Morning Report: Empire State outlook declines

Vital Statistics:

			Last	Change
S&P futures			2802	-1
Eurostoxx index			383.92	-1.14
Oil (WTI)			69.81	-1.2
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.50%

Markets are flattish as earnings season gets into full swing. Bonds and MBS are flat.

Oil is dropping after US Treasury Secretary Steve Mnuchin said the US could waive some Iranian oil sanctions. 

Bank of America reported decent earnings this morning. This is a big week for earnings, with about 200 major companies reporting. The early part of reporting season is generally dominated by the banks. 

Jerome Powell will testify in front of Congress on Tuesday and Wednesday. Generally these events don't yield much in the way of useful info - they are mainly for the benefit of politicians who want to draw attention to some issue that may or may not relate to monetary policy. Expect a lot of questions regarding how a trade war and income inequality will affect growth from Democrats, and expect a lot of questions regarding regulation from Republicans. The prepared remarks are here. 

Retail Sales rose 0.5% in June, which was in line with expectations. Ex-autos and gas they rose 0.3% while the control group was flat. May numbers were revised upward. The control group was below expectations, but with the May revisions offset that. Discretionary items (clothing, sporting goods, department stores) declined, which building materials and furnishings rose. 

Business Inventories rose 0.4% in May. The inventory-to-sales ratio is down to 1.34 from 1.39 last year. 

Business activity in New York State exhibited continued strength in June, according to the New York Fed's Empire State Manufacturing Survey. While the current conditions index exhibited strength, the outlook has slipped. The survey doesn't say whether this is being driven by a potential trade war or something else. Planned capital expenditures (a proxy for expansion plans) decreased. 

The Atlanta Fed took up their Q2 GDP estimate to 3.9%. Morgan Stanley warns that we are seeing a bit of a sugar rush in the economy courtesy of trade tensions. As companies worry about a potential trade war, they stockpile raw materials and other inputs. This gooses the inventory numbers which makes the current quarter look particularly strong. The problem is that you get a double whammy if the trade war materializes. Activity will drop, and that inventory will be liquidated, both of which will reduce GDP growth. Even if a trade war doesn't happen, uncertainty could cause companies to pull in their horns. FWIW, I am skeptical of the "uncertainty" argument. Regulatory "uncertainty" out of DC generally causes companies to be cautious. The rest of the clatter is just noise. Certainly investors (judging by the S&P 500) aren't worried. 

One stat to watch: Corporate bond spreads. We are seeing a slight widening in some of the junkier investment grade debt. Baa spreads increased to 200 basis points from 165 in February. While spreads are still tight relative to historic levels, this is something to watch. Years of financial repression have given issuers the upper hand with regards to covenants and some of those chickens will come home to roost in the next recession. 

Morning Report: Zillow gets slammed after changing its business model

Vital Statistics:

			Last	Change
S&P futures			2672	14
Eurostoxx index			378.3	-0.91
Oil (WTI)			66.56	-0.84
10 Year Government Bond Yield				2.87%
30 Year fixed rate mortgage				4.44%

Stocks are higher despite coordinated strike in Syria over the weekend. Bonds and MBS are down. 

Watch the oil markets. North Sea Brent crude is rising on tensions in the Middle East, but West Texas Intermediate (which is the main oil used in the US) is shrugging off the news. Bullish bets on Brent oil have hit record highs. 

The 2 year hit 2.4%, the highest level since 2008. The flattening of the US yield curve continues. 

There isn't much in the way of market-moving data this week, although we will get a lot of Fed-speak. Probably the biggest one will be housing starts tomorrow. 

Retail sales rose 0.6% in March, which was better than the Street 0.4% consensus. The control group increased by 0.4%, a touch below the 0.5% consensus estimate. Gasoline sales were up on higher prices. Revisions were lower, however. 

Business activity in New York State decelerated last month according to the Empire State Manufacturing Survey. New Orders and Production slowed down somewhat, but employment remained firm and the workweek increased. Future sentiment declined to the lowest level in 2 years.

The NAHB / Wells Fargo Housing Market Index slipped last month, but builder sentiment remains strong. 

Wells Fargo faces $1 billion in fines due to force-placed auto insurance and improper charges for lock extensions. The big banks have all reported strong earnings, and the tax law changes are certainly helping. 

Zillow shares fell 9% on news they plan to get into the house flipping business. "We're entering that market and think we have huge advantages because we have access to the huge audience of sellers and buyers," Zillow CEO Spencer Rascoff said on CNBC's "Squawk Alley." "After testing for a year in a marketplace model, we're ready to be an investor in our own marketplace." Investors are understandably skeptical, as the multiple for a fintech company is much higher than one for a property company, and it puts Zillow in direct competition with the realtors who utilize the site. Investors are not wild about changing focus from an ad model with high margins and low balance sheet usage to one that is low margin and uses a lot of balance sheet. Another issue: will people trust Z-scores if the company has a financial interest in the value of real estate in a particular area?

