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: Small business confidence soars

Vital Statistics:

			Last	Change
S&P futures			2833	7.5
Eurostoxx index			385.12	0.21
Oil (WTI)			67.99	0.79
10 Year Government Bond Yield				2.88%
30 Year fixed rate mortgage				4.58%

Stocks are higher this morning after the Turkish Lira rallied 6%. Bonds and MBS are flat. 

Import prices were flat in July but were up just under 5% on a YOY basis. This was pretty much all driven by oil prices which are inherently volatile and self-correcting. 

Small business optimism is near record highs according to the NFIB. Availability of workers remains a big concern, and we are seeing record levels of compensation increases. Note that many of these comp increases are planned, so there will be a 9 month lag before it shows up in the government data. Credit availability is a non-problem. The biggest headache for small business is availability / quality of labor, not the cost of labor. I don't know that we have cost-push labor inflation quite yet, but if that is the case, then it won't be good for mortgage rates as it will primarily affect the long end of the curve. 

HUD is electing to discontinue the Obama Administration's controversial interpretation of the AFFH rule from the 60s, which means it no longer will be suing towns to force them to change their zoning codes to allow multi-family housing. HUD will focus on eliminating regulatory impediments to building more housing, and will tie grants to measures which increase building. In other words, The Obama Admin used a stick approach, while the Trump Admin will use a carrot approach. 

Home prices rose 0.7% MOM and 6.8% YOY in June according to CoreLogic. They are forecast to rise 5% over the next year. Sales in the red-hot markets are down double digits as affordability issues and lack of inventory crimp activity. 

The Despot reported better than expected earnings as homeowners choose to fix up their existing place instead of trying to move in a tight real estate market. Better weather helped the company rebound from their sales miss in the first quarter. 

Morning Report: Sentiment close to 45 year peak

Vital Statistics:

			Last	Change
S&P futures			2789	2.25
Eurostoxx index			387.87	-0.07
Oil (WTI)			66.04	-0.06
10 Year Government Bond Yield				2.98%
30 Year fixed rate mortgage				4.59%

Stocks are higher this morning on reports of an agreement with North Korea. Bonds and MBS are down.

The FOMC meeting begins today. The Fed Funds futures are handicapping a 91% chance of a rate hike tomorrow. 

Trump and Kim signed an agreement to denuclearize the Korean Peninsula. There is no timetable, but not much in the way of concrete agreements, however Trump did pledge to end military exercises with South Korea. 

Inflation at the consumer level remains under control, as the Consumer Price Index rose 0.2% MOM / 2.8% YOY. The core rate rose 0.2% MOM / 2.2% YOY. These numbers were all in line with street estimates. Aside from energy, healthcare costs (hospital, Rx) drove the increase. 

Small business optimism remains strong, as the NFIB index hit its second highest level in its 45 year history. Compensation increases hit a 45 year high as a net 35% of small businesses increased wages. 58% of employers reported openings, but half couldn't find qualified applicants. I will say this again, I suspect the biggest culprit in the "labor shortage" is the plethora of application tracking systems which pre-screen job applications. They may have been a help during the days of high unemployment when finding the right employee was like finding a needle in a haystack. Nowadays, they the computer systems are probably screening out potential fits before anyone gets to see the resume. There are all sorts of articles about how these systems have to be gamed, and most people probably don't.  

The strong economy and good home price appreciation are contributing to a drop in delinquencies, according to CoreLogic. 30 day DQs dropped by 10 basis points to 4.3% in March. The foreclosure rate fell from 0.8% to 0.6%. In the first quarter, the typical homeowner saw a $16,300 increase in home equity. 

Declining margins has lenders bearish, according to the latest Fannie Mae lender sentiment survey. "Lenders remain bearish this quarter as they continue to face headwinds from rising mortgage rates, tight supply, and strong home price appreciation, which have drastically reduced refinance activity and restrained home purchase affordability," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "These factors have combined to squeeze mortgage origination volumes and have increased competitive pressures. Increased competitiveness will likely persist as a top driver of lenders’ mortgage business strategy. We expect this will prompt businesses to turn to cost-cutting as a means of managing their bottom lines, with payroll reduction likely to assume a more prominent role in future belt-tightening efforts."

