Morning Report: Trade tensions push down interest rates

Vital Statistics:

	Last	Change
S&P Futures	2681.3	-9.0
Eurostoxx Index	369.2	2.2
Oil (WTI)	61.4	0.1
US dollar index	83.8	0.1
10 Year Govt Bond Yield	2.84%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.4

Stocks are lower this morning the trade cold war between the US and the world escalated. Bonds and MBS are up.

Those hoping that Donald Trump would re-think his position on trade over the weekend were disappointed. He is now threatening EU automakers and demanding a re-negotiation of NAFTA to ease steel and aluminum restrictions with Mexico and Canada. Exiting and / or renegotiating NAFTA will probably not be as easy as he thinks it will be. The US has always had the leadership position globally in encouraging free trade. There is no doubt it that has accepted some protectionism from other countries as a cost of doing business, and in the spirit of moving the ball on free trade in general. In other words, the US has accepted a disadvantaged position, and these "free trade" agreements were in reality a negotiation over how many points the US would spot other countries.

Rates this week will be primarily determined by the fluid state of trade announcements. We will get  some important market-moving data this week with the jobs report on Friday, and productivity on Wednesday. There will also be Fed-Speak all week. 

Big picture, trade tensions are causing a flight to quality, which is pushing down interest rates. This is probably going to be only a temporary phenomenon so I would encourage LOs to push their customers to lock. Despite rising rates, we are not seeing an influx of foreign money into Treasuries, and we are seeing European investors and Japanese investors investing in Bunds and JGBs despite the lower yields. Why would investors accept 62 basis points in Germany or 5 basis points in Japan when they could get 2.8% in the US? Currency hedging costs wipe out the differential. 

Trade battles are generally bad for everyone involved, except for domestic producers in the industries being protected. Note that Secretary of Commerce Wilbur Ross is an ex-steel guy himself and is not an idealistic free-trader. I suspect that is where Trump is getting his advice, although the media claims it was a petulant decision out of the blue as a result of negative headlines. 

Tariffs on steel and aluminum will be bad for the construction industry, especially multi-fam. Don't forget, the housing business is already dealing with a 20% tariff on Canadian soft lumber. Building Material prices are already at record highs. 

The services economy continues to expand, with the ISM Non-Manufacturing index hitting 59.5 in February. This was lower than the exceptionally strong January reading of 59.9. The internals of the report were good, with the New Orders and Employment indices coming in over 60. Some of the comments from business below:

• "Lumber-related costs continue to increase as supply is also starting to become a problem. The market volatility of construction materials and the short supply of construction labor have added difficulty to long-term planning." (Construction)
• "Slight increase in activity; beginning to see some higher cost for goods and services." (Finance & Insurance)

Strong growth and inflation is the takeaway.

Amazon is in talks with JP Morgan to start providing checking account services. Amazon mortgages can't be far behind. Has Bezos ever looked at banking P/E ratios? They aren't triple digit. 

Morning Report: Confidence in the economy improved

Vital Statistics:

	Last	Change
S&P Futures	2171.8	-8.0
Eurostoxx Index	337.7	-2.0
Oil (WTI)	45.4	-0.4
US dollar index	90.6	0.2
10 Year Govt Bond Yield	2.27%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4

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

Mortgage Applications fell 9% last week as purchases fell 6% and refis fell 11%. I'm actually surprised it wasn't worse, as the 10 year bond yield went from 1.78% to 2.14%. 

Inflation at the wholesale level remains low as the producer price index was flat for October. Ex-food and energy, they were down .2%. Ex food, energy and services the index was down .1% and is up 1.6% for the year. Certainly nothing to concern the Fed, however the Fed Funds futures are factoring in a 94% chance of a rate hike next month. At the beginning of the month, the odds were 68%. 

Donald Trump's transition team is already having power struggles, as Chris Christie loyalists were sent packing after VP Mike Pence replaced him as head of the transition team. Given that Trump was an outsider, his transition is going to be a lot more rocky than we are used to. 

It looks like Trump is considering famed value investor Wilbur Ross and ex-Goldman guy Steve Mnuchin to Treasury and Commerce. Apparently an announcement is imminent. 

Industrial Production was flat in October, while manufacturing production was up 0.2%. Capacity Utilization slipped to 75.3%. The strong dollar is going to be a headwind for the manufacturing sector, although its weight in the US economy is a lot smaller than it used to be. 

Confidence in the economy surged after the election according to Gallup. The improvement was largely partisan as Republicans became more bullish on the economy. 

Fast money poured into ETF last week on the election news. Large caps were bought while small caps were sold. Pharma and biotech saw big inflows, as well as tech, which would benefit the most from an overseas repatriation tax holiday.

Home prices rose 6.6% last month according to the FNC indices.