Much more worrisome however, is the fact that protectionist policies are gaining in popularity. 

Homebuilder Hovnanian reported earnings this morning. Deliveries fell 3.8% compared with last year. Gross margins were down as well. Contracts did expand however, to almost 20%. It seems like the builders in general had a bit of a lull in deliveries over the summer, but almost all reported bit increases in contracts and backlog. We are entering the slow season for the builders, which lasts about as long as football season. While I sometimes feel like Linus in the pumpkin patch, 2016 could be a big year for the builders. Would be nice to get housing starts back around historical levels of 1.5 million or so. 

Larry Summers is out with another editorial which lays out the case for keeping rates at zero. His argument is that credit spreads have widened (which means the interest rate companies have to pay to borrow) has increased over the past month and that in of itself constitutes a tightening. David Stockman (Reagan's budget director) was on Bloomberg Radio this morning excoriating the "clowns at the Fed" for not having raised rates already. His point is that the unemployment rate is in the middle of the range of what the Fed considers full employment. In fact, the 5.1% unemployment rate is in the bottom quintile of unemployment rates over the past 40 years. 

Morning Report: Consensus shifting rapidly on a rate hike

Vital Statistics:

	Last	Change	Percent
S&P Futures	1918.4	45.6	2.43%
Eurostoxx Index	3213.3	-4.8	-0.15%
Oil (WTI)	39.37	0.1	0.15%
LIBOR	0.332	0.003	0.76%
US Dollar Index (DXY)	94.91	0.378	0.40%
10 Year Govt Bond Yield	2.16%	0.09%
Current Coupon Ginnie Mae TBA	104.3	-0.2
Current Coupon Fannie Mae TBA	104	-0.8
BankRate 30 Year Fixed Rate Mortgage	3.86

Green on the screen again this morning as stocks try to rebound. Yesterday, stocks traded up early only to give it all back late in the day and close with big losses. Bonds and MBS are falling again. 

Durable Goods orders were strong at 2%, and June's number was revised upward. Capital Goods Orders Non-defense, ex-air (a proxy for business capital investment) rose 2.2% versus a 0.3% expectation, while June was revised upward from 0.9% to 1.4%. These were the highest readings in a year. 

Mortgage Applications rose 0.2% last week as purchases rose 1,7% and refis fell 1%. Surprising that refis fell given the 17 basis point drop in the 10 year, but it looked like TBAs (which set mortgage rates) largely ignored the move in the bond market.

Not sure what caused yesterday's late day sell-off, but the S&P 500 made a 60 point swoon in the last hour of trading to close down 26 points. 

The other interesting thing about this sell-off has been the fact that bonds have not reacted much to the sell-off. The flight to safety trade has been almost non-existent in Treasuries. Odd, since the sell-off has taken down the probability of a rate hike in September. In fact, many strategists are moving out their estimate for the first hike to 2016. 

Larry Summers was arguing over the weekend that financial conditions are acting like a tightening, and therefore the Fed doesn't really need to raise rates right now. Hotlanta Fed President Dennis Lockhart said that conditions in the financial markets have complicated the Fed's decision. By any measure, inflation is nowhere to be found. Given the fear of replicating the 1937 mistake, the Fed is probably going to err on the side of caution. Aside from the psychological discomfort of having rates at 0%, what reason is there to raise rates? 

The carnage in the stock markets in Asia have created some bargains. HTC (the cellphone maker) is trading at a discount to cash. Market cap of $39.7B, no debt, $47.2 billion of cash. Like buying dollar bills for 84 cents. In crisis, opportunity.