Morning Report: The Fed bumps up its forecast for 2018 GDP

Vital Statistics:

	Last	Change
S&P Futures	2671.0	2.0
Eurostoxx Index	389.3	-1.4
Oil (WTI)	56.3	-0.4
US dollar index	86.9	0.1
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.531
Current Coupon Ginnie Mae TBA	103.591
30 Year Fixed Rate Mortgage	3.88

Stocks are higher after a relatively dovish FOMC statement. Bonds and MBS are down small after rallying hard after the announcement yesterday. 

As expected, the Fed raised rates a quarter of a percent yesterday and released their economic forecasts. This was Janet Yellen's last hurrah. The vote was 7-2 with two dissenters: Evans and Kashkari, who both wanted to maintain the current Fed Funds rate. Bonds rallied on the FOMC decision, largely due to the dot plot, which showed virtually no change from September, despite a big upward revision in the Fed's 2018 GDP forecast, which went from 2.1% to 2.5%. Their forecast for unemployment was revised downward from 4.1% to 3.9%, while their forecast for core inflation remained unchanged at 1.9%. It was a Goldilocks report for the markets. You can see the dot plot comparison below, with the central tendency right around 2%.

Note that the Fed Funds futures are currently predicting 1-2 hikes next year through November (we don't have December 2018 Fed Funds futures yet). So, the market is somewhat more dovish than the FOMC is, but they are pretty close. Note that one of the big trades on the Street right now is a bet that the Fed will blink and only raise rates 1-2 times next year. The other big trade that is happening right now: yield curve flattening trades, where traders bet that the difference in yield between the 2 year and the 10 year will decrease. 

Initial Jobless Claims fell to 225k last week. This is just off the post-crisis low of 223k, and you would have to go back to the early 1970s to find similar readings. The job market is pretty strong, provided you are employed. The long-term jobless still are with us, although it remains to be seen how many will (or even want to) re-enter the workforce. That untapped reservoir is probably one big reason why wage inflation continues to be muted. 

Retail Sales came in way stronger than expected, pointing to a strong holiday shopping season. The headline number was up 0.8%, as was the control group, which was a big jump from October, and above the highest point in the consensus range. The S&P SPDR Retailer ETF (XRT) is up about .63% in an otherwise flattish market early. 

The ECB maintained interest rates at current levels and cut their QE buying in half. Central bank demand for sovereign debt is being cut back globally. FWIW, we aren't really seeing that much of an impact in yields (Probably as people pile into curve flatteners, as described above). The German Bund is down with Treasuries. 

The NAR points out that the median age of renters is rising - it rose to 40 from 38 a year before. Given that the relative attractiveness of buying compared to renting is about as big as it ever has been, what gives? It is mainly empty-nest Boomers who are choosing to go with rentals, which means no more home maintenance. 

Bill Gross warns that the Fed really has to stop hiking rates once the Fed Funds rate gets around 2 - 2.25% or else it runs the risk of hurting the housing market. "A lot [of mortgages] are variable, floating-rate mortgages. And to the extent that the Fed has already raised interest rates by 75 to 100 basis points and is expect to raise by another 50 to 100 that affects the average monthly payments." He is correct on the ARM part of it, and with the Fed raising short term rates, while long-term rates stay in place, it is the time to refinance out of an ARM and into a 30 year fixed rate mortgage. While he does draw upon 2005 - 2006 as a comparison, we were in a bubble then. It really isn't similar to today, where inventory is so tight we probably won't see any price decreases. If anything, we are seeing bidding wars. 

Morning Report: What is the shape of the yield curve telling us?

Vital Statistics:

	Last	Change
S&P Futures	2475.8	4.3
Eurostoxx Index	387.3	1.8
Oil (WTI)	47.4	0.3
US dollar index	87.2	0.2
10 Year Govt Bond Yield	2.26%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.96

Stocks are up this morning as global central banks remain easy. Bonds and MBS are up small. 

The Index of Leading Economic Indicators jumped 0.6% in June, which is forecasting an acceleration in the economy going forward. 

Initial Jobless claims fell to 233k, which is a 9 week low. The last time we were at similar levels was the early 1970s, when the Vietnam War was still raging. I have plotted initial jobless claims (left axis) versus wage inflation (right axis). You can see the inverse correlation, and it also suggests that with claims this low, we should be seeing wage inflation. Of course inflation has an influence as well, and the late 60s / 70s were characterized by inflation. However, pressures seem to be building, and we are seeing wage inflation at the lowest end of the spectrum - low wage workers. 

Bill Gross looks at the shape of the yield curve and warns investors not to read too much into it, since the curve is being manipulated by central bankers worldwide. The chart below shows the difference in yield between the 10 year bond and the 3 month T-bill. That difference has historically been somewhat predictive of recessions, especially when it has inverted. While the current spread is nowhere near zero, the trend is certainly heading that way. Does that mean a recession is imminent? His point is that we are really in an apples-to-oranges comparison with QE. Global central bank buying of sovereign debt is pushing that spread downward, and the relevant question is where would the yield curve be without the Fed's (and other global central banks') buying? 