Morning Report: Jerome Powell agrees with markets on interest rates

Vital Statistic:

			Last	Change
S&P futures			2667	-3
Eurostoxx index			388.93	-0.56
Oil (WTI)			70.09	-0.62
10 Year Government Bond Yield				2.96%
30 Year fixed rate mortgage				4.55%

Stocks are lower as we await the Trump Administration's decision on the Iran deal. Bonds and MBS are down small. 

The Administration is set to announce later today whether they intend to stay in the Iranian deal or abandon it. Oil has been rallying on expectations Trump will leave. 

Jerome Powell said that market expectations (i.e. the Fed Funds futures) are more or less in alignment with the Fed's expectations for the future path of interest rates. The December Fed funds futures are predicting about a 10% chance of one more hike this year, a 44% chance of 2 more and a 39% chance of 3 more. Over the past month, the central tendency has become more hawkish. 

Small Business Optimism remains strong, according to the NFIB. More businesses are planning on increasing capital expenditures, while hiring remains strong and we are seeing evidence of increased compensation. Profitability increased as well, which indicates that productivity is increasing, and that some of this CAPEX is going towards labor-saving technology. Finding qualified workers continues to be the biggest issue surrounding small business. “There is no question that small business is booming,” said NFIB Chief Economist Bill Dunkelberg. “Consumer spending, the new tax law, and lower regulatory barriers are all supporting the surge in optimism across all small business industry sectors.”

Despite the hurricane-related spike in delinquences, overall DQ rates have been falling, according to CoreLogic. Home price appreciation, in addition to more stringent underwriting standards are the driving force behind it. The foreclosure rate is down from 0.8% to 0.5%, and the 30 day DQ rate is down to 4.8% from 5.0%. As you would expect, TX and FL are experiencing rising DQ rates, but the rest of the nation is down. 

Tesla stock has more or less recovered from its conference call induces swoon from last week. The bonds are at the lows however, trading at 88. Note there is a divergence also in NFLX, which has bonds in the low 90s, while the stock is a highflyer. 

NYS AG Eric Schneiderman resigned from office after reports came out that he abused 4 women. Schneiderman was an AG cut in the same cloth as Eliot Spitzer, and hated the financial industry about as much as he did (FWIW the feeling was mutual). When Spitzer announced his resignation, cheers went up on the floor of the NYSE. 

Freddie Mac is getting into the business of providing lines of credit against MSR portfolios. Nonbank servicers face liquidity issues when loans they are servicing go delinquent. They are required to make the mortgage payment to the ultimate investor of the mortgage until the loan is brought current or foreclosed. Banks generally have no problems with this, but nonbank issuers generally don't have the balance sheet to withstand heavy advances activity. Fannie Mae only requires 6 months of advances, but Ginnie Mae has no similar relief. Policymakers are concerned about the ability of nonbank servicers to withstand a period of prolonged stress if delinquencies spike. 

Homebuyer sentiment hit an all-time high according to the Fannie Mae Home Purchase Sentiment Index. "The latest HPSI reading edged up to a new survey high, showing that consumer attitudes remain resilient going into the spring/summer home buying season," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "High home prices and good economic conditions helped push the share of Americans who think it’s a good time to sell to a fresh record high. However, the upward trend in the good-time-to-sell share seen since last spring has done little to release more for-sale inventory. The tightest supply in decades, combined with rising mortgage rates from historically low levels, will likely remain a hurdle for mobility and a persistent headwind for home sales."

Morning Report: Markets recover on soothing trade statements out of China

Vital Statistics:

			Last	Change
S&P futures			2647	28.75
Eurostoxx index			376.97	1.67
Oil (WTI)			64.76	1.34
10 Year Government Bond Yield				2.79%
30 Year fixed rate mortgage				4.41%

Stocks are up big after Chinese President Xi Jinping made a speech that emphasized dialogue and opening up the Chinese markets. Bonds and MBS are flat. 

In a speech to the Boao Forum, Chinese President Xi Jinping warned against returning to a "Cold War mentality" and pledged to make progress on imports, foreign ownership limits, and intellectual property. This have always been the sticking points with the Chinese, and while they may just be empty words, they are being taken optimistically this morning. 

Inflation at the wholesale level increased in March, as the PPI came in a little higher than expected. The headline number rose 0.3%, while the core rate rose 0.4%. Higher metals prices (in response to tariff announcements) drove the increase. 