Want to know how acute the housing shortage is in California? From 2000 - 2015, the state built 3.4 million too few homes to keep up with job, population, and income growth. That is over 2 year's worth of current housing starts for the whole US population. Pretty astounding when you consider those years start before the housing bubble really got going. CA has always had NIMBY issues, and now there is a push to allow dense multi-family building near public transit, even if local zoning codes prohibit it. Separately, it looks like Dodd-Frank regulations did have an adverse affect on smaller banks. I wonder how much that plays into the housing shortage. 

Speaking of CA housing, here is what you can get for $800,000 in San Jose. Handyman special. 

Morning Report: Wholesale inflation still under control

Vital Statistics:

	Last	Change
S&P Futures	2779.5	6.8
Eurostoxx Index	376.9	1.4
Oil (WTI)	61.1	0.4
US dollar index	83.4	-0.1
10 Year Govt Bond Yield	2.84%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	102.75
30 Year Fixed Rate Mortgage	4.43

Stocks are higher this morning on no real news. Bonds and MBS are flat as well.

Inflation at the wholesale level rose 0.2% MOM / 2.8% YOY. Ex-food and energy, they rose 0.2% MOM / 2.7% YOY. The core index (ex food, energy and trade services) rose 0.4% MOM / 2.7% YOY. Overall, the report came in a touch hotter than expectations, but nothing major. In terms of services, hotel demand drove the increase, while goods were impacted by lower energy prices. This report shouldn't have any effect on the Fed's decision next week. 

Retail Sales came in weaker than expected, and this is providing some support for bonds. The headline number was down 0.1%, while the control group was up 0.1%. Census has made some technical changes to the way it measures and calculates the index, so these numbers are going to contain a bit of noise. That said, people who were hoping that tax cuts would propel spending are disappointed this morning, however it might take a month or two to show up in the data. 

Not much of a reaction in the Fed Funds futures, with March futures handicapping a 89% chance of a 25 basis point hike, and the December futures coalescing around a total of 75 basis points this year. 

Mortgage Applications increased 0.9% last week as purchases rose 3% and refis fell 2%. The average contract rate rose 4 basis points to 4.69%, the highest level since January 2014. Refis comprised 40% of all mortgages, the lowest level in almost 10 years. The government share of mortgages increased. 

The leading candidate to replace Gary Cohn is Larry Kudlow, a free-trade, supply-side economist. A veteran of Wall Street and Washington, he recognizes that some saber rattling in trade issues can be a useful negotiating tactic. He also is a regular on TV, which is crucial for selling the Administration's policies to the public. Finally, he is well-liked in Washington, and while Democrats might not agree with him on policy, he doesn't strike a nerve with them. This will be helpful in navigating budgetary decisions. 

10 years ago, Bear Stearns collapsed, pretty much setting the stage for the financial crisis. The public didn't pay attention until Lehman went under. At the end of the day, Bear and Lehman were symptoms, not the disease. The disease was a burst residential real estate bubble. Keep that in mind as the business press will undoubtedly publish a bunch of "Are we at risk for another financial crisis?" articles this week. Residential real estate bubbles are the Hurricane Katrinas of banking, and when they burst, they take down the system with it. We do not have one at the present, and while there is evidence of excessive risk taking in some corners of the market (subprime auto, etc) it simply isn't big enough to dent the economy in a material way. 

Hard to believe, but true. Last night not a single Japanese government bond traded. Between the central bank vacuuming up the supply as a part of QE and Japanese pension funds buying and holding, there is almost no liquidity in the market. Makes the yield curve pretty easy to manipulate, though. Japan has always had a different attitude about markets - it thinks interest rates and stock prices are too important to be determined by a mere market - but it will be interesting to see how the economy gets out from under such determined government support. Ultimately, accurate, unmanipulated interest rates and asset prices are a necessary part of the plumbing for a functioning economy.

Morning Report: Bonds sell off on a higher than expected CPI

Vital Statistics:

	Last	Change
S&P Futures	2672.8	11.0
Eurostoxx Index	373.4	2.9
Oil (WTI)	58.6	-0.6
US dollar index	83.6	-0.1
10 Year Govt Bond Yield	2.87%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.39

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

Consumer prices rose 0.5% MOM and are up 2.1% YOY, according to the Consumer Price Index. Apparel drove the increase. Ex-food and energy the index was up 0.3% and 1.8%. These numbers are a little higher than what the Street was looking for, and bonds sold off about 5 basis points on the report. Between the CPI and the higher-than-expected wage inflation in the jobs report, Treasury investors are getting nervous about inflation. 

The Fed Funds futures are predicting a 78% chance of a 25 basis point hike next month. For the year, there is about a 1/3 chance of two hikes and a 1/3 chance of 3 hikes. with the final 1/3 split between 1 and 4. 

Goldman's inflation forecast is for a 1.8% increase in the core PCE. Despite upward creeping inflation, this is still below the Fed's target rate. 

Mortgage Applications fell 4% last week as purchases declined 6% and refis declined 2%. On the back of the jobs report, Treasury yields rose and mortgage rates hit the highest level in 4 years. The typical 30 year mortgage rate rose to 4.57% from 4.5%. 