He does make the point that Corporate America is more leveraged than before, however with rates so low, the debt service (actual interest paid) is much less than it was historically. You see that in households too. Total debt has risen past the old highs, however the debt service (interest paid as a percent of disposable income) is close to the lows. 

The NYC luxury real estate market is soft, and many luxury sellers in Greenwich, CT are pulling the plug on sales. Of the homes in this market ($4.5 million+) days on market was 319, up by over 100 days. Some sellers have had to cut their price by 60% to entice a buyer. FWIW, I see very little building in this area of the country - only a handful of spec homes have been built, and they haven't sold yet. 

Morning Report: Slow week coming up

Vital Statistics:

	Last	Change
S&P Futures	2437.0	7.3
Eurostoxx Index	391.4	2.8
Oil (WTI)	44.8	0.1
US dollar index	88.6	0.2
10 Year Govt Bond Yield	2.17%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.89

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

Slow news day.

We don't have much in the way of important economic data this week (new home sales on Friday is probably the biggest), but we do have a lot of Fed-speak. Also, the Fed will release the results from its latest stress tests on Thursday afternoon. We will get some more housing data with existing home sales and the FHFA House Price Index. 

Where do the Fed Funds futures stand after the FOMC meeting last week? For the upcoming July meeting, a 97% chance of no changes to rates. For the Sep meeting, an 87% chance of no changes, and for December a 54% chance of no moves. The Fed continues to insist that the weak inflation numbers are transitory, however the markets don't seem to believe them. Note that monetary policy is a partisan issue as well. 

Another reason why inventory is so tight? 10% of the housing starts last year were tear-downs, which means a new structure is replacing an older one, so there is no net change in housing inventory. 

Debt supernova? Bill Gross warns of the possible negative consequences of $9.5 trillion in negative-yielding sovereign debt. The problem with the supernova theory is that most of the buyers of this negative yielding debt are central banks, not retail investors, and central banks are doing it for policy reasons. It is still strange though, Grandpa tell me again about how you had to pay money to lend to the government?

Elizabeth Warren wants the Fed to fire Wells Fargo's Board of Directors. 

Morning Report: Just how risky is the financial system right now?

Vital Statistics:

	Last	Change
S&P Futures	2434.5	2.5
Eurostoxx Index	389.4	0.2
Oil (WTI)	45.5	-0.3
US dollar index	88.2	0.2
10 Year Govt Bond Yield	2.19%
Current Coupon Fannie Mae TBA	103.47
Current Coupon Ginnie Mae TBA	104.33
30 Year Fixed Rate Mortgage	3.92

Stocks are up small after the ECB decision. Bonds and MBS are down.

James Comey testifies today at 12:30 pm EST. Here are his prepared remarks. Punch line: Nobody looks good in this situation, but nothing impeachable. There is a small chance that something could come out in questioning, but this should be a non market-moving event. 

Initial Jobless Claims fell to 245k last week. Jobless claims are hovering around lows not seen for 45 years. 

Bill Gross sees the bond market as fraught with risk - the worst since 2008 - but he says he feels required to stay invested. His concern is not necessarily risk within the financial system, but simply the prices people are willing to pay for risk. As he says, people are not buying low and selling high - they are buying high and crossing their fingers. His view is that central banks are behind this mindset, which has been a common objection for decades (remember the "Greenspan put?"). That said, the Fed is systematically removing that support, which should help risky asset prices normalize. Any sort of pullback in asset prices will inevitably be Treasury bullish, which means lower mortgage rates.

Meanwhile, Paul Singer of Elliott fame is very concerned about the current state of the market. He notes that the leverage in the system is higher than 2008. Yes, that is true, however the assets being leveraged today are much higher quality than they were a decade ago. Think of it this way: You borrow 95 cents on the dollar to buy a Treasury bond. Yes, you are leveraged, but the asset you hold is pretty low risk. Can you lose 5% on that asset? Maybe, but you probably won't. In 2008, people were borrowing 90 cents on the dollar to buy MBS backed by no-doc pick-a-pay loans. Can you lose more than 10% on that asset? Easily. Which is a more risky trade? Yes, the leverage today is higher (95 cents on the dollar versus 90 cents on the dollar), however the underlying assets being leveraged are much safer. Note that Paul is a bit of a perma-bear who has hated the stock market since 1982. 

Case in point: Over 9 million borrowers have regained equity in their homes since the 2008 crisis. Negative equity fell to 3.1 million homes, or about 6% of mortgaged properties. The biggest markets with negative equity? Miami, Las Vegas, and Chicago. 

Higher home prices have begun to temper homebuyer bullishness, according to Fannie Mae's Homebuyer Sentiment Index. The net number of people who believe now is a good time to buy fell 8 percentage points to a record low, while the number of people who believe now is a good time to sell hit a record as well. 