Small Business Optimism remains in the top 5% historically, according to the NFIB. Lower taxes are driving the increase in sentiment. Improved earnings were the second best reading in 30 years. Biggest problem: Quality of Labor. In fact, 21% of all respondents considered the inability to find qualified labor their biggest headache. A net 33% reported increasing compensation, the highest number since 2000. Perhaps we might start seeing a bit of a move in wage inflation, however the biggest predictor of wage inflation - the quits rate - hasn't gone anywhere in years. We'll get an update on the quits rate Friday. 

The CFPB has initiated no enforcement actions since Mick Mulvaney took over, according to consumer advocates. Prior CFPB Chairman Richard Cordray preferred to "regulate by enforcement action" which is the more aggressive approach to take with banks. Mick Mulvaney, in a memo to his staff, promised to end the Bureau's pattern of "pushing the envelope" and "looking for excuses" to bring lawsuits. The enforcement action is one of two ways for the Bureau to regulate - the other is via supervisory means - in other words confidential discussions with the banks involved. Richard Cordray preferred to use only the enforcement action, which the industry disliked. The best analogy would be driving down an expressway with no speed limit signs. The only way to find out if you are going over the limit is when you (or someone else) gets a ticket. Regulators generally loathe to put out "bright lines" for fear that the industry will go right up to the line, and then figure out how to game it. Mulvaney is backing off from that approach. 

That said, as any compliance officer can tell you, the CFPB is the not only agency to worry about. The individual states also have jurisdiction and can do much of what the CFPB did. New Jersey (one of the most creditor-unfriendly states out there) has just set up its own version of the CFPB, nominating ex-DiBlasio attorney Paul Rodriguez to run the Director of Consumer Affairs. "Rodriguez’s selection highlights the Administration’s efforts to fill the void left by the Trump Administration’s pullback of the Consumer Financial Protection Bureau (CFPB), fulfilling one of Governor Murphy’s promises to create a “state-level CFPB” in New Jersey."

Perhaps due to the increased regulatory scrutiny in DC (and elsewhere) big banks are getting back in the subprime business, although they are doing it indirectly. Big bank loans to non-bank financial firms in the business of subprime auto, etc are up sixfold since 2010. For example, Exeter, which does sub-600 FICO auto loans is owned by Blackstone and has a line of credit from Wells and Citi.

Delinquencies remain elevated in areas hit hard by the hurricanes, but early stage delinquencies are back to normal levels, according to CoreLogic. The 30+ DQ rate came in at 4.9% in January, down 0.2% YOY. The foreclosure rate fell to 0.6% from 0.8% a year ago. 

Homebuyer sentiment rebounded in March, according to the Fannie Mae Home Purchase Sentiment Index. Of course people may want to buy, but there isn't much around in the way of inventory. Overall, people are reasonably optimistic on the economic front as well. 

Morning Report: Bonds rise on tame consumer price growth

Vital Statistics:

	Last	Change
S&P Futures	2803.0	14.0
Eurostoxx Index	378.4	-0.8
Oil (WTI)	61.0	-0.4
US dollar index	83.7	0.0
10 Year Govt Bond Yield	2.84%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	102.714
30 Year Fixed Rate Mortgage	4.46

Stocks are higher this morning after the CPI came in lower than expected. Bonds and MBS are up. 

Consumer prices rose 0.2% MOM and 2.2% YOY, however the core rate, which excludes food and energy rose 0.2% MOM and 1.8% YOY. Communications (cell phones, data) costs were a drag on the index, while apparel prices pushed it higher. Owner-equivalent rent moderated as well, which is a proxy for house prices. 

The NFIB Small Business Optimism Index just missed the record high set in 1983, rising 0.7 points to 107.6. Lack of qualified workers was the #1 problem again, and reports of compensation increases were the highest since 2000. Reports of CAPEX spend were the highest since 2004 as well. For all of the talk about how things are going on Wall Street, Main Street has switched into a higher gear. Probably the biggest constraint to higher growth right now is a lack of qualified workers. Of course, if the labor markets were truly tight, we would see widespread wage inflation. There are pockets of strength as noted below, but some parts of the labor market are still relatively stagnant. 

Separately, the Conference Board's Employment Trends Index rose in February, and is up 5.6% YOY. The six month growth rate is the highest in 4 years, when the labor market was still in recovery mode. 