Retail Sales were down 0.3% in January and were flat YOY. Weak auto sales were behind the change. The control group was flat. 

Fannie Mae reported earnings of $2.5 billion for 2017, after taking a $9.9 billion hit on deferred taxes based on the tax law. Adding back the $9.9 billion noncash charge gives the company net income of about $12.4 billion, about the same as 2016. The stock has a market cap of $10.7 billion, meaning it is trading at a P/E below 1. Arguably, the stock shouldn't exist in the first place, and it only trades due to the vagaries of government accounting. 

About 130 mortgage bankers sent an open letter to Congress stressing the need for GSE reform. The letter laid out their preference for a guarantor-based system over an issuer-based system. Essentially the difference would be that the guarantor-based system would be most similar to the current one, where someone like Fannie and Freddie do not originate mortgages, but guarantee than and issue securities. The issuer-based system would rely on a few large aggregators to secure the government guarantee and issue securities. The smaller bankers would probably be at some sort of competitive disadvantage under an issuer-based system and would be better off under a guarantor-based system. 

Federal Reserve Chairman Jerome Powell's prepared remarks at his swearing-in ceremony. "While the challenges we face are always evolving, the Fed's approach will remain the same. Today, the global economy is recovering strongly for the first time in a decade. We are in the process of gradually normalizing both interest rate policy and our balance sheet with a view to extending the recovery and sustaining the pursuit of our objectives. We will also preserve the essential gains in financial regulation while seeking to ensure that our policies are as efficient as possible. We will remain alert to any developing risks to financial stability."

Morning Report: Congress cracks down on serial VA refinancings

Vital Statistics:

	Last	Change
S&P Futures	2769.0	-0.5
Eurostoxx Index	397.5	0.2
Oil (WTI)	63.2	-0.6
US dollar index	85.3	-0.2
10 Year Govt Bond Yield	2.58%
Current Coupon Fannie Mae TBA	101.75
Current Coupon Ginnie Mae TBA	102.875
30 Year Fixed Rate Mortgage	4.01

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

Inflation on the consumer level continues to be under control, according to the Consumer Price Index. The headline number was up 0.1% MOM and 2.1% YOY. The core rate, which excludes food and energy) was up 0.3% MOM and 1.8% YOY. Housing and medical costs drove the increase in the rate. 

Retail Sales were up 0.4% in December, which was a touch below expectations. The control group was up 0.3%, which was in line with expectations. The MOM numbers may seem low, however November was exceptionally strong. 

Robert Kaplan said the Fed has upped their 2018 economic forecast to 2.5% - 2.75%. The current estimate is at 2.5%. After having been too high in their GDP estimates for 9 years, the Fed finds itself in the position of consistently being too low. 

The two year bond yield topped 2% for the first time since the financial crisis. The 2 year is much more sensitive to the Fed Funds rate than the 10 year is, and is part of the reason why we are talking about a yield curve flattening and what it means. A common narrative these days is that the yield curve is flattening (that is, the difference between long-term rates and short-term rates is falling) and that signals a recession. That could be the case if the Fed tightens more aggressively than they are now, however they are going at such a slow pace that it probably won't knock the economy into a recession. Plus there is so much pent-up demand from the last 10 years that a lot of the necessary pieces for a recession simply aren't in place. 

Where do we stand with the market's prediction of rates? The Fed Funds futures are now pricing in a 73% chance of a 25 basis point hike in March. This is up from 59% a month ago. 

Wells Fargo reported higher earnings, however part of that was due to a one-time benefit due to the tax bill. On the mortgage side, originations came in at $53 billion for the fourth quarter, down 10% QOQ (largely explained by seasonality) and down 26% from a year ago. Margins were up a basis point from the third quarter and were down 43 basis points from a year ago. 

The Administration and the Senate continue to work on hammering out a deal on funding the government. The current continuing resolution expires in a week, and Democrats are holding out for an immigration deal in order to sign off on a new CR. It is still too early to predict a shutdown, but remember that a shutdown will affect the IRS and getting tax transcripts. Plan accordingly. 

Washington is looking to do something about serial VA refinances.  Many veterans were refinancing their mortgages (and adding to their principal by folding in the funding fee) for a de minimus drop in monthly payment. The Protecting Veterans from Predatory Lending Act of 2018 will make the following changes to VA lending. 

• A lender may only submit a refinance loan for VA insurance if it certifies that all fees associated with the refinance would be recouped through lower monthly payments within three years;
• A lender may only receive VA insurance for a refinance loan if the refinance loan has a fixed rate 50 basis points lower than the earlier fixed-rate loan (or 200 basis points lower if the new refinanced loan is an adjustable rate mortgage).
• A lender may only receive VA insurance or get a Ginnie Mae guarantee for a refinance loan if the refinance comes more than six months after the initial loan.   

At the margin, this legislation is bullish for Ginnie Mae TBAs and Ginnie Mae servicing, which should translate into better FHA and VA rates going forward. 

