Morning Report: 75% of the US Treasury market is under water

Vital Statistics:

			Last	Change
S&P futures			2773.25	10.1
Eurostoxx index			383.72	1.4
Oil (WTI)			74.01	0.21
10 Year Government Bond Yield				2.86%
30 Year fixed rate mortgage				4.50%

Stocks are higher this morning as trade war fears recede. Bonds and MBS are down.

Earnings season begins this week, with a bunch of the big banks reporting on Friday.

The biggest econ data will be the PPI and CPI on Wednesday and Thursday. For the most part it should be a quiet week. 

Leandra English has resigned from the CFPB. She was the Deputy Director for Richard Cordray, and believed she should have been given the job instead of Mick Mulvaney. She sued in Court and lost. Now that Kathy Kraninger has been nominated, she is gone. 

Donald Trump will announce his SCOTUS pick at 9:00 pm tonight. The favorites are Brett Kavanaugh and Thomas Hardiman.

Interesting stat: 75% of the US Treasury market trades under par. This is the highest percent ever recorded (we started measuring this in the 80s). In the past, it generally peaked around 50%, which happened at the end of Fed tightening cycles and was usually a buying opportunity. I would note that these were in the context of a secular bull market in bonds. In secular bull markets, you buy the dip. We are now in a secular bear market in bonds and that changes the dynamic. 

The REO-to-Rental Trade was a big winner over the past several years. Hedge funds and pension funds bought foreclosed properties for pennies on the dollar, fixed them up and rented them out, earning high single digit returns. As home prices rise, you would think these people will start ringing the register. Turns out they are doubling down. Professional investors are buying up homes in urban areas with good schools. This is making things even tougher for the first time homebuyer who is struggling to find a starter homes. That said, it isn't a ridiculous number - last year major investors bought 29,000 homes, which is a drop in the bucket compared to total existing home sales of 5.45 million. 

Morning Report: Why aren't we seeing wage growth?

Vital Statistics:

	Last	Change
S&P Futures	2382.3	0.8
Eurostoxx Index	391.4	-0.1
Oil (WTI)	51.0	0.6
US dollar index	88.6	-0.1
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	103.27
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.94

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

Economic activity picked up in April, according to the Chicago Fed National Activity Index. It rose to .49 (better than expectations) and the 3 month moving average rose to .23. Production and employment led the rise, while personal consumption and housing were negative. 

We have some Fed-speak at 10:00 EST today along with a bunch after the close. The biggest events this week should be the FOMC minutes on Wednesday and the second revision to Q1 GDP on Friday. We will also get a lot of housing data this week. 

One of the biggest issues for the Fed is wage inflation (or the lack thereof). The last time unemployment was this low, we were experiencing 4% wage growth. Why aren't we now? Here are a few explanations. They revolve around a few different theories. The first is that there has been a structural change in labor economics, and that the tradeoff between unemployment and inflation is over due to globalization, lack of union representation, etc. The second explanation is that wage negotiation dynamics have been colored by the economy since 2008: employers are training people internally instead of hiring outside at a higher price, employees don't feel comfortable asking for more, productivity is lousy, and the huge reservoir of the long-term unemployed means the market is not as tight as it may appear. The final one is a measurement problem: that the BLS numbers aren't accurately reflecting the reality of the marketplace. Take construction: Builders constantly complain that they can't find skilled labor, that they are offering signing bonuses, etc yet when you look at the actual BLS numbers, construction wages are only growing 2.1%. We are seeing in the mortgage business with ops folks as well. So maybe we are starting to see pockets of wage growth, however it isn't showing up quite yet in the rest of the economy or the numbers. 

The drop in construction spending hasn't only been in housing - it has also been in schools. State and local governments are spending about 1/3 less on school construction than they did before the crisis, yet enrollment is up 4%. This is just another problem for the first time homebuyer - finding affordable homes with good schools. 

NAR is predicting 5.6 million home sales in 2017, up 200k from last year, and new home sales of 620k, up from 560k last year. GDP will grow at 2.2% and inflation will remain tame. Sales would be higher if there was more inventory, and the group hopes that regulatory changes, especially with Dodd-Frank will ease up credit for smaller banks, who fund local homebuilders. 

Now that the REO-to-rental trade is largely played out, Wall Street is now building houses for rentals. Some are planned communities, where renters get the benefit of living in a single family detached homes, plus they get some of the advantages of apartment living, with gyms and common spaces. They also don't have to deal with maintenance.  Interestingly, many people intend to rent for only a short time period, but end up staying. For one landlord, 1/3 of the tenants have been on month-to-month arrangements for 7 years. The REITs behind this trade also get discounts from builders, lower maintenance costs, and about a 5% - 8% pickup in rental income for a new house. 

Morning Report - Settlements, Settlements

Vital Statistics:

	Last	Change	Percent
S&P Futures	1454.2	1.9	0.13%
Eurostoxx Index	2697.2	5.8	0.21%
Oil (WTI)	93.08	-0.1	-0.08%
LIBOR	0.305	0.000	0.00%
US Dollar Index (DXY)	80.53	0.180	0.22%
10 Year Govt Bond Yield	1.86%	-0.01%
RPX Composite Real Estate Index	192	-0.2

Markets are firmer this morning after Alcoa kicked off earnings season with better than expected revenues. Mortgage applications rose 11.7% in the first week of Jan.  The Japanese yen continues its slide that started with the elections last month, which means the entire planet is now playing the currency devaluation game. Bonds and MBS are up small.

Crossing the tape right now:  Looks like it is official - Jack Lew will be nominated as the next Treasury Secretary.

Blackstone has been accelerating its rental strategy, buying $2.5 billion or 16,000 homes last year.  In the 4th quarter alone, they bought $1.5 billion worth on homes.  Their plan is to turn residential properties into a new  $1.5 trillion institutional asset class. J.P. Morgan estimates that the market could total 12 million homes and be double the institutional multi-fam market.  Blackstone is concentrating on the 9 hardest-hit cities - places like Phoenix and Miami.  Scalability will be the key determinant here. Still, it is an interesting idea, and is another reason why the rebound in house prices could be stronger than people are forecasting.  

Another settlement seems to be in the works - Goldman, HSBC, Ally, and Morgan Stanley are close to reaching a $1.5 billion settlement with the Feds for alleged servicing sins. For consumer activists and lawyers, these settlements are never enough.

Marketwatch is reporting that we will finally get the new QM rules this week. It is expected that implementation could take up to a year.  The ABA has said that "Banks are not likely to operate outside the legal guarantees offered by the qualified mortgage protections, meaning that the safe harbor rules will largely determine the scope of all future mortgage lending."  The CFPB is expected to finalized rules on servicing, LO comp and appraisals by Jan 21.

Tony Crescenzi of PIMCO asserts there is no bubble in bonds. Between demographics and the Fed, he believes we will not see a collapse in the bond market. Needless to say, PIMCO has a habit of talking its book, so take what he says with a grain of salt. But he may in fact be correct that the baby boom's investing habits will mirror the ones of the jazz age generation which lost everything in the Great Depression.