Morning Report: Bank earnings pour in

Vital Statistics:

			Last	Change
S&P futures			2797	-1
Eurostoxx index			385.18	0.81
Oil (WTI)			70.6	0.27
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.53%

Markets are flat as bank earnings come in. Bonds and MBS are up small. Slow news day.

The US government held a reasonably strong auction yesterday, where primary dealers took down their smallest positions ever. Meanwhile, speculative shorts in Treasuries (one of the biggest trades on the Street) are struggling as rates stay stubbornly low. Some continue to warn that the flattening yield curve is really telling us that a recession is around the corner. 

The prepared remarks for Jerome Powell's semiannual report to Congress should be out today. Probably won't be market-moving, but you never know. 

Import prices fell 0.4% in June as petroleum and food prices fell. For the year, they are up 4.3% however. 

Consumer sentiment fell according to the University of Michigan / Reuters survey. The current conditions index drove the fall, which is usually a function of gas prices. Trade fears also weighed on sentiment. 

Wells Fargo reported earnings this morning. Earnings were down due to a tax charge. Stripping out the tax charge, they were flat. They had a tough quarter for mortgages like everyone else. Origination for the quarter was $50 billion, which is up seasonally from Q1, but down 11% YOY. The current pipeline of $24 billion is down 26% YOY. Margins were 77 basis points, which is down 17 from the prior quarter and down 47 bps from a year ago. The stock is down 3% pre-open. 

JP Morgan had a similar story to Wells. They originated $23.7 billion in mortgages during Q2, which was higher seasonally and down about 10% from a year ago. Mortgage banking revenue (which includes servicing) was down 6% YOY. Margin compression again was the story, especially in correspondent lending. They marked up the MSR book. JPM is flat pre-open. 

A bunch of other banks reported this morning and the whole sector is getting hit, with the XLF down about a percent and a half. 

Federal Reserve Chairman Jerome Powell made positive comments about the economy, although he is concerned about trade and the effects of a long trade war with China. He is concerned about rising trade tensions, although he notes that Trump's goal is to get others to lower their tariffs. If he succeeds in that, then the trade tension would be a good thing, not a bad thing. It is important to remember that China's biggest weapon against the US is not imposing tariffs on US goods - it is ignoring US intellectual property laws. Those sorts of things will not really show up in the balance of trade numbers, but will have huge effects on IP firms, particularly media and software. 

Morning Report: Wells gets a $1 billion fine

Vital Statistics:

			Last	Change
S&P futures			2691.25	-1.75
Eurostoxx index			381.41	-0.54
Oil (WTI)			67.9	-0.39
10 Year Government Bond Yield				2.92%
30 Year fixed rate mortgage				4.45%

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

The Index of Leading Economic Indicators took a step back in March, following unusually strong readings in January and February. Employment-related indicators drove the decline, however weather could have played a part. “The LEI points to robust economic growth throughout 2018,” said Ataman Ozyildirim, director of business cycles and growth research at the Conference Board. “While the Federal Reserve is on track to continue raising its benchmark rate for the rest of the year, the recent weakness in residential construction and stock prices—important leading indicators—should be monitored closely.”

Regulators are close to fining Wells Fargo $1 billion. This stems from force-placed auto insurance and improperly charged lock extensions. An internal review found that up to 20,000 customers had their cars repossessed due to these improper insurance charges. 

Donald Trump tweeted about how OPEC's manipulation of oil prices will not be tolerated. “Looks like OPEC is at it again,” Trump said on Twitter. “Oil prices are artificially Very High! No good and will not be accepted!” OPEC fired back, claiming that oil prices reflect geopolitics and not manipulation. 

Maxine Waters introduced legislation to increase scrutiny of FHA servicers. The bill aims to improve compliance with loss mitigation actions to prevent foreclosures. It will also establish a process for borrowers to register complaints and make appeals if they believe they are being treated unfairly. I am not sure what chance this has of actually becoming law, but government MSRs already trade far back of Fannie MSRs, and I can't imagine this helps things. 

Here is a new metric for measuring affordability: payment power. It basically is a metric that looks at MSAs on a granular level. it measures incomes versus available inventory and calculates how many people can afford the PITI payments for the typical home for sale. It takes into account changes in incomes (say due to an employer entering or leaving), interest rates and property taxes. Unsurprisingly, the Midwest has the best payment power levels, while the West Coast has the least. 