Morning Report: DC focused on Equifax

Vital Statistics:

	Last	Change
S&P Futures	2491.5	-2.8
Eurostoxx Index	380.8	-1.0
Oil (WTI)	50.0	0.1
US dollar index	85.0	-0.2
10 Year Govt Bond Yield	2.20%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.83

Stocks are lower this morning as September options and futures expire. Bonds and MBS are flat.

Retail Sales fell 0.2% last month, and prior months were revised downward. The control group which excludes autos, gas, and building materials fell 0.2% as well. August retail sales included some early hurricane effects, but overall it points to a lousy back-to-school shopping season. I wouldn't be surprised to see strategists start to cheat down their Q3 GDP estimates. Separately, business inventories rose 0.2%.

Consumer confidence slipped slightly in August, but is still reasonably robust. Consumer confidence is often an inverse of gasoline prices, so this number should fall going forward as gas prices have been increasing.

Hurricane Harvey affected industrial production and manufacturing production, both of which fell in August. Industrial production fell 0.9%, while manufacturing production fell 0.3%. Utilities and mining (really energy production) drove the decrease. September should also come in depressed as well due to Irma. Capacity Utilization fell 0.8% to 76.1%. The national industrial numbers have been exhibiting a bit of volatility over the past few months. Interestingly, the regional Fed indices (like the Empire State Manufacturing Index, which improved to a strong 24.4 reading this morning) have not been confirming the overall weakness. 

Bond yields have been rising over the past week as Hurricane Irma had less damage than expected. Inflation numbers have come in slightly strong as well, and Goldman has upped its probability of a rate hike to 60% in December. The Fed Funds futures echo that sentiment right now: over the past week or so, we have gone from a 40% chance of a hike to a 53% chance of a hike.

The FTC announced an investigation into Equifax's security breach. This is pretty unusual for the agency to comment on ongoing investigations, which demonstrates how seriously the government is taking it. Elizabeth Warren introduced a bill to require credit reporting agencies to freeze a person's credit for free and would restrict their ability to profitably use that data during the freeze. Chuck Schumer called the security breach "one of the most egregious cases of corporate malfeasance since Enron." He further said that "the company's chief executive and board of directors should step down unless they take five steps to correct their mishandling: notify affected consumers; provide free credit monitoring to them for at least 10 years, offer to freeze their credit for up to 10 years; remove forced arbitration clauses from their terms of use; and comply with fines or new standards that come out of investigations." Here are some tips if you were affected. 

North Korea fired a missile last night that flew over Japan before crashing in the Pacific. The missile had a long enough range to hit Guam. US Secretary of State Rex Tillerson called on China and Russia to do more to contain NK. China supplies most of North Korea's oil and Russia is the biggest employer of their forced labor. Both Russia and China have veto power for any UN sanctions. 

Morning Report: Retail sales disappoint

Vital Statistics:

	Last	Change
S&P Futures	2457.0	2.0
Eurostoxx Index	387.2	0.4
Oil (WTI)	46.5	0.0
US dollar index	87.3	-0.1
10 Year Govt Bond Yield	2.30%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.59
30 Year Fixed Rate Mortgage	3.96

Stocks are higher this morning after a strong GDP report out of China. Bonds and MBS are up.

There isn't much in the way of market-moving events this week with a sparse economic calendar and the Fed is in the quiet period ahead of their FOMC meeting next week.

Inflation at the consumer level remains below the Fed's target as the consumer price index was flat MOM and up 1.6% YOY. Ex-food and energy, it was up 0.1% MOM and 1.7% YOY. 

Retail sales disappointed, falling 0.2% MOM. The prior month was revised upward however from a drop of 0.3% to a drop of 0.1%. The Street was looking for 0.1% gain. The control group fell 0.1% versus expectations of a 0.4% gain. 

Industrial production rose 0.4% MOM while manufacturing production rose 0.2% and capacity utilization ticked up to 76.6%. Improvements in the mining sector accounted for the rise. 

Business inventories rose 0.3% as autos increased. Inventory will amount to a slight positive in the Q2 GDP report. The inventory-to-sales ratio is at 1.38, which is elevated compared to historical norms and would ordinarily be associated with a downturn in the economy. 

The Empire State Manufacturing Survey fell to 9.8 last month, but is still reasonably strong. 

Earnings season gets into full gear this week, with a lot of the big banks reporting. 

Wells Fargo reported better-than-expected earnings last week. The stock was down about 2% on the news, despite the earnings beat as improvements in credit quality were offset by high expenses. Mortgage origination was down 11% YOY to $56 billion, while applications fell 13% and the size of their pipeline fell 28%. Nonconforming loans rose by $7.3 billion, while second mortgages fell. Mortgage banking revenues fell 19%, however which indicates margin compression. 

Mortgage banking revenues at JP Morgan and Citi also fell by 26% and 52% respectively. 

Defaults are soaring for subprime auto loans, as the sector has hit new post-crisis highs. While subprime auto loans are not going to have the impact on the economy that subprime mortgages did, this is a tell that all is not necessarily well in consumer-lending land. Despite the aggressive underwriting in auto loans, mortgage credit remains tight as a drum. The auto loan issue is yet another one of the unintended consequences of Fed policy: many of the biggest investors in this sort of paper are pension funds, insurance companies, etc, who have to hit a return bogey and cannot earn enough in government and investment grade paper to meet their actuarial obligations. Many of the state pension funds are solvent only if you squint at the asset return assumptions. 