The House is looking to reform the National Flood Insurance Program, which is heavily subsidized and currently running a $25 billion deficit. Reforming it will be tough without imposing sticker shock on many homeowners. 

Morning report: Unemployment and wages fall

Vital Statistics:

	Last	Change
S&P Futures	2190.0	-2.0
Eurostoxx Index	338.2	-3.0
Oil (WTI)	51.1	0.0
US dollar index	91.5	-0.2
10 Year Govt Bond Yield	2.41%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.14

Markets are flattish as investors digest the jobs report. Bonds and MBS are flat as well. 

Jobs report data dump:

• Payrolls up 178k vs 170 expected
• Unemployment rate 4.6% vs. 4.9% expected
• Labor force participation rate 62.7% vs 62.8% expected
• Average hourly earnings down .1% vs expectations of a .2% increase

On balance, the report was mixed. While the drop in the unemployment rate was encouraging, the drop in wages was a disappointment. The drop in the labor force participation rate didn't help things either. This probably doesn't change the Fed's thinking for the FOMC meeting in a couple of weeks. 

The bright spot in the report: the big drop in the unemployment rate for the age 25-34 cohort. Good news for the mortgage and real estate industry. Anecdotally, college applications are falling markedly, which indicates people are getting jobs as opposed to going back to school. Overall, it means the first time homebuyer is in better shape. 

Bonds initially rallied on the report, but have given back their gains. 

Bill Gross isn't buying the big rally in stocks lately. “An investor should move to cash and cash alternatives, such as high probability equity arbitrage situations,” Gross, who runs the $1.7 billion Janus Global Unconstrained Bond Fund, said. “Bond durations should be far below benchmarks.” The bond duration comment means he sees interest rates continuing to rise. In his view, equity investors are putting too much stock in things like regulatory reform and fiscal stimulus, as demographics and low productivity are likely to remain the more dominant forces in the market, which is ultimately bearish for stocks. Separately, investors pulled $4.1 billion out of taxable bond funds last week. 

HUD has raised the FHA loan limit to $424,100. following the increase from Fannie Mae. 

Morning Report: Markets rally on the Fed

Vital Statistics:

	Last	Change
S&P Futures	2163.0	7.0
Eurostoxx Index	347.6	5.0
Oil (WTI)	46.0	0.7
US dollar index	86.1	-0.2
10 Year Govt Bond Yield	1.65%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.56

Markets are higher after the Fed maintained interest rates yesterday. Bonds and MBS are up.

The Fed kept interest rates unchanged yesterday, and released new economic projections. Most members expect the Fed to hike another 25 basis points this year according to the dot plot. They tweaked their economic projections slightly, taking down their GDP forecast for 2016 and inching up their unemployment forecast. Longer term projections were unchanged. Three members dissented, wanting to hike rates in September. 

In her press conference, Janet Yellen was careful to say the Fed was confident in the economy: "Our decision does not reflect a lack of confidence in the economy, Conditions in the labor market have strengthened and we expect that to continue, and while inflation remains low we expect it to rise to our 2 percent objective over time." She also guided that the default path was for one more rate hike this year, assuming no major changes in the economy: "I would expect to see (a rate increase this year) if we continue on the current course of labor market improvement, and there are no major risks that develop and we stay on the current course."

Bonds rallied on the Fed's announcement, and that is carrying over this morning as markets rally worldwide. 

FWIW, Bill Gross isn't buying that the Fed is "data dependent." He thinks they are "market dependent." 

In other economic news this morning, initial Jobless Claims fell to 252k last week. 

The Chicago Fed National Activity Index fell to -.55 last month, which confirms the slowdown we have seen in other indicators. The 3 month moving average is slightly negative, which means the economy is growing, albeit below trend. 

Delinquencies and foreclosures continued to fall in August, according to Black Knight Financial Services. The rally in bonds from Brexit caused prepayments to spike, with prepayment speeds hitting a 3 year high. 4.24% of all homes are delinquent and just over 1% are in foreclosure. 

Morning Report: Buy real estate, sell stocks and bonds

Vital Statistics:

	Last	Change
S&P Futures	2149.0	-4.0
Eurostoxx Index	334.7	-1.0
Oil (WTI)	39.9	0.4
US dollar index	86.3	-0.5
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	3.51

Stocks are lower this morning as oil and emerging markets move lower. Bonds and MBS are down.

Mortgage Applications fell 3.5% last week as purchases fell 2% and refis fell 4%. Rates fell a lot last week, but the biggest move was on Friday, so perhaps we'll catch up this week. 

The ADP payrolls report shows 179k jobs were created in July. Friday's jobs report is looking for an increase of 185k. The number to watch on Friday isn't so much payrolls, it is the increase in average hourly earnings. 

Shades of the bubble years: Over 50% of all listings in San Francisco and Seattle end up selling for over the listing price. In Washington state, there is 2 month's worth of inventory for sale and in California it is 2.5 months. A balanced market is 6.5 months. 