Nice fixer-upper just went for $1.23 million in the Bay Area.

Morning Report: Wells reports flat YOY growth in origination

Vital Statistics:

			Last	Change
S&P futures			2676	12.5
Eurostoxx index			380.54	1.72
Oil (WTI)			66.97	-0.24
10 Year Government Bond Yield				2.83%
30 Year fixed rate mortgage				4.42%

Stocks are higher after it looks like cooler heads are prevailing in a trade war with China. Bonds and MBS are down. 

Donald Trump told his aides to explore re-joining the Trans-Pacific Partnership trade deal after withdrawing early in his administration. Does this mean "re-negotiate?" Unclear, but that would encounter heavy resistance. Still, it is better than throwing around tariff threats. Markets are breathing a sigh of relief. 

Job openings were little changed at 6.1 million in February. They are up almost 8% YOY however. The quits rate was stuck at 2.2%. The quits rate is a metric the Fed invariably mentions in their analysis of the job market and wage inflation. A higher quits rate usually presages wage inflation. Construction and manufacturing had big increases in openings. 

Consumer sentiment slipped in the preliminary April reading. Market volatility could be driving it, however higher gas prices could be playing a role as well. 

Acting CFPB Head Mick Mulvaney appeared before the Senate Banking Committee yesterday, and noted that Dodd-Frank only requires him to appear, not answer questions. Jeb Hensarling made a crack about the Chairman could sit and play Candy Crush in front of Congress if he wanted to. Mulvaney did answer questions, however he was making a point about how little accountability the agency has, and perhaps a point from his memo earlier - that the CFPB would follow the law, but go no further. The big question for the CFPB is the status of the PHH case. If that goes to SCOTUS, the only one that has standing to defend the agency is the Administration. 

Wells Fargo reported earnings, and it looks like they have been affected less by higher rates than other independent bankers. Mortgage origination was down 19% QOQ, which is simply seasonality at work, but they were only down 2% YOY. As you would expect, the purchase business is a higher percentage, and it looks like they were able to maintain flat YOY growth by getting more aggressive in the correspondent channel. The price of that was a sizeable drop in margins - 31 basis points. 

JP Morgan saw a more typical drop, with originations down 19% YOY. The servicing portfolio fell as well. Citi reported better earnings on equity trading. 

Californians may get to vote for a divorce from each other - to separate the state into 3 separate ones. One will contain the coast between LA and SF, another will be Northern CA, and the other will be Southern CA. As of now, LA and SF basically control the whole state, and there is a big conflict between the coastal environmental types and the farmers who supply something like half of the US's agricultural output. Still, given that Democrats control the state and the ag belt will probably vote R, this probably isn't happening. 

Morning Report: Why hasn't there been better wage growth?

Vital Statistics:

	Last	Change
S&P Futures	2474.5	2.8
Eurostoxx Index	381.6	-0.9
Oil (WTI)	49.0	-0.6
US dollar index	86.3	0.0
10 Year Govt Bond Yield	2.27%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.94

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

Should be a relatively dull week after the employment report. Not much in the way of data but we do have Fed-speak almost every day. 

Last Friday's jobs report didn't have much of an impact on the Fed Funds futures. They are forecasting a 99% chance of no hike at the September meeting, while the December meeting is being priced as a coin toss. The consensus seems to be that the September meeting will usher in the next steps in reducing the size of the Fed's balance sheet. 

The jobs report prompted a lot of articles asking about wage growth and why we aren't seeing it. The usual explanations include low productivity, lack of bargaining power on the part of workers, and the untapped reservoir of the long-term unemployed. IMO maybe the answer IS inflation - at 1.5% PCE growth, maybe 1% real wage growth is about the best we can hope for. We are seeing wage inflation in pockets (especially skilled labor and construction) however unskilled labor is still competing with technology which unfortunately keeps getting better and cheaper. Also, note that wage and job growth has been uneven geographically. 

The post-election spike in interest rates pushed down prepayment speeds and refis earlier this year. Now that interest rates have corrected some of that move, we are seeing them increase again, according the Black Knight Financial Services. The January and February numbers were the most depressed, which reflects the increase in the 10 year to 2.6% post-election. 