Mortgage credit eased a touch in June, according the the MBA Mortgage Credit Availability Index. Conforming and non-conforming credit eased while government credit tightened. 

Morning Report: Bond yields hit a 2017 low on weak data

Vital Statistics:

	Last	Change
S&P Futures	2440.8	2.8
Eurostoxx Index	390.4	1.7
Oil (WTI)	46.1	-0.4
US dollar index	87.9	-44.0
10 Year Govt Bond Yield	2.14%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.95

Stocks are higher this morning ahead of the Fed decision. Bonds and MBS are up, with the 10 year hitting a 2017 low. That sound you hear this morning is the sizzle of bond bears getting roasted over the fire. 

The Fed decision is scheduled to be released at 2:00 pm EST, and there will be a press conference as well. There could be some bond market volatility around that time, so be aware. Things to watch for: a move down in rate forecasts on the dot plot, and discussion about unwinding the balance sheet. 

Mortgage Applications increased 2.8% last week as purchases fell 3% and refis rose 9%. The drop in purchase applications is largely due to technical adjustments to the index due to the Memorial Day holiday. Unadusted, the index was up 19% and is up 8% YOY. The refi percent increased to 45.4%, which was the highest since November. As home price appreciation continues, borrowers with sufficient equity should consider refinancing out of FHA into conventional to save on MI. 

Lower energy prices moved inflation lower in May. The Consumer Price Index fell 0.1% last month and is up 1.9% on a YOY basis. Ex-food and energy, prices rose 0.1% and are up 1.7% YOY. These numbers were lower than street expectations. 

Retail sales fell 0.3% MOM and are flat on a YOY basis. Lower gasoline prices, along with slower motor vehicle sales drove the drop. The core control group was flat, but April was revised upward from 0.2% to 0.6%. On a YOY basis, they were up 3.8%. 

Brokers pretty much got decimated after the financial crisis, but they are coming back, slowly but surely. While subprime is a maybe 2% of what it was during the go-go days, the infrastructure is getting built back. One of the biggest challenges is finding brokers who remember how to do subprime loans. 

Another big question regarding the mortgage market: Where are the boomerang buyers? The people who bought during the boom years, and were foreclosed on early in the bust are now seeing that foreclosure fall off their credit reports. So far, they have been slow to materialize, however high home prices, low affordability, and competition are playing a part. 

Morning report: Weak retail sales and inflation

Vital Statistics:

	Last	Change
S&P Futures	2386.0	-5.0
Eurostoxx Index	394.7	0.3
Oil (WTI)	47.9	0.1
US dollar index	90.2	-0.2
10 Year Govt Bond Yield	2.36%
Current Coupon Fannie Mae TBA	102.33
Current Coupon Ginnie Mae TBA	103.78
30 Year Fixed Rate Mortgage	4.08

Stocks are lower this morning as retailer earnings disappoint. Bonds and MBS are up on weak inflation data.

Inflation remains tame according to the Consumer Price Index which rose 0.2% MOM and is up 2.2% YOY. Stripping out food and energy, it is up 0.1% MOM and 1.9% YOY. This 1.9% YOY print in the core CPI is the lowest in almost 2 years. 

Retail sales came in lower than expected at 0.4% for April. The control group, which strips out volatile elements like autos, gasoline and building products rose 0.2%. Note that retail sales only captures a part of consumer spending - services are largely ignored. Overall it points to steady consumer demand - nothing great. The mall based retailers have been getting crushed however as Q1 numbers were pretty much abysmal. 

Wells Fargo is contemplating doing a private label MBS deal this year. Private label MBS are backed by mortgages without government insurance, and have been mainly limited to the jumbo market since the crisis. 

Rising wages helped ease affordability concerns in the first quarter. A total of 60.3% of all homes were affordable to someone earning the median income of 68,000, up from 59.9% in the fourth quarter, according to NAHB / Wells Fargo Housing Opportunity Index. 

Good news for the first time homebuyer: entry level salaries for college grads are the highest in a decade. 

Morning Report: Retail sales improve

Vital Statistics:

	Last	Change
S&P Futures	2165.0	5.0
Eurostoxx Index	338.3	0.1
Oil (WTI)	44.6	1.3
US dollar index	90.5	0.0
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.89

Stocks are up modestly this morning on no real news. The bond bears are taking a break today, everywhere except Japan, where the JGB 10 year yield is now positive. 

You can see just how dramatic the sell-off in the 10 year has become. Note the big drop in yields as the election was called for Donald Trump, and then the huge reversal. That is the mother of all head fakes. Carl Icahn was buying about a billion dollars worth of S&P 500 futures contracts during that head fake. 

