Morning Report: Productivity flat

Vital Statistics:

	Last	Change
S&P Futures	2435.8	-2.0
Eurostoxx Index	391.8	-0.7
Oil (WTI)	47.1	-0.5
US dollar index	88.3
10 Year Govt Bond Yield	2.18%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.9

Stocks are lower this morning after we saw terror attacks in London. Bonds and MBS are down as well.

Four nations over the weekend cut diplomatic ties with Qatar, one of the Middle East's biggest financial centers. The issue is over political interference, terrorism, and ties with Iran. Oil is selling off on the news. 

The week after the jobs report is generally data-light and that is the case this week as well. We are entering the blackout period for the Fed ahead of the FOMC meeting, which means no Fed-speak either. Should be a relatively calm week. 

Nonfarm productivity was flat in the first quarter as unit labor costs rose 2.2%. Productivity is the biggest driver of wage increases (because it is generally non-inflationary) and the lack of productivity has been a big reason why wages have been going nowhere for the past 10 years. 

Factory orders fell 0.2% last month, despite strength from aircraft orders. The ISM services index came in at a strong 56.9, just missing Street expectations. 

The Fed Funds futures are now pricing in a 96% chance of a rate hike next week. The implied probability of rate hikes continues to increase as the yield curve flattens. This means the long end of the curve (which is the biggest influence on mortgage rates) is sanguine about the economy and the risk of inflation. 

How regulation is impacting the supply of starter homes by increasing the cost to build them. In the DC area, about $75 of the price of a new home is driven by government mandates. Meanwhile, D.R. Horton is in a bidding war for Austin Texas based Forestar. 

Morning report: Hard vs soft data

Vital Statistics:

	Last	Change
S&P Futures	2345.5	-10.5
Eurostoxx Index	378.7	-0.6
Oil (WTI)	50.5	0.3
US dollar index	90.5
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	103.41
Current Coupon Ginnie Mae TBA	103.7
30 Year Fixed Rate Mortgage	4.09

Stocks are lower this morning after auto sales disappointed. Bonds and MBS are up. 

Factory orders rose 1% last month, in line with expectations.

US economic confidence decreased last week, according to Gallup, however confidence is still strong. Meanwhile, consumer spending was flat. 

These data points (economic confidence, consumer spending, and auto sales) illustrate the conundrum we have been seeing for the past few months: soft data like confidence and ISM reports show a strong economy, while the hard data like sales have been showing a mediocre economy. Much of this is Washington-driven as investors realize that Trump will have a difficult time pushing through his agenda in the face of unified Democratic opposition and a Freedom Caucus that wants less government, period. Unrealistic expectations are being brought back to Earth. Despite gridlock, much is being done on the regulatory front and with executive orders which don't require Congressional approval. That will help. But there seems to be a shift in the psychology of investors: the markets seem to be worrying less about the Fed and worrying more about tepid growth. Bonds have noticed as well, with the 10 bond yield down about 30 basis points over the past 3 weeks. 

Home prices rose 7% YOY in February, according to CoreLogic. We are seeing the highest price appreciation at the lower price points. The first time homebuyer is getting hit with a double-whammy of higher prices and borrowing costs. 

Housing's share of GDP came in 15.6% in the fourth quarter. Historically, that number has been around 18%. Housing continues to punch below its weight, as evidenced by tight inventory. It is hard to know exactly why homebuilding continues to be weak - credit is an issue, as is the general post-bubble caution, along with local land use regulations. 

Morning Report: Bond Yields continue to fall

Vital Statistics:

	Last	Change	Percent
S&P Futures	2085.1	-11.2	-0.53%
Eurostoxx Index	2818.0	-44.2	-1.54%
Oil (WTI)	47.64	-1.4	-2.76%
LIBOR	0.653	-0.001	-0.11%
US Dollar Index (DXY)	95.67	0.016	0.02%
10 Year Govt Bond Yield	1.39%	-0.05%
Current Coupon Ginnie Mae TBA	106.3
Current Coupon Fannie Mae TBA	105.7
BankRate 30 Year Fixed Rate Mortgage	3.4

Markets are lower this morning as bond yields push lower globally. Bonds and MBS are up, with the 10 year trading below 1.4%. The German Bund now yields negative 16 basis points. 

We have a short week, but a lot of data. The biggest events will be the FOMC minutes on Wednesday and the jobs report on Friday. Given the Brexit backdrop, I see the FOMC minutes as a nonevent, and the jobs report shouldn't be market moving unless wage inflation accelerates. 

This morning, the ISM New York Index rose from 37.2 to 45.4. Still, a reading below 50 is indicative of a slowing economy.

Economic Optimism slipped in July to 45.5 from 48.2 a month ago. 

Factory Orders fell 1% in May after increasing 1.8% in April. Durable Goods orders fell 2.3% while capital goods orders, which is a proxy for business capital expenditures, fell 0.3%. 

Last week stocks rallied as it looks like Brexit didn't trigger a financial crisis. Bonds continued their march higher and yield curves flattened, which is a recessionary pattern. Generally speaking, when the stock market and the bond market disagree, the bond market is usually right. That said, Italy is injecting more capital into its weak banking system, but that issue predates Brexit. 

Speaking of Italy, they may be the next one out of the EU, as they have issues with their banks and cannot come to the aid of banks without giving investors a haircut according to EU rules. Since about half of Italian bank debt is held by ordinary Italians, no politician wants to suggest that investors lose money on a bailout. Plus their debt to GDP ratio is 1.3x, which gives them little maneuvering room.  