One of the strange things in this labor market has been wage growth at the lower end of the wage scale, but not in the upper half. Between minimum wage laws and voluntary raises provided by companies like WalMart in the aftermath of tax reform have boosted wages at the lower end of the scale. This is squeezing the middle to upper middle class, as things like child care and entertainment, become more expensive, while their own disposable income remains relatively unchanged. This might just be a delayed reaction, and we will see more widespread wage growth. However, it might also crimp demand for housing as people feel like they don't have the disposable income for homeownership. More issues for the first time homebuyer. 

Rex Tillerson is out as Secretary of State. CIA Director Mike Pompeo has been appointed to the role. Meanwhile, Larry Kudlow is seen as the favorite to replace Gary Cohn, who is leaving the Admin as well. 

While most people in the mortgage markets are focused primarily on long rates, rising short term rates are having a large impact as well. Short rates (LIBOR / 1 year T-bill) are the highest in 10 years. This affects ARMs and their relative attractiveness to the 30 year fixed rate mortgage. As the yield curve steepens (in other words, the difference between the 30 year bond yield and LIBOR increases) the more attractive ARMS become. As that spread falls, the 30 year fixed becomes more attractive. While ARMS provide a borrower with a lower monthly payment out of the box, paying the extra yield may be a better bet this time around. ARMs perform best in secular bond bull markets, like we experienced from 1981 to a couple of years ago. In a rising rate environment, they won't be as attractive.

The rise in short term rates is also going to have knock-on effects in the stock and bond markets. For the past 10 years, short term bonds have paid next to nothing, so stocks and longer duration bonds have had no competition. That is changing, and we will see an effect on stocks as funding costs for companies increase. 

Morning Report: CFPB will stop "pushing the envelope."

Vital Statistics:

	Last	Change
S&P Futures	2643.5	-11.8
Eurostoxx Index	372.7	-0.2
Oil (WTI)	58.8	-0.5
US dollar index	83.8	-0.3
10 Year Govt Bond Yield	2.54%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.37

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

Small Business Optimism rebounded in January as expansion plans hit a record high. The net percentage of businesses saying "now is a good time to expand" was the highest since 1973, when the survey began. A more benign regulatory and tax environment is helping drive sentiment. In fact, "finding quality workers" is a bigger concern now than "taxes and regulations." Small businesses added .23 workers last month on average. 

The CFPB released its strategic plan for the next 5 years, and it marks a departure from the Cordray CFPB. CFPB Acting Director lays out his strategic vision in the opening statement: "This Strategic Plan presents an opportunity to explain to the public how the Bureau intends to fulfill its statutory duties consistent with the strategic vision of its new leadership. In reviewing the draft Strategic Plan released by the Bureau in October 2017, it became clear to me that the Bureau needed a more coherent strategic direction. If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes. I have resolved that this will not happen at the Bureau. The rest of the document reiterates the role of the CFPB and Mulvaney's commitment to those duties. 

Donald Trump laid out his priorities in a budget document yesterday. These sorts of things are never intended to become law (Obama had one that garnered exactly zero votes), but are more to lay out philosophies and priorities. The document did contemplate an increase in the guaranty fee that Fannie Mae charges borrowers by 10 basis points. At the margin, this would make Fannie loans somewhat less attractive relative to FHA / VA however it probably won't matter all that much. The amount of money involved ($26 billion over 10 years) is not major. Separately, shareholders of Fannie Mae and Freddie Mac stock had hoped the document would discuss the GSEs retaining their profits. That didn't happen. 

Hurricane-related delinquencies rose in November, but fell everywhere else, according to CoreLogic. 30 year DQs fell overall from 5.2% a year ago to 5.1%. The foreclosure rate fell from 0.8% to 0.6%. 

Morning Report: What low bond volatility means for mortgages

Vital Statistics:

	Last	Change
S&P Futures	2751.3	4.5
Eurostoxx Index	400.3	1.9
Oil (WTI)	62.0	0.2
US dollar index	86.0	0.1
10 Year Govt Bond Yield	2.50%
Current Coupon Fannie Mae TBA	102.313
Current Coupon Ginnie Mae TBA	103.063
30 Year Fixed Rate Mortgage	3.92

Stocks are higher this morning on good economic data out of Europe. Bonds and MBS are down.

Small Business Optimism slipped slightly in December, capping the strongest year in the index since the early 80s. Hiring was sluggish in December, with a lack of qualified workers being the biggest problem in construction and manufacturing. Compensation is trending up as well, as a net 23% of small businesses intend to raise compensation this year. 