Retail Sales came in stronger than expected in October, rising 0.8%. Ex-autos and gas, they rose 0.6%. The October readings are in that sort of trough period between back to school and the holidays. BTS sales were on the weak side, FWIW so I am not sure what this necessarily means for holiday sales. Stocks seem to like it, with the S&P SPDR retailer ETF (XRT) up a couple of percent pre-open. 

More stirrings of inflation? Import Prices rose 0.5% in October, higher than expected. The headline number is even more surprising given that the dollar rose during the month, however the increase was pretty much concentrated in the petroleum sector. Export prices fell. 

The Empire State Manufacturing Survey increased modestly in November, climbing out of negative territory for the first time in 4 months. New York State remains in a bit of a funk compared to the rest of the US. The employment indices fell. 

More good news for housing: The Despot reported better than expected earnings this morning as people spend more on home improvement. 

Is the firing spree finally over in the financial sector? It could be. Since 2005, approximately 800,000 jobs have been shed in the sector. About the only demand came in compliance. 

People have been saying for a while that auto loans are the new subprime. It looks like the next subprime is online consumer loans, which were supposed to disrupt the banking industry, but are taking way more credit losses than anticipated. Technology is all fine and good, but if you can't analyze credit risk properly, you aren't going to make it. 

Head of the SEC Mary Jo White submitted her resignation, which clears the way for a more pro-free market head of the regulatory body. 

The jump in rates has been bad news for many in the mortgage business, as it weighs down the refi shops. VA IRRRLs have been a gravy train for many shops and that party looks to be winding down between higher rates and new rules on securitization. Certainly this isn't great news for the first time homebuyer, however if the employment market continues to improve, that should offset the increase in rates. It will almost certainly mean that further home price appreciation will be harder to come by, as the affordability gift of low rates goes away. Does that necessarily mean the refi market is dead? Cash-out refis where borrowers can refinance their credit card debt will still make a ton of sense, even if mortgage rates top 4%. We may see an increase in ARM demand as a way to lower payments, but with the Fed in a tightening cycle, that is a risky way to go. 

Morning Report: Bank earnings

Vital Statistics:

	Last	Change
S&P Futures	2137.5	11.0
Eurostoxx Index	340.8	5.0
Oil (WTI)	50.7	0.3
US dollar index	88.3	0.2
10 Year Govt Bond Yield	1.78%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.58

Stocks are higher this morning on good overseas economic data. Bonds and MBS are down.

Inflation at the producer level is picking up, according to the Producer Price Index, which rose 0.3%, higher than expected. The core index is up 1.5% YOY. Inflation remains under the Fed's target, but we are seeing it creep up towards their preferred 2% range.

Retail sales increased 0.6% last month, in line with expectations. Retail Sales ex autos and gasoline rose 0.3%. Housing-related sales did particularly well, with furniture up 1% and building materials up 1.4%. I wouldn't be surprised to see some strategists take up their Q3 GDP estimates on this number. 

Consumer sentiment unexpectedly fell in early October, according to Reuters and the University of Michigan. 

Business inventories rose 0.2%, a little higher than expected. This will have the effect of goosing Q3 GDP growth at the expense of Q4. 

Wells Fargo reported earnings this morning. Origination was up 11% QOQ to $70 billion. Purchase activity accounted for 58% of originations. The stock is unchanged in early trading. 

JP Morgan reported earnings this morning as well. Mortgage origination was up 8.4% QOQ to $27.1 billion. On an annualized basis, it is down 9.4%. 

The typical homeowner's perception of the value of their home is about 1.25% lower than where the appraised value has been coming in. Appraised values are up almost 8% YOY, which is a faster rate of appreciation than we have been seeing in the real estate indices like FHFA or Case-Shiller. 

Morning Report: foreigners are investing in MBS again

Vital Statistics:

	Last	Change
S&P Futures	2185.0	5.0
Eurostoxx Index	346.5	0.4
Oil (WTI)	44.8	0.3
US dollar index	86.3	-0.2
10 Year Govt Bond Yield	1.54%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.52

Markets are higher this morning as emerging markets rally. Bonds and MBS are down

We will get a lot of data this week with housing starts and the FOMC minutes on Wednesday. The minutes are probably the most likely event to affect bonds. Earnings season is largely over except for the retailers.

The Empire State Manufacturing Survey fell in August, according to the NY Fed. New orders were flat. Employment contracted.The 6 month outlook dimmed as well. 

Foreign investors are beginning to wade into TBAs again as sovereign debt yields continue to offer nothing. Ginnie Mae TBAs stand to benefit the most, which means FHA and VA pricing should improve relative to Fannie Mae pricing. The next event to watch from the Fed will be their own TBA purchasing. The Fed is still re-investing maturing proceeds of their MBS portfolio back into the market. Part of policy normalization will involve ending this practice. 

Friday's weak retail sales data caused some strategists to take down their Q3 GDP numbers from the mid 2% to the low 2% range. 

Homebuilder sentiment improved in August to 60 from 58. We are entering the seasonal slowdown for the builders, which coincides with football season. 