Wells Fargo has admitted that the fake account scandal could be bigger than previously thought. Meanwhile, Trump administration is taking a look at the Obama-era settlements where banks were forced to donate to third party activist groups as part of their settlement. 

Why are Treasury investors buying them at what will probably turn out to be a negative yield after taxes and inflation? Because the alternative (of losing more in the stock market). 

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: 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: PIMCO is buying mortgages

Vital Statistics:

	Last	Change
S&P Futures	2116.0	-15.0
Eurostoxx Index	334.4	-4.0
Oil (WTI)	50.0	-0.1
US dollar index	88.4	0.1
10 Year Govt Bond Yield	1.75%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Stocks are lower this morning after weak Chinese data. Bonds and MBS are up.

The FOMC minutes showed that September was a close call with respect to raising rates, and definitely set up the markets for a December rate hike. The Fed noted that third quarter GDP was stronger than the first half of the year, and the labor market is strengthening. The consensus for a December tightening doesn't necessarily indicate that there is the same consensus for further rate hikes. Interestingly, the Fed views consumer spending as"growing strongly" when the actual data does not suggest much strength at all. Bottom line, it looks like we are getting a rate hike in December, and the November meeting will be a non-event. The Fed Funds futures are assigning a 68% probability of a December hike of 25 basis points. 

Initial Jobless Claims fell to 245k last week, which is the lowest since the early 70s.  Consumer comfort increased last week as well.

Import prices rose 0.1% MOM and are down 1.1% YOY. Export prices rose 0.3% MOM and are down 1.5% YOY. Strategists are warning that the rise in the dollar is going to hit corporate profits.

PIMCO is getting into a defensive posture, buying mortgage backed securities and inflation-linked securities. Mortgage backed securities now account for 55% of the Total Return portfolio from 49% in August. Why mortgages? Think about what will happen to long term bonds as the Fed hikes rates. If long term bonds don't really move all that much (in other words, the yield curve flattens) the yield on mortgage backed securities will be much better than the yield on Treasuries. If the long end of the curve increases in line with the increase in the Fed funds rate, PIMCO is betting that the decrease in prepayment speeds will offset (at least partially) the interest rate effect. You can see over the past 5 tightening cycles, the yield curve has flattened.

John Stumpf is out at Wells. COO Tim Sloan, will take over. While the scandal was in the retail banking are and not the mortgage division, there probably will be fallout there too. 

Morning Report: Originations and Margins fall for Wells

Vital Statistics:

	Last	Change	Percent
S&P Futures	2079.4	3.5	0.17%
Eurostoxx Index	3053.6	14.4	0.47%
Oil (WTI)	42.03	0.3	0.65%
LIBOR	0.63	0.000	-0.04%
US Dollar Index (DXY)	94.78	0.033	0.03%
10 Year Govt Bond Yield	1.79%	0.03%
Current Coupon Ginnie Mae TBA	105.5
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.62

Stocks are up this morning as commodities rally. Bonds and MBS are down.

Initial Jobless Claims fell to 253k from 266k the week before. This is the lowest reading since 1973. When you take into account population growth, the number is even more dramatic. Employers are hanging onto their workers, but they aren't necessarily paying them more. 

Inflation remains muted at the consumer level, with the Consumer Price Index rising 0.1% month over month. Ex-food and energy, it is up 0.9%. The core index, which excludes food and energy was up 0.1% MOM and 2.2% YOY. Real average weekly earnings were up 1.1%. 

Consumer comfort increased slightly last week to 43.6 from 42.6 the week before. 

Wells reported numbers this morning, with a decrease in profit on loan loss provisions. Mortgage loan origination volume and margins both fell on a QOQ and YOY basis. Originations fell 6% from Q4 and 10% YOY. Margins fell 15 bps QOQ and 25 bps YOY. Non-conforming mortgage growth was up 8% YOY. The stock is down a couple percent pre-open. Overall, lower net interest margins are hurting the banking business in general. Separately, the US government increased Well's "systemically important" rating, which means they could be subject to higher capital requirements. JP Morgan, Citi, Morgan Stanley and Goldman are also in that club. 

Bank of America also reported weaker-than expected earnings this morning. Losses in the energy patch are hurting them. The stock is down about a percent. The big legal fees and settlements should be in the rear view mirror now. 

Hillary Clinton and Bernie Sanders are debating in New York over whether the financial industry should be drowned in boiling oil or just put before a firing squad. 