Job openings were little changed in November, according to the JOLTs survey. This was a slight drop from October, and a touch below expectations. Openings increased for retail, and fell for government, transportation, and utilities. The quits rate was unchanged at 2.2%. Until we start seeing the quits rate move up, we probably won't be seeing broad-based wage inflation. 

Volatility in the bond market has hit a 52 year low, according to a Bank of America / Merrill Lynch report. This is not surprising: volatility in the stock market is also at record lows. Volatility is generally a sign of stress in the system, and it tends to fall during periods of stronger growth.

The drop in bond market volatility has major implications for the mortgage market as well, and helps explain a bit of why mortgage rates are behaving the way they are. While the 10 year has been steadily moving higher over the past few months, mortgage rates have been relatively stable. While mortgage rates do tend to lag Treasuries, something else has been going on, and that something has been low volatility. 

30 year fixed rate mortgages have an embedded option in them, which is the right of the borrower to prepay their mortgage without penalty at any time. That right to prepay is worth something, and that value explains the yield differential between government backed mortgage debt and Treasuries. The value of the prepayment option is determined largely by the volatility of the bond market - when volatility rises, the right to prepay is worth more, and when volatility falls, it is worth less. So, when the market is stable, investors bid up mortgage backed securities as the value of that option falls, which translates into tighter MBS spreads and lower mortgage rates. In fact, the difference between a 30 year fixed rate mortgage and an adjustable rate mortgage is driven by the value of that prepayment option and risk-shifting between borrower and lender. When volatility is low, the borrower is paying less for that option and 30 year fixed rate mortgages will be more attractive than ARMS. When volatility is high, ARMS will be much cheaper. During periods of low volatility, it makes sense to scoop up that prepay option on the cheap and take out a 30 year fixed rate mortgage. When volatility is high, you will end up getting a much lower initial rate with the ARM. Co-incidentally, the economic backdrop (stronger growth, accelerating inflation, and a Fed raising short term rates) also favors the 30 year fixed over ARMS. 

Morning Report: Stirrings of inflation at the wholesale level

Vital Statistics:

	Last	Change
S&P Futures	2666.3	1.8
Eurostoxx Index	390.4	1.4
Oil (WTI)	58.4	0.5
US dollar index	87.3	-0.1
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.531
Current Coupon Ginnie Mae TBA	103.591
30 Year Fixed Rate Mortgage	3.88

Stocks are up this morning as we begin the FOMC meeting. Bonds and MBS are flat. 

Inflation at the wholesale level came in slightly above forecast according to the Producer Price Index. The headline number was 0.4% MOM and 3.1% YOY. Ex-food and energy, it rose 0.3% / 2.4% and ex-food, energy, and trade services it was up 0.4% / 2.4%. This report confirms building inflationary pressures in the system. It won't have an effect on this Fed meeting, but it is something to watch.

Speaking of inflation, one of the bigger complications for the Fed is the effect of Amazon on price discovery. Amazon (and the Internet in general) allow consumers to compare prices easily, something that was not possible a generation ago. Goldman tried to estimate the effect of the internet on core CPI, and they found it to be about 0.1%. All of the Fed's inflation models were conceived pre-internet. While price comparison on the web is not the only reason why inflation is low, it is a new factor. Deflation is generally experienced in the wake of asset bubbles - Japan has experienced it for a generation, the US had low inflation from the Depression that lasted until the 60s, and we have had persistently low inflation since the residential real estate bubble burst. Low productivity hasn't helped either, as productivity growth drives wage inflation. 

Small business optimism hit the highest level in 34 years on tax reform according to the NFIB. “We haven’t seen this kind of optimism in 34 years, and we’ve seen it only once in the 44 years that NFIB has been conducting this research,” said NFIB President and CEO Juanita Duggan. “Small business owners are exuberant about the economy, and they are ready to lead the U.S. economy in a period of robust growth.” While small business didn't add any workers last month, hiring plans increased, and difficulties in finding workers remains a big problem. 

CoreLogic reported that delinquency rates in July were the lowest in a decade. The foreclosure inventory rate was 0.7%, down from 0.9% a year ago and is the lowest level since 2007. Delinquency rates are the lowest in the West, while New York has the highest. The Northeast judicial states like New York, New Jersey, and Connecticut still have a foreclosure inventory to work through. Lower oil prices were beginning to push up DQ rates in places like Alaska and Louisiana. 