Morning Report: Delinquencies are at a 10 year low

Vital Statistics:

	Last	Change
S&P Futures	2180.0	10.0
Eurostoxx Index	346.0	-1.2
Oil (WTI)	43.7	0.1
US dollar index	86.1	-0.2
10 Year Govt Bond Yield	1.49%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.52

Stocks are higher this morning on strong economic news out of Europe. Bonds and MBS are up.

Retail Sales were flat in July. Ex-autos and gas they were down. Basically autos and ecommerce did okay, and everything else was lousy. Speaking of lousy, we are getting retailer earnings and for the most part they are disappointing. 

Inflation at the wholesale level is nowhere to be found, with the producer price index falling .4% in July versus expectations of a .1% increase. The core PPI was up .8% YOY. 

Business inventories barely moved in July, increasing by 0.2%.

Consumer sentiment came in lower than expected as well. 

The National Association of Federal Credit Unions blames high prices and tight regulation for the lack of housing that people in the middle class can afford. 

Delinquency rates hit a 10 year low in the second quarter according to the MBA. The number of homes in foreclosure hit 1.64%, down 10 basis points from the first quarter and 40 basis points from a year ago. VA loans are performing the best, while FHA are performing the worst.

Partisan conflict is the highest since 1984, according to the Philly Fed. This conflict supposedly suppresses economic growth. 

Morning Report: capping off a terrible week for bonds

Vital Statistics:

	Last	Change
S&P Futures	2160.0	3.0
Eurostoxx Index	337.5	-1.0
Oil (WTI)	46.1	0.4
US dollar index	87.0	0.1
10 Year Govt Bond Yield	1.57%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.49

Markets are higher this morning in spite of a massive terrorist attack in France. Bonds and MBS are down.

Lots of stronger-than-expected economic data this morning

The Consumer Price index rose 0.2% versus expectations of 0.3%. On an annualized basis, it rose 1%. Ex food and energy, it is up 2.3% YOY. Note the Fed prefers the Personal Consumption Expenditure index and not the CPI. 

Retail sales came in stronger than expected - up 0.6% versus expectations of 0.1%. Retail sales had a sluggish start to the year, which partly drove the lousy 1.1% Q1 GDP growth rate. I wouldn't be surprised to see some strategists and the Fed take up Q2 GDP estimates on this number. 

Industrial Production rose 0.6% last month and manufacturing production rose 0.4%. Both numbers beat estimates. Capacity Utilization rose to 75.4%, again better than expectations.

It is hard to believe, but the 10 year bond has picked up 20 basis points in yield since Monday morning. This is the biggest weekly loss in a year.  Whether that was "the top" remains to be seen: markets can have ferocious sell-offs in the context of a bull market. At the end of the day, the US is going to be driven by foreign bond trading. The German Bund went from -18 basis points on Monday to nearly 0% this morning.

Larry Fink of Blackrock says that a .75% 10-year yield wouldn't surprise him. 

Wells Fargo reported a 4% YOY increase in net income for the second quarter. Mortgage origination was up 2% YOY. Citi beat numbers. 

Morning report: retail sales come in better than expected

Vital Statistics:

	Last	Change	Percent
S&P Futures	2055.9	-2.9	-0.14%
Eurostoxx Index	2947.8	12.3	0.42%
Oil (WTI)	46.21	-0.5	-1.05%
LIBOR	0.627	-0.002	-0.24%
US Dollar Index (DXY)	94.58	0.426	0.45%
10 Year Govt Bond Yield	1.74%	-0.02%
Current Coupon Ginnie Mae TBA	105.7
Current Coupon Fannie Mae TBA	104.8
BankRate 30 Year Fixed Rate Mortgage	3.52

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

Retail Sales increased 1.3% month-over-month, topping Wall Street forecasts. Autos, grocery and online led the charge. Ex-autos, gas and building materials, it increased 0.9%. We have had a laundry list of retailers miss earnings lately (Macy's, JC Penney, Kohls, Nordstrom), so investors were probably expecting the worst. Given all of the weak economic data lately, this is one decent data point. We are seeing some sell-side firms take up Q2 GDP estimates on the number. 

The chart below is retail sales as a percentage of GDP. It is not a seasonally adjusted number, so holiday spending accounts for the spikes. However, you can see that post the real estate crash, retail sales have been a much smaller percentage of GDP than they were for the 90s and the bubble years. Perhaps spending during the 90s and the bubble years was driven by the cash-out refi and now that is gone. If so, that would certainly help explain why growth has been so tepid. Or it simply means the Great American Deleveraging Process has further to go. 

Inflation at the wholesale level remains well below the Fed's target. The Producer Price Index rose 0.2% in April and is up 0.9% year-over-year. 

Business inventories climbed 0.4% in March, while consumer sentiment jumped. 

Janet Yellen doesn't rule out the possibility of negative interest rates, however they would be a last resort. 

The National Association of Homebuilders estimates that 14 million people are priced out of the housing market due to government regulation.