Once bitten, twice shy. 2010 marks the peak of the foreclosures from the bubble years, and next year, the foreclosure black mark drops off their credit reports. So far, we are only seeing a gradual return to the real estate market.   Many borrowers are unaware that FHA is more forgiving than other programs - you can apply for a loan after 3.5 years with only 3.5% down and a 580 FICO.

Bill Gross is on the "buy real assets" versus financial assets bandwagon. He dislikes stocks and bonds here, and prefers real estate and gold. With sovereign debt, you are making the bet that inflation is never, ever coming back. Governments seem to be coming to a consensus that more fiscal stimulus is needed, and that should be bond bearish. Theoretically, companies should be investing in property, plant and equipment instead of buying back their own stock. This isn't good for stock prices short term (and will drive the activists batty), but it is good long-term, provided these investments cover their cost of capital and aren't just empire-building exercises. You want stock prices supported by a future earnings stream, not artificially low interest rates. Problem is, capacity utilization is already pretty low, so there isn’t much need for additional PP&E, at least at the moment.

While the chart below is complicated, it does suggest that real assets will outperform financial assets going forward. For most people, the biggest "real asset" is their home. With rental inflation still high, having your mortgage payment set for 30 years isn't a bad deal at all. 

Note both Donald Trump and Hillary Clinton are advocating fiscal stimulus packages. Post-Brexit UK is looking at taking that route as well. FWIW, the bond market is betting nothing comes of it. 

Morning Report: Bill Gross talks Monopoly

Vital Statistics:

	Last	Change	Percent
S&P Futures	2069.8	-12.9	-0.62%
Eurostoxx Index	2756.5	-56.4	-2.00%
Oil (WTI)	46.06	-0.5	-1.16%
LIBOR	0.656	0.003	0.46%
US Dollar Index (DXY)	96.1	-0.066	-0.07%
10 Year Govt Bond Yield	1.36%	-0.02%
Current Coupon Ginnie Mae TBA	106.4
Current Coupon Fannie Mae TBA	105.8
BankRate 30 Year Fixed Rate Mortgage	3.39

Stocks are lower this morning as markets fret about the Italian banks and the Japanese 20 year bond went negative overnight. Bonds and MBS are up. The US 10-year hit 1.32% overnight and is trading at 1.36% at the moment. The German Bund now yields -18 basis points. 

The FOMC minutes from the June meeting will be released around 2:00 pm EST today. Brexit has pretty much made these pretty much irrelevant for July meeting which is in 3 weeks. Still, there is always the possibility that something surprising could come out of it, so just be aware. 

Mortgage applications rose 14.2% last week as purchases rose 4.3% and refis increased 20.8%. 

The June ISM services index jumped to 56.5 from 52.9 in May. 

Hillary Clinton will not face criminal charges over the email investigation. This should stick a fork in Bernie. 

Bill Gross compares the current state of the economy to the game of Monopoly. In the beginning of the game, you get $1,500 and begin buying properties (investing). You also get $200 for passing go. However, the game always ends in a credit crunch where your opponents go bankrupt. He then imagines the game where the amount you get for passing go increases as the game progresses. He likens the income from passing go as credit growth. If you look at credit growth over the past several years, it has been much less than the previous decades. His advice to Janet Yellen is to stop worrying about the Taylor rule and inflation and worry more about slow economic growth. While QE and negative interest rates should have helped create credit, they aren't really doing that, and the current economy is like the end of a monopoly game, where all the property has been bought, and conservation of cash becomes the name of the game. This is a recipe for stagnant growth. 

Bank of America is forecasting a 1.25% 10 year yield by the end of September as pension funds embrace the "lower for longer" thesis and build their holdings of Treasuries. Roughly 6% of pension fund assets are in Treasuries, about half the allocation they were in 1980. Of course Treasuries represented true value in 1980, and now they are simply a momentum trade. The 100 largest pension funds in the U.S. have a shortfall of $400 billion, which has doubled over the past year. Pension funds have been the biggest victims of ZIRP, as the actuarial tables couldn't care less that interest rates are zero. In fact, it makes their liabilities appear even worse because the rate used to discount them is lowered. 

Morning Report: How's that working for you?

Vital Statistics:

S&P Futures	1909.9	12.5	0.66%
Eurostoxx Index	2933.6	-18.2	-0.62%
Oil (WTI)	30.73	0.9	2.84%
LIBOR	0.619	0.006	0.98%
US Dollar Index (DXY)	98.32	-0.555	-0.56%
10 Year Govt Bond Yield	1.88%	0.04%
Current Coupon Ginnie Mae TBA	105.4
Current Coupon Fannie Mae TBA	104.7
BankRate 30 Year Fixed Rate Mortgage	3.71

Stocks are higher this morning after oil rebounds overnight. Bonds and MBS are down. 

Mortgage Applications fell 2.6% last week as purchases fell 7% and refis rose 0.3%. 

