Morning Report: Housing starts solid

Vital Statistics:

	Last	Change
S&P Futures	2697.3	2.8
Eurostoxx Index	392.4	-0.3
Oil (WTI)	57.4	0.2
US dollar index	86.9	0.3
10 Year Govt Bond Yield	2.43%
Current Coupon Fannie Mae TBA	102.531
Current Coupon Ginnie Mae TBA	103.375
30 Year Fixed Rate Mortgage	3.88

Stocks are higher as Congress begins the voting for tax reform. Bonds and MBS are down. 

The House is expected to vote on tax reform this afternoon around 1:30. Depending on the procedural machinations, the Senate will vote either tonight or tomorrow. Bob Corker and Susan Collins are supposedly on board, so this should be done. 

Housing starts increased to 1.3 million in November, according to Census. This is up 3.3% MOM and 13% YOY. Building Permits came in at 1.3 million as well. The increase in starts was driven by single-family, not multi, and hit a 10 year high. Note that tax reform's pass-through treatment will be good news for landlords and could encourage more multi-fam construction. We didn't see any jump in multi-fam permits last month, so maybe the change is too recent to influence behavior yet. 

Minneapolis Fed Head Neel Kashkari argues that we should not be raising interest rates yet. Neel was one of 2 dissenters at the last FOMC meeting, preferring to maintain the current level of rates.  His argument is that inflation remains below the Fed's target rate of 2% and there is still slack in the labor market. He also is worried about what the flattening yield curve is saying. IMO he has a point - we want the labor market to keep bringing back the long-term unemployed, however we are hardly going to a tightening posture. On a scale of 1 - 10, where 1 is easy and 10 is tight, we are going from a 1 to a 2. Real interest rates are still negative, and the Fed is still buying Treasuries and MBS albeit at a reduced pace. What would a 10 on that scale look like? The early 1980s, when Paul Volcker tightened to quell inflation and took the Fed Funds rate from 9% to 19%. We are in a different economic scenario than the late 70s, but some historical perspective is helpful. 

New mortgage loan credit risk increased in the third quarter, according to CoreLogic's Housing Credit Index. The increase in risk was driven by an increase in the share of condo / multi-fam loans. Credit scores improved, while DTIs fell. We are back in the pre-bubble range of credit risk. 

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: 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: Janet Yellen's dovish comments spark a rally

Vital Statistics:

	Last	Change
S&P Futures	2435.3	11.0
Eurostoxx Index	382.2	3.0
Oil (WTI)	45.7	0.7
US dollar index	88.1	-0.1
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	4.03

Stocks and bonds are sporting their rally caps on Janet Yellen's prepared testimony in front of Congress. 

The big event of the day will be Janet Yellen's semiannual testimony in front of the House Financial Services Committee. Expect the focus to be on the tightness of the labor market and why we have yet to see any real wage inflation. Both sides will also try and get her to agree with their viewpoints on banking regulation. Here are her prepared remarks. 

The statement that jumped out to me was this: "That expectation is based on our view that the federal funds rate remains somewhat below its neutral level--that is, the level of the federal funds rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel. Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance." That is a dovish statement, and bonds took off, especially the long end of the yield curve. This sentiment was echoed by Lael Brainard as well.

The Fed Funds futures reacted to the remarks by assigning a 91% probability of no move in September and assigning a 53% chance of no move in Decsember. These are about 9-10 basis points higher than they were last week.

Minneapolis Fed President Neel Kashkari is skeptical that the economy is close to overheating, and he believes that wage growth will happen once labor is scarce. The fact that wages aren't really increasing leads him to believe there is still plenty of slack in the labor market, despite some shortages in certain skills.

Donald Trump Jr. met with a Russian lawyer last year who supposedly had dirt on Hillary Clinton. Turns out the info mainly concerned the Ziffs and was tangentially related to the Clinton Foundation. Interpretation of the gravity of this is predictably falling along partisan lines. PIMCO is warning that this could affect markets since it makes bipartisan consensus less likely in DC, but that ship has sailed. Note stocks went out on their highs yesterday, which indicates the stock market assigns zero import to the latest "bombshell."

Mortgage Applications fell 7.4% last week as purchases fell 3% and refis fell 13%. The index does include an adjustment for the 4th of July holiday, however many people took off on the Monday prior. Interest rates did rise on the back of a European bond sell-off, which hurt production. 

RBS reached a settlement with the FHFA for $5.5 billion related to toxic MBS securities from the go-go days. 

Morning Report: Fed hikes, but is a credibility problem brewing?

Vital Statistics:

	Last	Change
S&P Futures	2420.0	-15.3
Eurostoxx Index	384.3	-3.3
Oil (WTI)	44.6	-0.2
US dollar index	88.6	0.5
10 Year Govt Bond Yield	2.16%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.95

Stocks are lower this morning after the FOMC raised rates yesterday. Bonds and MBS are down after rallying yesterday. 