Morning Report: Homebuilder sentiment flat

Vital Statistics:

	Last	Change	Percent
S&P Futures	2018.7	-1.2	-0.06%
Eurostoxx Index	3057.2	-34.8	-1.13%
Oil (WTI)	36.12	-1.1	-2.85%
LIBOR	0.634	0.002	0.24%
US Dollar Index (DXY)	96.57	-0.058	-0.06%
10 Year Govt Bond Yield	1.92%	-0.04%
Current Coupon Ginnie Mae TBA	105.2
Current Coupon Fannie Mae TBA	104.2
BankRate 30 Year Fixed Rate Mortgage	3.67

Markets are lower this morning as the dollar rallies and commodities fall. Bonds and MBS are up.

The FOMC meeting begins today. The decision will come out at 2:00 pm EST tomorrow, along with the new economic and Fed Funds forecasts. Here is Tim Duy's take on the state of play. His take: while you could make an argument to tighten, the Fed still considers the bigger risks to be to the downside. The doves are ascendant on the Board. 

Retail Sales fell 0.1% in February, although declining gasoline prices had a lot to do with it. Ex-autos and gas, they were up 0.3%. The control group, which also strips out building products was flat. The downward revisions to January got everyone's attention however as the initial 0.2% estimate was revised downward to -0.4%. 

Inflation at the wholesale level remains well below the Fed's target. The Producer Price Index fell 0.2% in February as well. Ex-food and energy, it was flat on a month-over-month basis and is up 1.2% YOY. 

The Empire Manufacturing Index rebounded smartly to .62 after a heavily negative start to the year. 

The NAHB Homebuilder Sentiment Index was unchanged at 58 in March. This is a 9 month low. A shortage of lots and labor continue to be the biggest headaches facing the sector. The builders have been able to drive the top line by raising prices, not by pushing volume. You can see below how the index has tracked versus housing starts. The divergence is as big as it has ever been. 

Voters go to the polls in several states today, including Florida and Ohio, which are do-or-die races for Marco Rubio and John Kasich respectively. The Democratic side seems pretty much set at this point, unless Bernie Sanders pulls a free rabbit out of a hat. 

Morning Report: Stocks remain under pressure as oil continues to fall

Vital Statistics:

	Last	Change	Percent
S&P Futures	2049.3	7.2	0.35%
Eurostoxx Index	3219.9	-50.0	-1.53%
Oil (WTI)	36.48	-0.3	-0.76%
LIBOR	0.492	0.006	1.13%
US Dollar Index (DXY)	97.77	-0.165	-0.17%
10 Year Govt Bond Yield	2.17%	-0.06%
Current Coupon Ginnie Mae TBA	104.4
Current Coupon Fannie Mae TBA	103.4
BankRate 30 Year Fixed Rate Mortgage	3.93

Stocks are lower this morning on emerging market weakness and oil. Bonds and MBS are up.

Retail Sales rose 0.2% in November, lower than expectations. Ex food, energy and building materials, they rose 0.6%, better than expectations. 

Inflation at the wholesale level remains under control as the producer price index rose 0.3% in November. Ex food and energy and trade services it was up 0.1%. 

Morgan Stanley is warning investors that the world's central banks could succeed in creating inflation. Markets are definitely priced right now as if inflation is never ever coming back. We could see another bond sell-off like the "taper tantrum" of 2013. IMO, until we start seeing wage inflation we don't have anything to worry about on that front. 

Zero down-payment jumbo loans are back. Up to 2 million, provided you live and work in San Francisco

The House Financial Services Committee has picked up on the CFPB suing firms on discrimination using bogus data.

The MR will be spotty next week as I will be on the Left Coast

Morning Report: Retail Sales miss

Vital Statistics:

	Last	Change	Percent
S&P Futures	2037.7	-2.9	-0.14%
Eurostoxx Index	3354.2	-33.5	-0.99%
Oil (WTI)	41.36	-0.4	-0.93%
LIBOR	0.359	0.003	0.84%
US Dollar Index (DXY)	98.95	0.299	0.30%
10 Year Govt Bond Yield	2.30%	-0.02%
Current Coupon Ginnie Mae TBA	104
Current Coupon Fannie Mae TBA	103.1
BankRate 30 Year Fixed Rate Mortgage	3.91

Stocks are lower this morning after some disappointing data and an earnings miss out of Cisco Systems. Bonds and MBS are up small.

Retail Sales rose 0.1% in October, missing estimates. The control group which strips out autos, gas and building supplies rose 0.2%, which was again below expectations. Retail sales are getting tougher to measure as more and more shopping goes on line. Many of the small online shops do not report their sales data to the government, so actual retail sales data is hard to come by. 

The Producer Price Index fell 0.4% in October, which was well below expectations again. Ex-food and energy, the index was up 0.1%. 

The University of Michigan Consumer Sentiment Survey increased to 93.1 from 90. 

Low energy prices are a big driver of this disinflationary environment. They aren't going away as the International Energy Association says we have 3 billion barrels in storage, which is a record. And soon we will have Iran adding to the supply.

The third quarter was the best in nearly a decade, according to the NAR. Home prices increased in 87% of all MSAs. Existing home sales are up 8.3% YOY and prices are up 5.4%. Inventory remains tight. 

Citing market conditions, non-bank lender Loan Depot is postponing its IPO.