The ISM Non-Manufacturing Index fell to 53.5 from 55.8 in January

The ADP Employment Change report came in at 205k. The Street is forecasting 190k in Friday's jobs report. 

Bill Gross's latest Investment Outlook takes some shots at central bankers, and asks why we think negative interest rates are going to generate growth. As he says "How's that working for you?" While the consumer has deleveraged over the past 10 years, corporate america has not. That said, corporate america has taken advantage of record-low interest rates to refinance and extend high coupon debt with lower coupon debt. When people are willing to lend you money at 2% for 20 years, why not take it?

Speaking of negative interest rates, it seems the only nation anymore that isn't playing the beggar thy neighbor devaulation game is the US. Exports are falling, while imports are rising. This is the reason why we are seeing everyone - from Republicans to Democrats - willing to take potshots at free trade. Of course foreigners can accept one of two things in payment for their imports: goods and services from the US or IOUs (Treasuries). So far, they seem to want the IOUs. Which means interest rates are lower than they ultimately would be. Still manufacturing job losses are easy to point to versus interest rates and the benefits of cheaper imports. 

Another day, another settlement with the banks: Wells is paying FHA $1.2 billion over "failure to properly review early payment defaults in 2010-2012." And the government is scratching its head wondering why banks like JP Morgan are reducing / exiting FHA lending... At what point do these constant suits and settlements become simply a surtax on banking?

Morning Report: The ECB disappoints, send bond yields higher

Vital Statistics:

	Last	Change	Percent
S&P Futures	2082.5	0.9	0.04%
Eurostoxx Index	3370.2	-98.4	-2.84%
Oil (WTI)	40.63	0.7	1.73%
LIBOR	0.422	0.006	1.44%
US Dollar Index (DXY)	98.52	-1.472	-1.47%
10 Year Govt Bond Yield	2.23%	0.05%
Current Coupon Ginnie Mae TBA	104.2
Current Coupon Fannie Mae TBA	103.5
BankRate 30 Year Fixed Rate Mortgage	3.8

Stocks are flat after the ECB cut rates again and promised more stimulus. Bonds and MBS are down. 

ECB President Mario Draghi announced more quantitative easing and a cut in rates. They maintained their main rate at 0.05% and cut the deposit rate to -.3%. Apparently it wasn't enough as bond yields are up worldwide.

Janet Yellen will be speaking in front of Congress starting at 10:00 am. 

The ISM Non-Manufacturing Index fell from 59.1 to 55.9 in November, coming in well below expectations. Note the ISM Manufacturing Index also missed estimates and came in below 50, which indicates deceleration in the manufacturing sector. The employment sub-index fell, and some business owners are blaming Obamacare for higher costs.

Factory Orders rose 1.5%, a bit better than expectations, while durable goods orders were revised downward to 2.9%. Capital Goods Orders ex-defense and aircraft (a proxy for business capital expenditures) rose 1.3%. 

Job cut announcements fell 13.9% to 31,000, according to outplacement firm Challenger, Gray and Christmas. This is the lowest level in over a year. 

Initial Jobless Claims rose 9k to 269k. Initial Jobless Claims are still at multi-decade lows, which is amazing when you take into account population growth.

The Bloomberg Consumer Comfort index fell again last week to the lowest level in a year. Consumers are becoming more pessimistic about the economy, with 31% having a positive view and 69% having a negative view. FWIW, November same store sales are coming in this morning from the retailers, and they look to be disappointing.

Bill Gross's latest investment outlook is out. He is advising clients to gradually de-risk their portfolios during 2016. His thesis is that years of QE have essentially hollowed out real economies as it allows zombie corporations to continue to exist and it punishes savers and insurance companies / pension funds. Of course he is talking his own book to some extent. There is no doubt that the fear of the unintended long-term consequences of ZIRP and QE are coming into play with the Fed's plan to raise interest rates in the US. 

Morning Report: Bill Gross says 100% chance of a move in December

Vital Statistics:

	Last	Change	Percent
S&P Futures	2089.4	-4.3	-0.21%
Eurostoxx Index	3459.5	-8.8	-0.25%
Oil (WTI)	44.28	0.0	-0.02%
LIBOR	0.341	-0.003	-0.73%
US Dollar Index (DXY)	99.14	-0.033	-0.03%
10 Year Govt Bond Yield	2.35%	0.03%
Current Coupon Ginnie Mae TBA	104.1
Current Coupon Fannie Mae TBA	103.2
BankRate 30 Year Fixed Rate Mortgage	3.82

Stocks are down this morning as investors digest the jobs report. Bonds and MBS are down.

The Labor Market Conditions Index improved to 1.6 in October from an upward-revised 1.3 in September.

The week after the jobs report is usually pretty data-light, and this week is no exception. Aside from the JOLTS job openings on Thursday and retail sales on Friday, there simply isn't much market-moving data. 

