Morning Report - FOMC minutes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1567.7	4.5	0.29%
Eurostoxx Index	2630.1	35.0	1.35%
Oil (WTI)	93.64	-0.6	-0.59%
LIBOR	0.277	-0.001	-0.36%
US Dollar Index (DXY)	82.38	0.070	0.09%
10 Year Govt Bond Yield	1.77%	0.02%
Current Coupon Ginnie Mae TBA	107.1	1.2
Current Coupon Fannie Mae TBA	103.6	-0.1
RPX Composite Real Estate Index	190.1	0.0
BankRate 30 Year Fixed Rate Mortgage	3.57

Stock markets are higher this morning in anticipation of the Fed minutes which will be released this morning at 9:00 am (a change from their usual 2:00 pm time).  Market participants will focus on hints regarding the end of quantitative easing. Mortgage Applications rose 4.5% last week on the back of the BOJ-led rally in the bond market and MBS. Treasury will also be conducting a 10-year auction around 1:00 pm. It will be interesting to see if the bid / cover ratio is affected by events in Japan. Bonds and MBS are down small.

Earnings season kicked of on Tuesday with Alcoa reporting better than expected earnings, but weaker sales. Retailers Fastenal and Family Dollar are down this morning after missing. We will get JP Morgan and Wells Friday morning before the open.

The President plans to release a $3.77 trillion budget today. He is proposing $1.8 trillion in new spending (although to be fair, that is to replace the sequester). He is also instituting a AMT II on incomes over $1 million of 30%. He also proposes to cap IRAs at $3 million, end carried interest, and to raise taxes on tobacco. He will also propose changes to the way cost-of-living adjustments are calculated - aka Chained CPI - to Social Security. Given that taxes and spending both increase pretty dramatically, the plan is DOA in the house.

It turned out the Fed mistakenly released the minutes early. Still don't have the actual link, but here are some of the particulars: Economy re-accelerating after Q4 slowdown. Private nonfarm payroll increased at a modest rate in January, but expanded more briskly in Feb. (We now know that March was a disaster). The Fed asked primary dealers about their expectations for when the Fed will start tightening (are they running the Fed according to polls now?) and the view seems to be Q114 for the end of QE and Q315 for the first increase in the Fed Funds Rate. They noted that there did not seem to be much of a pullback in the economy in response to the tax hikes that kicked in Jan 1. Opinions about QE were all over the place, with some wanting to end it now and others wanting to increase the pace of purchases.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1503.0	-3.7	-0.25%
Eurostoxx Index	2679.2	-30.9	-1.14%
Oil (WTI)	96.79	-1.0	-1.00%
LIBOR	0.296	0.000	0.00%
US Dollar Index (DXY)	79.45	0.325	0.41%
10 Year Govt Bond Yield	2.03%	0.01%
RPX Composite Real Estate Index	193.1	0.0

Markets are weaker on the back of big declines in the Italian and Spanish bourses. Euro sovereign yields are starting to tick back up. There doesn't seem to be a story out there driving it.

As the bond market has backed up, there is a lot of talk about whether this is the big rotation out of bonds and into stocks. Within the bond market, there is a rotation out of Treasuries and into high yield. Overall, the "risk on" trade seems to be gaining steam, which means we have seen the low point for mortgage rates. It also means that the private label market might come back.

Obama wants more revenue, specifically through reducing loopholes and deductions. I don't know if this is posturing for the sequestration cuts or something else. Liberals are using the negative Q4 GDP report to argue that we can't cut spending. That is simplistic - Q3 government spending was higher than normal due to the government's "use it or lose it" budgeting. The government's fiscal year ends in September, and there is always a push to spend your budget, even if you don't really need it, to ensure your budget doesn't get cut. Which means that Q4's government spending was borrowed in Q3. Obama is being a little disingenuous when he says things like "The big problem was defense spending was cut 22 percent, the biggest drop in 40 years." which implies we are already cutting to the bone. He is in favor of "smart spending reductions," whatever that means, to bring down the deficit.  I suspect the only smart spending reductions he favors are the Orwellian-named "tax expenditures" and oil subsidies.  And don't forget, the definition of what is considered a spending cut depends greatly on what the baseline is when you start counting. Many in Washington prefer to use the baseline from when spending was the highest (late 2010) as the baseline, project spending out 10 years from there, and count any difference between the old projection and the new projection as a "spending cut."