Congress hopes to pass tax reform by Christmas. The bill is in committee right now, where the House and Senate are trying to reconcile their differences. 

Bitcoin mania: People are taking out mortgages to buy bitcoin. This will not end well. That said, can bitcoin double from here? Of course. Can it go to zero? Of course. 

Morning Report: Inflation is picking up

Vital Statistics:

	Last	Change
S&P Futures	2577.0	-5.0
Eurostoxx Index	384.4	-1.8
Oil (WTI)	56.5	-0.3
US dollar index	87.5	0.0
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.87

Stocks are lower on overseas weakness. Bonds and MBS are flat.

Inflation at the wholesale level picked up in October, according to the Producer Price Index. The headline number rose 0.4% MOM and 2.8% YOY on services inflation, which is being driven (hopefully) by increased compensation. The core rate was up 0.2% MOM and 2.3% YOY. 

Small business optimism picked up in October on strong labor readings. The average firm added .17 workers, while job openings stayed in record territory. In fact, the inability to find qualified workers was the second biggest headache for small business. As an aside, I wonder if this is an inability to find qualified workers, or an inability to find qualified workers who can pass a drug test. A net 27% of firms reported increasing compensation. 

People are spending money on their homes. The Despot reported strong Q3 earnings with comparable store sales up 7.9%, despite the hurricanes. I guess when inventory is as low as it is, people will remodel their current home instead of moving. 203ks anyone?

Loan delinquencies are falling, according to CoreLogic, however we are seeing a bump up in the oil patch states, especially around Houston and in Alaska. 30+ DQ rates fell 0.6% YOY to 4.6% in August. These were the lowest numbers in a decade, however the hurricanes will probably bump up those numbers in the next few readings. The number in foreclosure fell to 0.6% from 0.9% a year ago. 

The Senate came to an agreement to limit some of the post-crisis financial regulation for small and medium sized banks. The threshold for additional scrutiny was increased from $50 billion in assets to $250 billion in assets. Some larger banks who have a more traditional business like US Bancorp and PNC, were hoping for some relief, but didn't get any. “This is the first proposal that has a legitimate shot at making it to the president’s desk,” said Milan Dalal, an attorney at lobbying firm Brownstein Hyatt Farber Schreck in Washington and a former aide to Sen. Mark Warner (D., Va.), who backed Monday’s deal.

Morning Report: Trump interviews possible replacements for Yellen

Vital Statistics:

	Last	Change
S&P Futures	2555.0	-1.3
Eurostoxx Index	391.2	-0.2
Oil (WTI)	52.1	0.2
US dollar index	86.7	0.2
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.86

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

Neel Kashkari speaks at 10:00 am. The Fed funds futures are pricing in a 93% chance of a rate hike at the December meeting. 

Industrial Production increased 0.3% in September as the effects of the hurricanes probably depressed the number by 0.25%. Capacity Utilization rebounded from August but is still lower than where it has been most of the year. Manufacturing capacity utilization is around 75%, which is 3% below its longer-term average. 

Small business optimism fell in September, as the hurricanes in Florida and Texas took their toll. Job creation fell during the month by .17 workers per firm. We saw firms cutting workers in most census divisions, so this isn't just a hurricane effect. That said, 19% of firms listed "difficulty in finding qualified workers" as their single most important business problem. This was the second overall issue, with the highest being taxes. Access to credit remains a non-problem as only 1% said their credit needs were not being met. Overall, sentiment declined from a historically high level. 

Donald Trump met with John Taylor yesterday, and came away very impressed. Kevin Warsh had been seen as the front-runner, however he has attracted criticism from economists on the left, particularly Paul Krugman. Taylor is known for the Taylor Rule which sets the proper Fed Funds rate based on what his model tells him. He is probably more hawkish than Warsh, and certainly more than Janet Yellen, who Trump will interview this week. A Reuters poll of economists has Jerome Powell as the most likely choice. 

Tax reform has the potential to make the mortgage interest deduction irrelevant for most homeowners. Note that many articles will breathlessly say the MID is "threatened," however in reality it will just become irrelevant, as the standard deduction will increase and most people will be better off taking the standard deduction instead of itemizing. You can't really call it "threatened." Currently about 30% of the homes in the US are valuable enough to take the MID. Under tax reform, that number should drop to 5%, according to Zillow. 