Luxury builder Toll Brothers announced preliminary numbers for the 4th quarter and full year. Revenues came in at $1.44 billion, a touch higher than the Street estimates. This was up 6% in dollars and 1% in units. Average selling prices rose 5.8% to $790,000. Signed contracts rose 29% in dollars and 12% in units. Backlog is up 29% in dollars and 10% in units. We will hear from D.R. Horton tomorrow. Although we are in the dull season for the builders, it looks like they are thinking of ramping up production. In the jobs report, construction jobs increased from 33k in September to 78k in October. 

The OECD took down its forecast for global growth in 2016 from 3.6% to 3.3%. A deterioration in the Brazilian and Russian economies drove the downgrade. Japan's forecast from from 1.2% to 1%. The Eurozone was taken down from 1.1% to 1%. The US economy is forecast to grow 2.6%. 

In light of those forecasts, should the Fed hold off on raising rates until things are more clear? Many would argue that ZIRP is an emergency measure and we are no longer in an emergency. Bank of America lays out the argument that the economy can withstand an increase in rates.

Bill Gross says there is a 100% chance the Fed will hike rates in December. 

Morning Report: TRID to delay closings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1973.7	-1.0	-0.05%
Eurostoxx Index	3212.5	22.1	0.69%
Oil (WTI)	46.68	0.4	0.91%
LIBOR	0.327	0.003	0.96%
US Dollar Index (DXY)	95.9	-0.207	-0.22%
10 Year Govt Bond Yield	2.07%	0.01%
Current Coupon Ginnie Mae TBA	104.8	-0.1
Current Coupon Fannie Mae TBA	104.4	0.0
BankRate 30 Year Fixed Rate Mortgage	3.84

Stocks are unchanged this morning as there is very little in the way of economic data / earnings to move markets. Bonds and MBS are down small.

The trade deficit widened to 48 billion in August as the strong dollar cuts exports and increases imports.

The IMF cut is global growth estimate to 3.1% from 3.3%. Blame weak commodity prices.

Economic Optimism improved markedly according to Investors Business Daily and TIPP Online. Many of these consumer confidence indices are merely inverse gasoline price indices. Falling gasoline prices makes people happy. 

Home prices rose almost 7% in August on a year-over-year basis, according to CoreLogic. They are forecasting home price appreciation around 4.3% over the next year. 

Bill Gross sees another 10% downside in stocks and is recommending sitting in cash for a while. His point is that corporate profits are flatlining as commodity prices hurt earnings in the energy patch and the strong dollar hurts manufacturers. Expect more layoffs in the energy sector. Bill Gross called the Chinese sell-off earlier this year as well as the German Bund sell off. 

Goldman is saying the Fed might not hike rates until we are well into 2016.

TRID is expected to delay closings as people get adjusted to the new rules.  CFPB Chairman Richard Cordray says the agency will give lenders who are making good-faith efforts to comply with the new rules a break: "Nobody believes that market participants are going to be trying to abuse consumers here; they're trying to change their systems. So we'll be diagnostic and corrective, not punitive, and there will be time for them to work to get it right and not be perfect on the first day," said Cordray. We'll see if that actually happens. 

What to the French do well? Food, lifestyle, and labor strife. Propose job cuts and you are likely to get the shirt ripped off your back by an angry mob.

Morning Report - Bill Gross says hike now.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1930.7	-1.4	-0.07%
Eurostoxx Index	3097.2	21.2	0.69%
Oil (WTI)	46.45	0.1	0.19%
LIBOR	0.326	0.007	2.13%
US Dollar Index (DXY)	96.42	0.138	0.14%
10 Year Govt Bond Yield	2.15%	0.02%
Current Coupon Ginnie Mae TBA	104.4	0.2
Current Coupon Fannie Mae TBA	104	0.0
BankRate 30 Year Fixed Rate Mortgage	3.79

Markets are flattish this morning on no real news. Bonds and MBS are down small.

Mortgage Applications rose 13.9% last week, with purchases rising 9.1% and refis rising 17.7%. Refis increased to 58.4% of all loans. This was the first full week after the Labor Day holiday, so don't break out the champagne quite yet - the increase was due to a holiday-shortened week before. 

Mario Draghi (European Central Bank President) said more time is needed to assess whether more stimulus is needed. 

Bill Gross wrote about financial repression (essentially having rates pegged at the zero bound) and the risks it poses to the financial system. He makes the point that pension funds are getting hammered because they cannot generate the required return on assets with safe assets so they are taking more and more risk, citing municipalities like Chicago, Detroit, etc. He argues that we should be willing to take some short-term financial pain for longer term financial stability. Of course Dr. Cowbell has a different take, which is that bankers want higher rates because they hate poor people and want them to suffer. Or something. 

Now that Scott Walker has exited the race, it looks like his money and staffers are going to Marco Rubio.

Has ATR and HMDA restricted mortgage credit? Not according to the Fed. Probably because credit has been highly restrictive since 2008. It couldn't have gotten any tighter to begin with. Note that QM was intended to make lender more likely to lend. Given what we have seen with the big banks exiting FHA (Wells and Chase), the CFPB's new rules aren't having the desired effect.