Morning Report: Home purchase sentiment the lowest in 18 months

Vital Statistics:

	Last	Change	Percent
S&P Futures	2051.0	10.3	0.50%
Eurostoxx Index	2936.0	24.1	0.83%
Oil (WTI)	40.06	0.3	0.86%
LIBOR	0.631	0.002	0.32%
US Dollar Index (DXY)	93.99	-0.246	-0.26%
10 Year Govt Bond Yield	1.74%	0.03%
Current Coupon Ginnie Mae TBA	105.6
Current Coupon Fannie Mae TBA	105
BankRate 30 Year Fixed Rate Mortgage	3.63

Markets are higher this morning on no real news. Bonds and MBS are lower

No economic data today - in fact this week looks pretty data-light. We will get retail sales, inflation and industrial production data this week, but none of these should be market moving, unless inflation comes in way higher than expected. The Fed doesn't really pay too much attention to the CPI and PPI numbers.

Earnings season kicks off this week in the traditional way, with Alcoa reporting after the close. The first week is usually pretty slow, and dominated by the banks. JP Morgan and Citi report Wednesday and Friday, respectively. The banks are being squeezed by a flattening yield curve as the Fed is tightening while long-term rates are falling. This compresses net interest margins and cuts profits. The stock market has been hitting the financials lately, which you can see below with a relative performance graph of the S&P SPDRs versus the XLF financials ETF

Consumer home purchase sentiment is the lowest in 18 months, according to Fannie Mae. Pessimism over the economy is spilling over into the real estate market. They haven't been this pessimistic about the economy since March of 2014.

Want to hear something depressing? Check this out: Hillary's take on the banking industry...(feel free to ignore the commentator) She thinks lending discrimination is rampant in our industry, which is a preposterous assertion in the age of automated underwriting systems. The ironic thing is that if the government was on a mission to restrict credit to poor people, push mortgage origination to the biggest TBTF banks, and depress the economy, they would be doing exactly what they are doing. Worse, they don't even realize it.

Following on that theme, Wells just settled with the DOJ for $1.2 billion over errors in its FHA loans from 2001 to 2008. According to the settlement, Wells Fargo "admits, acknowledges, and accepts responsibility" for having from 2001 to 2008 falsely certified that many of its home loans qualified for Federal Housing Administration insurance. Wonder if Wells is going to follow JP Morgan in de-emphasizing FHA loans.

Morning Report - Bank earnings and Iran

Vital Statistics:

	Last	Change	Percent
S&P Futures	2091.8	-2.6	-0.12%
Eurostoxx Index	3577.9	-12.6	-0.35%
Oil (WTI)	52.15	-0.1	-0.10%
LIBOR	0.286	0.000	-0.07%
US Dollar Index (DXY)	96.33	-0.532	-0.55%
10 Year Govt Bond Yield	2.40%	-0.06%
Current Coupon Ginnie Mae TBA	103.3	-0.1
Current Coupon Fannie Mae TBA	102.3	-0.1
BankRate 30 Year Fixed Rate Mortgage	4.22

Stocks are lower this morning after retail sales came in weaker than expected. Bonds and MBS are up. 

Looks like we have a deal with Iran. Sanctions are lifted, but snap back if Iran violates any of the terms of the agreement. The immediate effect will to bring another 3 MM barrels of oil per day onto the market. Congress will have a vote on the deal. 

Retail sales disappointed in June, with the headline number falling .3% versus expectations of a positive .3%. Ex autos and gas, they fell .2%, versus the .4% expectation. May strong numbers were revised down slightly. There appears to be some seasonal effects going on here (early Memorial Day "borrowed" sales from June) so don't read too much into this number. 

The NFIB Small Business Optimism Survey fell in June to 94.1 from 98.3. Weak sales and the political environment accounted for the decrease. Looks like hiring stopped in June. 

Import prices fell .1% in June and are down 10% on a year-over-year basis. 

Now that Tsipras has accepted the EU's terms, he has to sell the idea back at home. Not going to be an easy task, but it will probably pass. 

Hillary Clinton gave a speech yesterday on the economy, and it is more or less a grab-bag of assorted liberal ideas: increase the minimum wage, more aggressive enforcement of discrimination laws, paid family leave, free childcare, the usual.. She even went after Uber (who cheekily did a senior citizen promotion that day). It is clear she is feeling the #Bern and is worried about her left flank. 

