Morning Report: Risk-off feeling on North Korea missile launch

Vital Statistics:

	Last	Change
S&P Futures	2431.3	-12.5
Eurostoxx Index	367.6	-4.7
Oil (WTI)	46.6	0.0
US dollar index	85.1	-0.1
10 Year Govt Bond Yield	2.11%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.84

Stocks are lower on news that North Korea fired a missile over Japan. Bonds and MBS are up.

Pre-open, the 10-year bond is trading at 2.11%, the lowest level of 2017 and we are back at immediate post-election levels. Remember, on the day of the election, the 10 year was trading around 1.83%, so we could still have further to fall in rates. The Great Trump Election Reflation simply isn't going to happen, though the Administration still intends to pivot to tax reform. The trader in me thinks we test the 1.83 level at some point. 

Home prices rose 0.1% MOM and are up 5.7% YOY according to the Case-Shiller Home Price Index. The Case-Shiller index has been lagging the FHFA index, which indicates that there might be some issues at the high end of the market. The FHFA index only looks at homes with a conforming mortgage, so jumbos and all-cash sales are excluded. 

Consumer confidence rose again in August to 122.9. The present situation component of the index hit a 16 year high, as we are back to mid 2001 levels. 

Tax reform won't be a slam dunk, but there could be a possibility for a bipartisan deal. Democrats might be willing to trade a carbon tax for an income tax cut, but that might be too tough of a deal for Republicans to stomach. A repatriation holiday for overseas corporate earnings is another possibility, however Democrats will certainly want some sort of strings attached to the repatriation break to ensure the funds don't simply go to buybacks and dividends, which is what happened last time we did one. Perhaps a deal could be found if there is a stipulation that some percentage of the savings be applied to worker compensation and training. 

A drop in the cap for the mortgage interest deduction is also something being considered, however that is such a politically risky issue that I doubt anyone does anything about it. The main beneficiaries are the wealthy and the upper middle class, and the upper middle class is really the third rail of politics. Liberals may hate the distribution of the benefits, but they probably won't go to the mat for it. Why? It isn't indexed for inflation, so the cap will hit more and more people simply due to home price appreciation. As a practical matter, the cap is declining 6% a year. 

Fannie Mae Chief Economist Doug Duncan looks at the implications of the Fed ending QE. He believes that it will increase MBS spreads, which means that mortgage rates will rise more than you would typically expect when rates rise, and fall less than you would expect when rates fall. FWIW, I think any effect would be minor: it certainly was when QE was actually happening. He also speculates that tapering will affect Fannie Mae and Freddie Mac spreads more than Ginnie spreads due to the differing capital treatment for banks. This means that FHA and VA loans will be relatively more attractive to a borrower than a Fannie or Freddie loan. The GSEs have also been ordered to reduce their balance sheets to a set level, so they won't automatically absorb that lost demand. 

Morning Report - Consumer confidence and home price appreciation decline

Vital Statistics:

	Last	Change	Percent
S&P Futures	2073.9	9.5	0.46%
Eurostoxx Index	3559.1	46.0	1.31%
Oil (WTI)	47.5	0.1	0.23%
LIBOR	0.294	-0.002	-0.51%
US Dollar Index (DXY)	96.91	0.407	0.42%
10 Year Govt Bond Yield	2.26%	0.05%
Current Coupon Ginnie Mae TBA	104.1	0.1
Current Coupon Fannie Mae TBA	103.5	0.2
BankRate 30 Year Fixed Rate Mortgage	4.04

Stocks are higher this morning as Euro markets rally on M&A activity, and the 200 day moving average held for Chinese stocks. Bonds and MBS are down.

The FOMC starts their two day meeting today. 

Big drop in consumer confidence, according to the Conference Board. It fell from 99.8 in June to 90.9 in July: “Consumer confidence declined sharply in July, following a gain in June. Consumers continue to assess current conditions favorably, but their short-term expectations deteriorated this month. A less optimistic outlook for the labor market, and perhaps the uncertainty and volatility in financial markets prompted by the situation in Greece and China, appears to have shaken consumers’ confidence. Overall, the Index remains at levels associated with an expanding economy and a relatively confident consumer.”

The S&P Case-Shiller index of real estate values was basically flat in May, and is up 5% year over year. David Blitzer has an important comment on the first time homebuyer, which speaks to the education challenge those of us in the real estate business have to do:  “First time homebuyers are the weak spot in the market. First time buyers provide the demand and liquidity that supports trading up by current home owners. Without a boost in first timers, there is less housing market activity, fewer existing homes being put on the market, and more worry about inventory. Research at the Atlanta Federal Reserve Bank argues that one should not blame millennials for the absence of first time buyers. The age distribution of first time buyers has not changed much since 2000; if anything, the median age has dropped slightly. Other research at the New York Fed points to the size of mortgage down payments as a key factor. The difference between a 5% and 20% down payment, particularly for people who currently rent, has a huge impact on buyers’ willingness to buy a home. Mortgage rates are far less important to first time buyers than down payments.” Probably the biggest misconception in the market is the idea you must have 20% down. 

Morning Report - The Avon Lady gets a fake suitor

Vital Statistics:

	Last	Change	Percent
S&P Futures	2118.5	0.9	0.04%
Eurostoxx Index	3607.3	5.1	0.14%
Oil (WTI)	59.05	-0.8	-1.39%
LIBOR	0.274	-0.001	-0.40%
US Dollar Index (DXY)	93.96	0.502	0.54%
10 Year Govt Bond Yield	2.19%	-0.04%
Current Coupon Ginnie Mae TBA	102.2	0.2
Current Coupon Fannie Mae TBA	101	0.2
BankRate 30 Year Fixed Rate Mortgage	3.92

Markets are flattish after some disappointing industrial data. Bonds and MBS are following European bonds higher.

Industrial Production fell .3% in April, the same as March. This is the fifth consecutive month of negative readings. On a year-over-year basis, industrial production was up 1.9%. While mining and energy extraction were down as expected, other categories like consumer goods, business equipment etc were down as well. Manufacturing Production was flat, and capacity utilization fell. The European QE-driven dollar rally that began about a year ago is probably a big reason for the continued weakness here. Here is an interesting take on the big bond market sell-off.

Consumer confidence slipped in May, according to the University of Michigan Consumer Confidence Survey. Consumers are coming to the realization that we aren't getting the expected V-shaped recovery from the weak first quarter.

The Avon Lady had a fake suitor yesterday, which drove the stock price up 20%. Someone managed to file a fake press release on EDGAR (The SEC's public documents website) saying the company was being bought by an investment company called PTG Capital Partners (which doesn't exist). The fake bid drove the stock from $6.60 a share to $8.00 a share. Amazing someone was able to file a fake document on EDGAR. 

I will be at the MBA Secondary Conference in NYC next week. If anyone is around and wants to meet, please let me know.