Morning Report: All eyes on the FOMC this week

Vital Statistics:

	Last	Change	Percent
S&P Futures	2093.1	-16.1	-0.76%
Eurostoxx Index	3434.5	-68.3	-1.95%
Oil (WTI)	59.08	-0.9	-1.47%
LIBOR	0.286	0.000	0.07%
US Dollar Index (DXY)	95.21	0.240	0.25%
10 Year Govt Bond Yield	2.33%	-0.07%
Current Coupon Ginnie Mae TBA	101.1	0.5
Current Coupon Fannie Mae TBA	99.57	0.4
BankRate 30 Year Fixed Rate Mortgage	4.09

Stocks are lower after talks between Greece and its creditors broke down over the weekend. Bonds and MBS are up.

This is supposedly "deal week" for Greece. They owe the IMF $1.7 billion. If they don't pay (and they have already missed one payment), then it makes it hard for the ECB to continue providing emergency liquidity. The current program with the ECB expires at the end of the month. Rhetoric is getting more and more heated between Germany and Greece at this point. At issue are the pensions. Greece is steadfastly resisting restructuring the country's pension system. And the Germans are getting sick of it: ‘We will not let the German workers and their families pay for the overblown election promises of a partially communist government,’’ Vice-Chancellor Sigmar Gabriel wrote in a Bild opinion column on Monday. If they can't get a deal, then the ECB will probably stop supporting the Greek banks and the county will have to impose capital controls to keep hard assets from fleeing the country. It sounds like the Europe will consider allowing Tsipras some sort of face-saving change to the deal, but nothing really meaningful. The bond markets are getting nervous, as the Greek 10 year bond yield is up almost one full percentage point this morning at 12.723%. For us in the the US markets, any sort of Greek exit will probably cause a flight to quality, which means it would be bullish for US bonds. 

Chart: Greek 10 year bond yield:

In other "bullish for US bonds" news, the manufacturing sector had a rough go of it in May. Industrial Production fell 0.2%, manufacturing production fell 0.2% and capacity utilization fell to 78.1%. Separately the New York State Empire Manufacturing Index fell to -1.98. While manufacturing is no longer the economic driver it used to be, these are still lousy numbers, and reinforces the idea that the Fed will stand pat this week. 

The NAHB Homebuilder index rebounded to 59 in June, topping its post-crisis highs. Builder confidence is more or less back at "normalcy." While homebuilder sentiment is back to normalcy, housing starts most certainly are not. The Street is forecasting housing starts to come in at 1.09 million tomorrow, which is still 27% below the normal, pre-bubble level of 1.5 million starts a year. Starts are only now approaching the recessionary lows of the past. So while builders may have positive sentiment, they aren't putting their money where their mouth is, at least not yet. 

Chart: housing starts, long term:

The FOMC meets on Tuesday and Wednesday this week. This will be the first FOMC meeting where a rate hike is in play. Given some of the weak economic data and persistent low inflation, it is unlikely the Fed will hike rates this week, however the language of the statement will certainly be important. Expect to see some volatility this week in bonds, between the FOMC and the Greek situation. LOs, be sure to tell your borrowers about the risks of floating. 

If the Fed does in fact hike rates, it doesn't necessarily follow that the 10 year bond yield (and by extension mortgage rates) will spike. When you look at the tightenings in the past, the yield curve flattened, which means the short end of the curve (overnight rates etc) moved higher, but the longer end of the curve largely ignored the increase. The 2004 tightening cycle is probably the most relevant, as we were still in the aftermath of the collapse of the stock market bubble. The Fed increased the Fed Funds target rate from 1% to 5.25% over the course of 2 years. The US 10 year basically went nowhere.

Chart: aftermath of 2004 rate hikes:

For a contrarian view on the Fed and long-term interest rates, listen to Bill Gross, who thinks the world's central banks want higher long-term rates because they are worried about insurance companies and pension funds. These entities are not able to earn the returns they need in this low interest rate environment (the actuarial tables couldn't care less that rates are zero), and they have been forced to take a lot of credit risk. The most painless way to avoid a crisis is to let long-term rates slowly creep up. It just goes to show how small the eye is in the needle the world's central banks need to thread.

Elizabeth Warren and the left are not fans of share buybacks And there are legitimate questions about companies levering up to fund buybacks. And yes, buybacks are more tax efficient than dividend hikes because investors can defer taxes on capital gains by not selling. . However they are trying to conflate stock buybacks with "market manipulation," which is fraud and illegal. I think the gameplan is twofold here: The first is to weaken the presumption that management's first priority is to maximize shareholder value. The second is to shame companies into raising wages for workers. 