JP Morgan reported this morning that mortgage banking net income fell 20% in the quarter. Not a lot of color on mortgage banking in particular, however they are paying close attention to China (I'll bet). The stock is up about 1 percent on the open. 

Wells also reported this morning. Mortgage banking revenues fell 1% in spite of the fact that originations rose to $62 billion from $47 billion. Well's market share fell to 13% from 28% three years ago. 

Morning Report - Bank earnings pile in

Vital Statistics:

	Last	Change	Percent
S&P Futures	2081.3	-5.2	-0.25%
Eurostoxx Index	3787.3	-41.4	-1.08%
Oil (WTI)	52.62	0.7	1.37%
LIBOR	0.277	0.001	0.40%
US Dollar Index (DXY)	98.75	-0.737	-0.74%
10 Year Govt Bond Yield	1.86%	-0.06%
Current Coupon Ginnie Mae TBA	103.4	0.0
Current Coupon Fannie Mae TBA	102.6	0.3
BankRate 30 Year Fixed Rate Mortgage	3.76

Markets are lower this morning as bank earnings pile in. Bonds and MBS are up on the back of a strong bond market rally in Europe.

Retail Sales came in weaker than expected, although some of that is due to falling commodity prices (especially gasoline). The headline number was +0.9% versus +1.1% expected. The control group, which strips out some of the more volatile components increased .3%.

Wells reported that originations increased to $49 billion in Q1 versus $44 billion in Q4. Margins expanded, with gain on sale margins increasing from 1.80% to 2.06%. Given that mortgage banking is so seasonal, it is surprising Wells reports quarter over quarter comparisons. J.P. Morgan reported first quarter originations were up 7% QOQ and up 45% YOY. MSR valuations got hit - their MSR book is valued at 2.53x versus 2.8x at the end of the year and 2.86x last year. 

Inflation remains muted at the wholesale level, with the Producer Price Index coming in at .2% month-over-month and falling 0.8% year over year. While the Fed prefers to look at Personal Consumption Expenditure Inflation instead of CPI / PPI, markets still pay attention. This is the other reason why bond yields are so much lower this morning.

Things are still somewhat "meh" for small business, according to the National Federation of Independent Business. The NFIB attributes some of the weakness to the weather. 

We haven't talked about European bond yields in a while, but they continue to fall, which is keeping a bid under Treasuries. The German Bund (their 10 year bond) yields 13.7 basis points. The Swiss 10 year yields negative 12.4 basis points. Yes, it will cost you money to lend to the Swiss government for 10 years. How about the PIIGS (remember them? Portugal, Ireland, Italy, Greece, and Spain) The Irish 10 year yields 68.3 basis points. The US 10 year yield is higher than all but one of the erstwhile PIIGS - Greece. 

Bubbles, bubbles everywhere, but especially in Asia. where the Chinese real estate bubble is beginning to deflate, and the Chinese economy begins to slow. Asian stocks are ignoring this however - the Nikkei 225 is up 43% over the past year, while the Hang Seng is up almost 11% in the first two weeks of April. While these markets are still well below their all-time highs, and no one is suggesting stock market bubbles, the Asian markets look frothy. China's real estate bubble is epic and as it bursts, China will export deflation around the world. Yet another reason for the Fed to sit on their hands. 

But we don't have any bubbles in the US, right? Well, according to Bill Ackman, we do. The student loan debt market is about $1.3 trillion all in, and about 9% is in default. As he points out, there is almost no way that gets repaid. He sees some administration doing a mass debt forgiveness. 

Morning Report - Disappointing Retail Sales

Vital Statistics:

	Last	Change	Percent
S&P Futures	1580.1	-7.6	-0.48%
Eurostoxx Index	2639.3	-35.0	-1.31%
Oil (WTI)	91.94	-1.6	-1.68%
LIBOR	0.278	0.001	0.18%
US Dollar Index (DXY)	82.45	0.202	0.25%
10 Year Govt Bond Yield	1.74%	-0.05%
Current Coupon Ginnie Mae TBA	105.7	0.3
Current Coupon Fannie Mae TBA	103.9	0.2
RPX Composite Real Estate Index	190.4	-0.4
BankRate 30 Year Fixed Rate Mortgage	3.57

Markets are lower after disappointing retail sales data. JP Morgan and Wells Fargo reported numbers that beat on the headline, but both are down. Bonds and MBS are rallying, with the 10-year yield back below 1.74%.