As expected, the FOMC raised the Fed Funds rate by 25 basis points and continued its policy of re-investing maturing bonds from QE back into the market. Neel Kashkari dissented, preferring to maintain the current Fed Funds rate. The dot plot basically did not change meaningfully from March to January. The projections did change, as the unemployment forecast for 2018 and 2019 was revised downward from 4.5% to 4.2%. Bonds reacted negatively to the move, but that was colored by the fact that bond yields were already down 10 basis points on the day due to the weaker than expected CPI and consumer spending numbers. The highlighted areas on the projection below show the major changes.

The Fed Funds futures are predicting a less than 15% chance of a rate hike in September, however. In fact, the Fed funds futures are handicapping a 50% chance of no more rate hikes this year. 

Compare the Fed Funds futures implied probability to the latest dot plot. The labels on the side show what each forecast is. 

Note that 14 out of the 17 FOMC members think the Fed is going to hike at least another 25 basis points this year. In fact, 4 out of 17 think that will be the case, while the market gives it about a 6% chance. There is a big disconnect happening between what the Fed is saying it will do and what the market thinks they will do. Not necessarily saying the Fed has a credibility problem, but the markets and the FOMC don't seem to be on the same page. 

In other economic data, initial jobless claims fell to 237k last week, which is more evidence that the labor market is strengthening into the summer months. The Philly Fed report showed continued strength in manufacturing, while the Empire State Manufacturing Survey picked up strength as well. 

Industrial production was flat in May after a big upwardly-revised jump in April. Manufacturing production slipped 0.4%, while capacity utilization ticked down 0.1%. Big picture: April was a huge jump in all indices and May gave back a little. 

The NAHB Housing Market Index slipped a little in May, but builder sentiment is still buoyant.

Wells is being sued for allegedly changing the terms of loans for customers in bankruptcy. They lowered the payments, but extended the term without the borrower's knowledge, nor Court approval, the suit alleges. The stock is down slightly pre-open, more or less in line with the market. 

Morning Report: Credit scores back to pre-crisis levels

Vital Statistics:

	Last	Change
S&P Futures	2409.0	-4.8
Eurostoxx Index	390.1	-1.2
Oil (WTI)	49.5	-0.4
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	3.98

Markets are down on overseas weakness. Bonds and MBS are up small. 

Personal Incomes rose 0.4% last month, while personal spending rose the same amount. The PCE inflation index rose 0.2%. All three were in line with expectations, and point to a recovery in the second quarter. The Fed Funds futures are pricing in an 84% chance of a rate hike at the June FOMC meeting, which is only 2 weeks away. 

The Fed will also likely begin to lay out its plan to let its balance sheet shrink at the next meeting as well. It looks like they will allow a small portion of their portfolio to run off and they will keep increasing that number every quarter. Note that this could be put on hold if we get into a protracted debt ceiling fight this fall. 

Home prices are up 5.8% YOY, according to the Black Knight Financial home price index. The index hit $272k, as strength on the West Coast was offset by weakness in the Deep South. The Case-Shiller HPI came up with the similar numbers as well. Meanwhile, housing demand remains strong, according to Redfin, as inventory remains tight and new listings draw in buyers from the sidelines. Despite these market dynamics, home building remains stuck at recessionary levels. It does open up the possibility of more cash-out refis though. 

US credit scores hit a 12 year high this Spring as consumers continue to improve their financial situations by saving more and borrowing less. Interesting tidbit: More than 6 million families will have personal bankruptcies fall off of their credit reports over the next 5 years. Chapter 7 and 13 personal bankruptcy filings hit 1.5 million in 2010. That will be an additional source of mortgage demand in addition to Millennial first time homebuyers. 

Consumer confidence slipped in May, however it remains elevated. Investor confidence rose. 

Neel Kashkari discusses bubbles and the Fed. I found this part fascinating: "When I went to Treasury in July 2006, then-Treasury Secretary Henry Paulson declared to his staff that the U.S. economy was due for some form of crisis. He didn’t know where it would come from but, because markets had been stable for some time, history suggested something would happen. So he tasked his staff (including me) to work with the Federal Reserve and Securities and Exchange Commission to look for signs of trouble. We looked at a variety of scenarios, from an individual large bank running into trouble to a hedge fund blowing up. Sadly (and embarrassingly), we never considered a nationwide housing downturn. We missed it, and we were looking. It seems obvious now. This was clearly a “false negative.”" As the real estate bubble was peaking, the Fed looked for a catalyst for a crisis, and didn't see the housing bubble. I know hindsight is 20/20, but that is an astounding admission...

