Morning Report: Homebuilder sentiment reaches a decade high

Vital Statistics:

	Last	Change	Percent
S&P Futures	2016.8	-8.7	-0.43%
Eurostoxx Index	3263.6	-1.4	-0.04%
Oil (WTI)	46.17	-1.1	-2.31%
LIBOR	0.317	0.002	0.63%
US Dollar Index (DXY)	94.78	0.235	0.25%
10 Year Govt Bond Yield	2.02%	-0.01%
Current Coupon Ginnie Mae TBA	105.1
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.8

Markets are lower this morning on some disappointing economic data out of China. Bonds and MBS are up small. 

Not a lot of big data this week, but we do have some stuff related to real estate. Tomorrow, we will get housing starts and building permits. On Thursday, we will get existing home sales and the FHFA House Price Index. We will also hear from homebuilder Pulte on Thursday. 

The NAHB Housing Market Index rose to 64 in October from a downward-revised 61 in September. This is the highest reading since October 2005. Tight supply means that builders can increase average selling prices pretty easily. Unfortunately, since wage inflation remains muted, the median house price to median income ratio has become stretched again. 

Everyone knows China has been dumping Treasuries, yet rates aren't increasing. The reason why is that US firms are buying them. This means that (a) US investors are more making bearish bets on the US economy (b) the Fed will probably be watching this closely as a "tell" whether they need to raise rates, and (c) even if rates go up, you might not see any effect out on the curve, which means that mortgage rates might simply brush off any tightening for a while. 

Deutsche Bank is beginning to discuss scenarios where the next move could be something like a re-introduction of Operation Twist, which is where the Fed sells short term T-bills to fund purchases of long term Treasuries. 

Speaking of the Fed, Republican presidential candidate Donald Trump accused the Fed of keeping rates low for political reasons - to help Barack Obama and Hillary Clinton. Cleveland Fed President Loretta Mester fired back saying that politics is never a factor in their decisions. The political independence of the Fed is extremely important - no politician would ever argue that the Fed should hike rates. One thing to keep in mind however is that as we approach the election in 2016, the Fed will probably hold off on making any rate hikes late in the year to prevent the appearance of being political. 

Morning Report "Gs" and "Js" edition.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1420.8	6.4	0.45%
Eurostoxx Index	2603.5	28.2	1.10%
Oil (WTI)	89.54	0.6	0.71%
LIBOR	0.311	0.000	0.00%
US Dollar Index (DXY)	79.87	-0.288	-0.36%
10 Year Govt Bond Yield	1.64%	0.03%
RPX Composite Real Estate Index	191.1	0.0

Markets are higher this morning after a better than expected PMI report out of China and Europeans took steps to solve their crisis there.  We will get the November ISM report and Construction Spending at 10:00 am. Bonds are down a point, while MBS are down a few ticks.

Talks on the fiscal cliff seem to be at a stalemate.  Both sides are digging in their heels and making their respective cases on the Sunday morning talk shows. Given that we have seen this movie before in the debt ceiling and the last time we approached the cliff, the markets are taking a sanguine view.  Two economists sum up the left / right views pretty well this morning:  Sameulson vs Krugman.

Has the G-fee become the new Social Security Trust Fund - in other words, the piggybank government uses to fund items unrelated to housing?  It would appear so.  They were used in the debt ceiling deal a couple of years ago, and are now being used to pay for visas for highly skilled immigrants. Never mind that the G-fee is   more or less an insurance policy payment used to compensate the GSEs for credit risk. Maybe the "G" in G-fee should be changed from "guarantee" to "general"

The Fed is contemplating another round of asset purchases as Operation Twist ends this year. While Minneapolis President Kocherlakota believes "monetary policy if anything is too tight," Philly Fed President Charles Plosser warns that additional stimulus may not have the capability to affect employment rates and risks the possibility that the "US turns into a Japanese experience where we have extremely weak modest growth over a long period of time."  It is refreshing to hear someone invoke the "J" word - Japan - which should be the elephant in the room, both in Washington and at the Fed.

Check out our latest article in the Scotsman Guide:  Where are we going, Where have we been?