Morning Report - More bond market volatility ahead?

Vital Statistics:

	Last	Change	Percent
S&P Futures	2065.1	-9.4	-0.47%
Eurostoxx Index	3702.4	-25.4	-0.84%
Oil (WTI)	47.54	-1.15	-2.13%
LIBOR	0.269	-0.001	-0.30%
US Dollar Index (DXY)	98.58	0.52	0.56%
10 Year Govt Bond Yield	1.94%	-0.01
Current Coupon Ginnie Mae TBA	102.5	0.0
Current Coupon Fannie Mae TBA	101.9	0.2
BankRate 30 Year Fixed Rate Mortgage	3.80

Markets are lower on no real news. Bonds and MBS are up.

Home Prices rose .87% month-over-month and 4.56% year-over-year according to Case-Shiller. This is January data. The West and Southwest continues to outperform the Midwest and Northeast. A measure of housing market "healthiness" indicates the housing market is in the best shape since 2001.

It looks like we are close to an agreement to extend talks with Iran for 90 days and to outline the big steps needed to get a deal. The main sticking points seem to revolve around the actual mechanics of lifting the sanctions. The main thing to keep in mind is that one way or another, the sanctions will probably be lifted and a big new oil producer will begin dumping crude on world markets. 

As we get closer to "liftoff," which is Fed-speak for increasing interest rates, market professionals are worried about the possibility of more volatility in the bond markets. They point to one trading day in October, where the 10 year bond yield traded in a 40 basis point range intraday. A combination of automated trading and the unintended consequences of regulation have hampered liquidity in Treasury markets during periods of volatility. 

Speaking of bond market volatility, the government will release the jobs report on Friday as scheduled, however the stock market will be closed and SIFMA is recommending a noon close in bonds. Suffice it to say that trading desks will be thinly staffed and we could see some volatility in rates. I don't anticipate much of a reaction in the bond market unless payrolls fall off a cliff or we see a big uptick in wages. 

Morning Report - Challenger and Gray Job Cuts

Vital Statistics:

	Last	Change	Percent
S&P Futures	1407.0	-1.3	-0.09%
Eurostoxx Index	2598.5	6.4	0.25%
Oil (WTI)	87.52	-0.4	-0.41%
LIBOR	0.311	0.000	0.00%
US Dollar Index (DXY)	79.76	-0.015	-0.02%
10 Year Govt Bond Yield	1.58%	-0.01%
RPX Composite Real Estate Index	191	-0.2

Markets are flattish this morning as Washington continues to grind to some sort of agreement on the fiscal cliff.  Initial Jobless Claims fell to 370k. The ECB kept rates at .75% and cut their 2013 GDP forecast to a range of -.9% to .3%.  S&P lowered Greece's bond rating to "selective default."  Bonds are up 1/4 while MBS are flat.

FHFA Acting Chairman Ed DeMarco will be speaking at SIFMA at 1:00 pm. HUD Secretary Shaun Donovan will head to the Hill today to talk about the sorry state of the FHA.

More Republicans are showing openness to increasing rates on the rich in exchange for entitlement spending cuts. So far, the President has shown little interest in cutting any spending aside from defense.  One possibility under discussion involves splitting the difference between 35% and 39.6% on the top rate. That would allow both parties to claim victory.

Challenger and Gray reported job cuts increased 34% in November to 57,000.  This was the second-highest month of the year.  About a third of the announcements come from the Hostess bankruptcy.  Of course December already has 11,000 cuts in the bag as well, courtesy of Citi.  Wall Street has shed 300,000 jobs in the last two years, and more are on the way if revenues don't start increasing.

The NY Department of Financial Services has ordered Ocwen to hire a monitor to ensure compliance with its agreement with the state. The state found instances where Ocwen did not provide a single point of contact to borrowers and did not send a 90-day notice before instituting foreclosure proceedings.

Is the overseas cheap labor arbitrage coming to an end?  Apple announced that it will bring some production back to the US from China. It is a nominal amount - $100 million - and it might just be a symbolic move after the Foxconn PR disaster. The compay has $121B of cash on its balance sheet.

Citi is now advising clients against putting money with Stevie Cohen. SAC spin-off Diamondback is shutting down.

Morning Report: Cliff Diving Forecasts

Vital Statistics

	Last	Change	Percent
S&P Futures	1380.2	4.5	0.33%
Eurostoxx Index	2477.4	-2.4	-0.10%
Oil (WTI)	85.55	-0.5	-0.60%
LIBOR	0.31	0.000	0.00%
US Dollar Index (DXY)	80.97	-0.055	-0.07%
10 Year Govt Bond Yield	1.61%	0.00%
RPX Composite Real Estate Index	192.8	0.3

Stock markets are higher this morning after last week's post-election sell-off.  Bonds are closed for Veteran's Day. The government also has the day off, so there are is no major economic news.

Post election, all eyes turn to the fiscal cliff.  There appears to be a growing consensus that we can leave rates unchanged for the top and limit deductions. Partisan posturing and political jockeying will make the markets a miserable place for the next couple of months.  Capital gains and dividends remain a wild card. The obamacare surtax will happen regardless, so financial income is taking a hit right off the bat.

The Basel III requirements scheduled to take effect on Jan 1 have been pushed back to some time in the future.  SIFMA and the MBA agree with the decision.

So how will the election affect the markets and real estate?  I suspect FHFA Chairman DeMarco will be out of a job, which will pave the way for principal reductions on F&F/Ginnie loans. If they don't think this through, they could face a deluge of homeowners suddenly finding themselves "unable" to make their mortgage payment.

Geithner is out for obama II, and the favorite for replacement seems to be Jack Lew. Lew is a "middle of the road" candidate that has already been unanimously confirmed by the Senate in 2010 for the OMB job.

If we go over the fiscal cliff, we will undoubtedly have a 1H recession, which could result in a 1.25% 10-year.  Which means the refi boom will continue to have legs.  If FHFA starts modding underwater loans to LTVs of 1.0, we should see some refi activity, especially in the FHA space.  That said, if CFPB doesn't come out with a bright line definition of a QM, refinancing these folks may prove to be difficult.

Regarding a 1H recession, earnings this quarter were not great, and Sandy will probably lop 1% to 1.5% of of 4Q GDP.  Taxes are going up, so we should start handicapping a 1H recession. Will it affect housing?  My sense is no, the bottom is in, and the recession will be felt more in cap goods / the energy patch than in housing. JP Morgan downgraded CAT this morning based on the expected negative impact the election will have on energy and mining.