A warning? Credit card delinquencies have risen for the third month in a row, as lenders have pushed the envelope credit-wise to increase revenues. Both JP Morgan and Citi reported 14%-15% increases in DQs for the third quarter. 

The Census Bureau reported that building permits for the first 8 months of the year are up 7.5% compared to the first 8 months of 2016. Where are the most expensive places to build? The Left Coast, where it costs roughly $164 a square foot to build a spec house. The national average is $101. New England is second at $147, while the cheapest is the West South Central (TX, OK, AR and LA) at $81 a square foot. 

A trailer in New York City just went for $150,000. 

Morning Report: Small business optimism falls

Vital Statistics:

	Last	Change
S&P Futures	2547.8	4.0
Eurostoxx Index	391.2	0.0
Oil (WTI)	50.2	0.6
US dollar index	86.6	-0.3
10 Year Govt Bond Yield	2.36%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.9

Stocks are higher this morning after Walmart announced a $20 billion buyback. Bonds and MBS are flat.

Neel Kashkari speaks at 10:00 am. 

Small Business Optimism fell in September as the hurricanes hurt retail spending in Texas and Florida. We did see a weakening in the labor market, not just in Florida and Texas, but in 2/3 of all Census regions. The hurricanes will probably boost the economy into Q4 and Q1 next year, but at the moment they are depressing things. 57% of firms are trying to hire, but the vast majority of those are finding few or no qualified applicants. 

The US foreclosure and seriously delinquent rate remain very low, according to CoreLogic. The national Foreclosure rate was 0.7%, down from 0.9% last year. The Seriously Delinquent ratio was just under 2%. This is all July data, so pre-hurricane. We are starting to see the effects of the drop in oil prices in some of the energy intensive states like Alaska and Louisiana. 

Home Prices continue to rise, jumping 0.9% MOM and 6.9% YOY in August, according to CoreLogic. Their models hold that half of the largest 50 MSAs are now overvalued, which has been driven by low inventory. 

Fannie Mae is offering assistance to borrowers affected by the recent spate of hurricanes. Borrowers will be able to temporarily stop making monthly payments for 3 months (up to 12 months) without late fees, negative comments on their credit reports, or a requirement to get back current in one fell swoop. 

The IMF took up their forecast for global growth to 3.6% this year and 3.7% next year. At the margin, this means reduced demand for safe haven assets like Treasuries, which would mean higher interest rates going forward. That said, we have several real estate bubbles overseas at the moment, and when they bust, it should be bond bullish (i.e. encourage lower rates). 

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: Neel Kashkari to business: stop whining

Vital Statistics:

	Last	Change
S&P Futures	2474.0	-3.3
Eurostoxx Index	381.1	-0.9
Oil (WTI)	49.4	0.0
US dollar index	86.2	-0.1
10 Year Govt Bond Yield	2.26%
Current Coupon Fannie Mae TBA	103.197
Current Coupon Ginnie Mae TBA	104.068
30 Year Fixed Rate Mortgage	3.92

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

Job openings increased by 461,000 to hit 6.2 million in June, according to the JOLTS job openings report. The quits rate was steady at 2.1% (or about 3.1 million people). The quits rate is an important number to the Fed and often signals impending wage growth. The quits rate was the lowest in the Northeast, at 1.7% while the highest in the South at 2.5%. 

Small business optimism increased in July, according to the NFIB. Small business continues to hire, adding .21 workers on average over the past several months. Finding qualified workers remains a problem, and 87% of those trying to hire found few or no qualified applicants. Apparently drug use remains a big issue - getting workers who can pass a drug test can be difficult. Regarding the political environment in DC, while there has been no movement on anything legislatively, there have also been no new regulations put in place, and we are seeing some regulations from the Obama administration reversed, which is having a positive effect on sentiment. 

Minneapolis Fed Head Neel Kashkari spoke yesterday of the tight labor market and dismissed the idea that there is a labor shortage. "Are you really struggling to find workers? If so, the proof for me is you are raising wages. If you are not raising wages, then it just sounds like whining," he said. While Kashkari is definitely the dove on the committee, if that sentiment is any indication of the rest of the FOMC, they will be content to nudge up the Fed Funds rate at their current cautious pace until they see wage growth. 