Morning Report: Neel Kahskari explains his dissent

Vital Statistics:

	Last	Change
S&P Futures	2372.5	-2.8
Eurostoxx Index	377.7	-0.6
Oil (WTI)	48.0	-0.7
US dollar index	90.6
10 Year Govt Bond Yield	2.50%
Current Coupon Fannie Mae TBA	101.53
Current Coupon Ginnie Mae TBA	102.87
30 Year Fixed Rate Mortgage	4.24

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

Should be a relatively quiet week coming up with not a lot of market-moving data. 

Economic growth increased in February, according to the Chicago Fed National Activity Index. The 3 month moving average is the highest since December 2014. Employment-related indicators accounted for most of the growth in the index. 

Chicago Fed's Evans expects GDP to grow 2.3% this year, and says that 3 rate hikes is reasonable. 2 hikes are appropriate even if inflation progress remains uncertain. 

Minneapolis Fed Governor Neel Kashkari was the lone dissenter from last week's Fed decision, preferring to maintain rates at current levels. His rationale: inflation remains below the Fed's target rate and there is still too much slack in the labor market. “I dissented because the key data I look at to assess how close we are to meeting our dual mandate goals haven’t changed much at all since our prior meeting, We are still coming up short on our inflation target, and the job market continues to strengthen, suggesting that slack remains.” He also supports unwinding the Fed's balance sheet once conditions warrant tightening monetary policy, however he believes the Fed should announce their plan well in advance of taking any action in order to let the markets adjust. 

The internet has disintermediated the middleman in just about every profession - from retail to stockbroking. One area that hasn't been affected: realtors. It turns out people still value the human touch. “Who is going to write a contract? Fill out a disclosure statement? Anticipate what’s coming on the market?” asked association president Bill Brown. “There’s a human element to buying and selling a home that can’t be replaced.” It is amazing that the traditional 5% - 6% commission has been impervious to technology, but it has. 

The Department of Justice is taking PHH's side in the lawsuit over the structure of the CFPB. This is an amicus brief, and the judges may pay close attention, however the DC District Court of appeals is a liberal stronghold and will probably side with the CFBP. However the CFPB would need DOJ on its side if it goes to SCOTUS. 

As we begin the spring selling season, inventories are at record lows and we are seeing bidding wars even in places like the Midwest. In fact, buyers are bidding on contracts. It is truly a strange state of affairs when there is record low inventory, bidding wars, and housing starts remain well below historical averages. 

Here is what the proposed cuts to HUD means for US cities. The biggest cut will be the Community Development Block Grant program, which provides Federal funding for parks and bike paths etc. Unsurprisingly, the biggest beneficiaries are the counties surrounding Washington DC. This program also provides some of the funding for Meals On Wheels, which provides food to senior citizens. Needless to say, the media has focused all of its attention on that piece, which is a tiny fraction of the CDBG program. 

That said, we do have a housing shortage, especially at the lower price points. The Campaign for Housing and Community Development Funding makes its case for continuing public investment in low income housing. 

Supreme Court nominee Neil Gorsuch will start his Senate hearings this week. It will be interesting to see if the left filibusters him, and whether Mitch McConnell goes nuclear (eliminates the filibuster for SCOTUS nominees) in retaliation. 

Morning Report: Neel Kashkari wants to get tougher on the banks

Vital Statistics:

	Last	Change	Percent
S&P Futures	1906.7	17.9	0.95%
Eurostoxx Index	2885.9	64.6	2.29%
Oil (WTI)	30.17	1.1	3.89%
LIBOR	0.618	0.000	0.00%
US Dollar Index (DXY)	96.97	0.105	0.11%
10 Year Govt Bond Yield	1.82%	0.04%
Current Coupon Ginnie Mae TBA	105.2
Current Coupon Fannie Mae TBA	104.6
BankRate 30 Year Fixed Rate Mortgage	3.65

Stocks are higher this morning as yesterday's rally has follow-through on overseas markets. Bonds and MBS are down.

Mortgage Applications rose 8.2% last week as purchases fell 3.7% and refis rose 16%.

Housing starts came in 1.1 million, missing the 1.17 million estimate. Building Permits were flat at 1.2 million. 

The Producer Price Index rose 0.1% in January. The core index (ex food and energy) rose 0.4%. The headline number was up 0.6% YOY and the core number was up 0.8%. 

Industrial Production jumped in January by 0.9%, however the preior month was revised lower from -0.4% to -0.7%. Manufacturing Production rose 0.5%. Capacity Utilization improved markedly from 76.4% to 77.1%. 

At 2:00 pm, we will get the FOMC minutes. Given the uncertainty around the Fed's future plans, we could see the market more sensitive to these than usual. 

Neel Kashkari of the Minneapolis Fed gave a speech to Brookings yesterday, calling for even more regulation for the banks and to turn them into public utilities. Of course any examination over whether the Fed had a hand in creating the real estate bubble in the first place is nowhere to be found. 

The new enemy for consumer direct is not the government - it is a new robot designed to waste a telemarketer's time.