Brexit and the rise of Donald Trump are symptoms of a bigger problem: a lack of trust in government and institutions like the media. Some say we need to learn to trust the government. Other say we need to push Facebook to use its algorithms in order to show opposing viewpoints more often. Bottom line, we are more polarized than ever before, and no matter who wins in November, gridlock will be the name of the game. Both parties are focused on one thing: a potential 3 or 4 Supreme Court nominees, which would ideologically skew the Court for a generation. 

Home prices rose 5.9% in May, according to Corelogic. 

Loan performance increased in the first quarter, according to the OCC. Performing loans are up 0.7% YOY, while foreclosures have declined to 0.4% to 0.9%. 

Morning Report: ADP predicts a strong jobs report on Friday

Vital Statistics:

	Last	Change	Percent
S&P Futures	1974.3	-37.4	-1.86%
Eurostoxx Index	3118.5	-59.5	-1.87%
Oil (WTI)	34.65	-1.3	-3.67%
LIBOR	0.612	-0.001	-0.16%
US Dollar Index (DXY)	99.42	0.015	0.02%
10 Year Govt Bond Yield	2.18%	-0.05%
Current Coupon Ginnie Mae TBA	104.3
Current Coupon Fannie Mae TBA	103.5
BankRate 30 Year Fixed Rate Mortgage	3.89

Markets are getting slammed as China revalued the yuan at a weaker level than expected. Bonds and MBS are up on the flight to safety trade.

Mortgage Applications fell 11.6% last week as purchases fell 11% and refis fell 12%. 

The ADP Employment Change came in at 257k, much better than the 198k Street expectation. Note Friday's jobs report is forecasting an increase of 200k. 

The ISM Non-Manufacturing Index fell to 55.3 from 55.9 last month. 

Factory Orders fell 0.2% in November, while durable goods orders were flat. Capital Goods orders (a proxy for business capital expenditures) fell 0.3%.

Fed Vice Chairman Stanley Fischer says that 4 rate hikes this year is "in the ballpark" of what to expect. Note the FOMC minutes are scheduled to be released at 2:00 pm EST today. 

Banks are taking down their estimates of Q3 GDP based on the lousy ISM data. Deutsche Bank took down Q4 to 0.5% from 1.5%. The Atlanta Fed took it down to 0.7% from 1.3%. 

While inventories and exports are pushing down the GDP data, consumption seems to be turning around. 2015 was the best year for vehicle sales in the US since 2000. While some of that undoubtedly has to do with easy financing (some calling autos the new subprime) most was due to a replacement cycle that was long overdue. 

Speaking of autos, GM is investing in Lyft, the competitor to Uber. This is to have a foothold in the future of summonable driverless cars. 

Morning Report: Factory orders down, but vehicle sales strong

Vital Statistics:

	Last	Change	Percent
S&P Futures	2092.3	-3.1	-0.15%
Eurostoxx Index	3425.7	-8.8	-0.26%
Oil (WTI)	46.72	0.6	1.26%
LIBOR	0.334	0.005	1.58%
US Dollar Index (DXY)	97.33	0.401	0.41%
10 Year Govt Bond Yield	2.20%	0.03%
Current Coupon Ginnie Mae TBA	104.6
Current Coupon Fannie Mae TBA	104
BankRate 30 Year Fixed Rate Mortgage	3.89

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

Vehicle sales are coming in strong this morning, as the US goes through a long-delayed upgrade cycle. The average age of a US car has been at record levels for years, but consumers have been reluctant to spend on a new car. 

The ISM New York index jumped to 65.8 from 44.5 last month. This is a surprising reading given that factory orders fell 1% in September and August was revised downward from -1.7% to -2.1%. 

Economic optimism fell in November, according to the IBD / TIPP Economic Optimism Index. 

Weaker economic data has prompted the Atlanta Fed to take down its fourth quarter estimate for economic growth to 1.9%. Their prior estimate was 2.5%. While 1.9% growth is probably strong enough that we shouldn't be on the zero bound anymore, it is hard to see how this economy is overheating. 

Home Prices continue to climb, according to CoreLogic. Prices rose 0.6% in September and are up 6.4% year-over-year. Interestingly, they put out a map of the overvalued and undervalued real estate markets, and Southern California is largely undervalued. Green is considered undervalued, red is overvalued, grey is normal. Not sure how they are calculating this, but I find these results surprising. 

If you wondered what the median house looks like in these supposedly "undervalued" markets, here you go. 

Credit standards for conventional loans eased somewhat in the third quarter, while FHA loans tightened a bit, according to the Senior Loan Officer Survey. 

Bill Gross is suggesting that the Fed do "Operation Switch" which is the reverse of Operation Twist. The idea is to steepen the yield curve by selling longer-dated bonds and buying shorter dated bonds. Here is novel concept: How about we let the Treasury market be an actual market and let investors determine the cost of money. 

Seriously delinquent loans have hit a new post-crisis low, hitting 1.59% in September down from 1.96% a year ago. Seriously delinquent loans hit a high of 5.59% in February 2010. A "normal" rate of delinquency is below 1%, so the numbers are still somewhat elevated. I suspect many of these remaining seriously delinquent loans relate to zombie foreclosures left over from the bubble days, largely in states with judicial foreclosure laws. 

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.