Morning Report - Bill Gross sells Bund vol, not Bunds.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2070.3	-3.9	-0.19%
Eurostoxx Index	3550.0	-8.0	-0.22%
Oil (WTI)	60.8	-0.1	-0.21%
LIBOR	0.276	-0.004	-1.38%
US Dollar Index (DXY)	94.44	0.348	0.37%
10 Year Govt Bond Yield	2.23%	-0.01%
Current Coupon Ginnie Mae TBA	101.8	-0.2
Current Coupon Fannie Mae TBA	100.7	0.1
BankRate 30 Year Fixed Rate Mortgage	3.91

Stocks are down small as we get a few mixed signals on the job market. Bonds and MBS are holding in there despite another big sell-off in the German Bund, which now yields almost 65 basis points - this is an increase of 57 basis points in about two weeks. Welcome to the new QE normal, where sovereign debt trades with the volatility of tech stocks. 

Note that the volatility in the Bund has hurt Bill Gross, who considers it "the short of a lifetime." Unfortunately, it looks like Bill sold options against the Bund, betting it would trade in a narrow range, and is now taking some gas on his position given the furious sell-off Euro sovereign debt. Welcome to the wonderful world of negative convexity, which is the bane of mortgage bankers globally. 

The volatility in bonds has hurt the mortgage REITs, the latest of which is Annaly Capital, which missed yesterday. American Capital Agency struggled with the volatility as well. Interestingly, American Capital Agency was responsible for some of the outperformance in FHA / VA pricing at the end of the quarter. Ordinarily, they don't buy Ginnie Mae TBAs as Fannies offer higher returns, but they viewed the Ginnie Mae sell off due to the change in MI was overdone, and took a position the other way. Mortgage REITs are generally most active in the secondary market for MBS, however they do dabble in TBAs and can affect loan pricing at the margin. 

We have some mixed employment data this morning, with Challenger and Gray announced job cuts increasing 53% to 61,582 in April, which is the highest number in 3 years. About a third of these cuts are in the oil patch, as Schlumberger, Baker Hughes, and Halliburton all announced layoffs. The other big category is retail, where you are seeing layoffs as well. Ordinarily, you would expect lower energy prices to translate into higher spending at the mall, but it isn't working out that way this time around. Blame broke Millennials who can't find jobs, Gen-Xers who drew the candy cane card as they were hitting their peak earning years, and Baby Boomers who had to retire a little earlier than they had planned. 

On the plus side, initial jobless claims hit 265,000 last week, which is still flirting with 15 year lows. One thing to keep in mind between the initial jobless claims report and Challenger: Challenger looks at announced job cuts. Often, those cuts end up not happening because the business turns around first. 

The Bloomberg Consumer Comfort Index fell to 43.7 last week as consumers still fret about the state of the economy. An index reading of 50 is considered "normalcy."

Janet Yellen ventured into Alan Greenspan territory yesterday when she remarked stock prices are still "quite high." It didn't have the effect on markets that Alan Greenspan's "irrational exuberance" comments did, as stocks largely ignored the warning. Memo to central bankers: You don't have a bubble in stocks. You have a bubble in sovereign debt. 

Morning Report - Big reversal in Bunds

Vital Statistics:

	Last	Change	Percent
S&P Futures	2107.3	5.7	0.27%
Eurostoxx Index	3648.2	32.6	0.90%
Oil (WTI)	59.34	0.2	0.32%
LIBOR	0.28	0.001	0.36%
US Dollar Index (DXY)	95.33	0.028	0.03%
10 Year Govt Bond Yield	2.10%	-0.01%
Current Coupon Ginnie Mae TBA	102.5	-0.3
Current Coupon Fannie Mae TBA	101.5	0.1
BankRate 30 Year Fixed Rate Mortgage	3.87

Stocks are higher this morning after a stronger-than-expected European manufacturing report eased fears of deflation. Bonds and MBS are up small.

This week has some important economic data, with the biggest being the jobs report on Friday. The market has been backing away from the June rate hike forecast, and IMO the jobs report will have to be outstanding (300k+ payrolls, and a meaningful increase in wages) to bring a June tightening back into play. We will also get productivity and unit labor costs this week, which will figure heavily into the Fed's thinking. 

The ISM New York Index increased to 58.1 from 50 in March. Factory Orders rose 2.1%, topping the analyst 2% forecast.

A few stronger than expected economic reports turned around G7 debt in a hurry. The German Bund, which hit a record low of 7.5 basis points two weeks ago is now trading at a 41.5 basis point yield, which is a 3 month high. G7 sovereigns have been a one-way bet for a long time, so a sell-off is to be expected. 

Bill Gross's latest Investment Outlook is good. He is calling for the end of the secular bull market in bonds and is recommending shorting the Bund (good trade over the past two weeks). He also believes that cheap credit, which has fueled the bull market in stocks is going to slowly dry up. Is he suggesting to sell your portfolio and bury the cash in the back yard? Not at all. However he is arguing that the trade going forward may be focusing on lightly levered income trades instead of searching for capital gains. 

Delinquencies and foreclosures continue to drop, according to the Black Knight Mortgage Monitor.