China is trying to take away the punch bowl and reduce overseas investment, in an effort to prevent them from experiencing a bust similar to Japan's in the late 80s. I guess they see parallels between Mitsubishi paying $2 billion for the Rockefeller Center, which ended up going bankrupt a few years later. While I think they are barking up the wrong tree here (industrial policy and a residential real estate bubble are the real issues) it will have some knock-on effects perhaps in our markets. The Chinese withdrawal is probably going to hit the Canadian residential real estate market hard, and you are already seeing transactions dry up in Toronto. Chinese money will be most felt in the ultra-expensive urban areas like Seattle, New York City, and San Francisco. If China does in fact go through a Depression, they will probably try and export their way out of it, which means less inflation in the US, and lower interest rates, at the margin. 

The Fannie Mae Home Purchase Sentiment Index ticked off of record highs last month as high prices and tight inventory led to a record low of people saying now is a good time to buy. Granted, the index only goes back to 2012, but it does show how high prices are scaring buyers away. Those that say it is a good time to sell also saw a big decrease, which was the main driver of the reading. That is surprising since you would think that tight inventory + demand would equal a great seller's market. Not sure what would be causing that. 

Delinquency rates are improving for the industry according to the latest CoreLogic Loan Performance Insight Report. 30 day + DQs fell to 4.5% in May, which is down 0.8% from last year. The number in foreclosure fell 0.3% to 0.7%. About the only place you are seeing increases in delinquency are the fracking areas (South Dakota, Louisiana, some parts of Texas) which have been affected by falling oil prices. 

Morning Report: Hiring and quits are rising

Vital Statistics:

	Last	Change
S&P Futures	2422.0	-2.0
Eurostoxx Index	380.1	-1.6
Oil (WTI)	44.1	-0.3
US dollar index	88.4	0.1
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4.05

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

Job openings fell slightly in May to 5.7 million, according to the BLS. The number of hires increased by 430k to 5.5 million. The quits rate increased to 2.2 million. The quits rate is a key indicator that carries a lot of weight with the Fed. An increase in the quits rate usually is an indicator of future wage inflation. The quits rate is back to pre-crisis levels.

 

Small business optimism declined in June, according to the NFIB. We are still higher than we were pre-election, but some of the optimism is fading as it looks like tax reform and healthcare reform are not going to happen. Employment-related indicators ticked down, but are still very strong. 85% of all respondents that tried to hire reported that there were few or no candidates with the required experience. Rising compensation will draw more people into the workforce, however that will be a slow process. Note that much of the drop in the labor force participation rate has been due to people aging out. The first big question is whether these people want back into the workforce or are content to stay retired. The second big question is whether ageism will keep these people out. 

Consumers are becoming more optimistic according to the New York Fed. Nearly 35% of all respondents said they are better off now than they were a year ago, and they are less worried about losing their jobs. Consumers also said they expect to spend about 3.3% more in the coming year than they did last year.

Are appraisers going to be replaced by artificial intelligence and / or algorithms like Zillow's Z-estimates? Some people think so. Zillow has been tweaking its model to take into account more than just the comps - now it will include things like interior amenities. This may happen out of necessity: the regulators raised the barriers to entry so high that the pipeline of new people entering the profession is almost nothing (In 2005, 1,200 people entered the profession. Now it is 100). The average age of an appraiser is 58 and there simply isn't a stream of replacements. Freddie Mac is now willing to accept model-generated appraisals for some refis and is asking FHFA for permission to use more. It kind of begs the question of why the government then thinks appraisers need to have so much education and apprenticeship time if it is willing to accept modeled values to begin with. 

Mortgage performance improved last month according to CoreLogic. 4.8% of all mortgages were 30 days down in April compared to 5.3% the year prior. That said, early stage delinquencies (30 - 60 days down) ticked up to 2.2% from 2% the year before. 60-90 day DQs were roughly flat YOY. Some of the drop in performance is coming from the energy-intensive states like Alaska and North Dakota. Now that oil cannot seem to get out of its own way, we may start seeing more trouble in the oil patch. 

The CFPB has released a new rule making it easier for class-action suits against lenders. Financial firms will be restricted in their ability to use mandatory arbitration clauses to protect themselves against lawsuits. Under the Congressional Review Act, Congress has 60 days to overturn the new rule. The OCC has asked the CFPB for their data, and Republican Jeb Hensarling has already come out against it.