Retail sales dropped in March by .4%, the most in 9 months. February was revised down. Apparel, furniture and Home improvement retailers reported gains. Electronics stores reported decreases. Given the lousy jobs report last Friday, it isn't surprising that retail sales fell. Just crossing the tape:  Barclay's has taken down Q1 GDP estimates to 2.8% from 3.2% as a result.

Wells Fargo reported record Q4 earnings, with mortgage originations of $109 billion, down from $125 billion in Q4. MSR valuations were lowered as increasing real estate prices affect prepayment assumptions (Their average MSR note rate is 4.69%). The pipeline is $74 billion, down from $81 billion at the end of Q4.

The IMF is worrying that all of this easy money is going to inflate bubbles elsewhere. IMO, that train has already left the station. A commodity boom and easy money has created a real estate bubble in Canada that is even more expensive than ours was at the peak (median house price to median income ratio is above 5x, while ours peaked around 4.8x in 2006). We probably do have a bond bubble, however the Fed is running the show there and given that it is purchasing 70% of all Treasury issuance, can pretty much handle it has it pleases.

Morning Report - Notes from the CFPB conference

Vital Statistics:

	Last	Change	Percent
S&P Futures	1467.5	0.4	0.03%
Eurostoxx Index	2713.3	5.1	0.19%
Oil (WTI)	93.31	-0.5	-0.54%
LIBOR	0.304	-0.001	-0.33%
US Dollar Index (DXY)	79.6	-0.140	-0.18%
10 Year Govt Bond Yield	1.89%	0.00%
RPX Composite Real Estate Index	191.6	-0.1

Markets are flattish after Wells Fargo's earnings beat expectations and import prices showed that inflation remains contained. Bonds and MBS are up small.

Richard Cordray of the CFPB laid out the outlines of what will be considered a qualified mortgage at a presentation in Baltimore yesterday.  Big picture, he believes that lenders were too loose with credit in the past, but now they are too tight.  The Rule will be called Reg Z, or the Ability-to Repay and Qualified Mortgage Standards under the Truth in Lending Act.  These rules are intended to both protect consumers and increase access to credit. The highlights are

• A cap in points and fees
• No exotic (IO, increasing principal, 30 year + maturity, balloon) loans
• DTI < 43%.  Period.  (In other words, nothing on FICO or down payments)
• DTI ratios must be calculated on the expected long term payment, not teaser rates on ARMs.
• Provides immunity from homeowner lawsuits under the QM rules for prime loans.  Rebuttable presumption for subprime.
• Safe harbor is only for homeowner lawsuits under QM rules, all other rules still apply
• Rules will take effect 1/10/14 and will be phased in over a period of years
• Community banks / credit unions, and low income lenders will have relaxed standards

There were several housing advocates, consumer advocates, etc on the panel.  For the most part, they lauded the agency, but thought the QM rules were too skewed in favor of the financial industry. They also feared that it would restrict CRA lending. On the other hand, SIFMA praised the rule. The most eye-opening comment came from Cordray himself, when he said that he believed that we would not have had a financial crisis if these "ability to repay" rules would have been in effect before.  Really.  Of course the term "housing bubble" was not uttered during the entire discussion. 

Will it increase lending? My sense is that unless the GSEs and FHA agree to insulate lenders from buy-back risk if they follow the QM rules, it will not in any meaningful way.

Well Fargo's earnings release beat expectations on the top line, but net interest margins were disappointing. Particulars regarding mortgage banking:

• Originations fell from $139B in Q3 to $125B in Q4, reflecting the normal seasonal decline. Originations were up 4% YOY.
• Pipeline at quarter end was $81 billion, down 16% QOQ and up 13% YOY.
• Net interest margin declined from 3.89% to 3.56% YOY.  Q3 NIM was 3.66%
• Total delinquency and foreclosure rate was 7.04% down from 7.96% in Q3
• They continue to wind down the legacy Wachovia assets.  The "Pick a Pay" loan portfolio has a UPB of $63.8 billion and is being marked at $58.3 billion, or at 91%.  Note, the UPB is ex-writedowns already taken.