Morning Report: Inflation at the consumer level increases moderately

Vital Statistics:

	Last	Change
S&P Futures	2567.0	-11.0
Eurostoxx Index	380.9	-3.0
Oil (WTI)	55.1	-0.6
US dollar index	87.0	-0.4
10 Year Govt Bond Yield	2.32%
Current Coupon Fannie Mae TBA	102.688
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.87

Stocks are lower this morning as a risk-off feel is dominating the markets. Bonds and MBS are up.

As stocks swoon, we should continue to see mortgage rates tick lower, at least at the margin. We came close to positive reprices yesterday. 

Mortgage Applications increased 3.1% last week purchases increased 0.4% and refis increased 6%. There was no adjustment for the Veteran's Day holiday, and the 30 year fixed rate mortgage was unchanged at 4.12%. 

While inflation may be picking up at the wholesale level, it hasn't translated to the consumer level, at least not yet. The consumer price index rose 0.1% MOM and is up 2% YOY. Ex-food and energy, it was up 0.2% MOM and 1.8% YOY. The Fed is targeting 2% inflation, so they still have more work to do there. It probably won't change much in the way of the Fed's thinking, which is still on a gentle path of increasing interest rates. The Fed Funds futures are currently predicting a 100% chance of a hike in December, with 92% predicting a 25 basis point hike and 8% predicting a 50 basis point hike. 

Retail sales moderated in October after spiking in September on strong gasoline sales. Retail sales increased 0.2%, while sales less autos and gasoline rose 0.3%. The control group was also up 0.3%. Separately, Target forecasted moderate holiday spending growth, although that could be specific to that company, which is locked in a price war with Wal-Mart and Amazon. 

Manufacturing in New York State decelerated last month but is still historically strong according to the Empire State Manufacturing Survey put out by the New York Fed. Employment continue to expand, albeit at a slower pace than last month. 

Household debt balances increased in the third quarter, according to the latest Fed data. Overall debt rose to just under $13 trillion, which eclipses the high set in 2006. Mortgage debt is still lower than the peak levels, however, while non-housing debt is higher. We are seeing an increase in the share of auto debt, as well as student loan debt. If you look at the historical charts, you can see just how dramatically credit scores have improved for mortgage debt. 

The Senate has added a twist to tax reform. In order to come within the statutory limits for the national debt, they have added a wrinkle to save money: eliminating the individual mandate for Obamacare. This supposedly increases savings by some $300 billion. Some of those savings may be used for additional tax cuts. This will make tax reform an easier push legally, but will probably push some of the more liberal Republicans away from it. The Republican majority in the Senate will probably get even narrower, with the special election in Alabama looking like a D pickup. 

Morning Report: FOMC minutes slightly dovish

Vital Statistics:

	Last	Change
S&P Futures	2460.8	-6.5
Eurostoxx Index	378.5	-0.6
Oil (WTI)	46.6	-0.2
US dollar index	86.5	0.2
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	103.09
Current Coupon Ginnie Mae TBA	103.97
30 Year Fixed Rate Mortgage	3.88

Stocks are lower this morning after WalMart missed earnings. Bonds and MBS are up.

The FOMC minutes from the July meeting showed that some member are still worried about inflation being too low, while some are worried about overshooting the inflation target. "Many participants, however, saw some likelihood that inflation might remain below 2 percent for longer than they currently expected, and several indicated that the risks to the inflation outlook could be tilted to the downside. Participants agreed that a fall in longer-term inflation expectations would be undesirable, but they differed in their assessments of whether inflation expectations were well anchored. One participant pointed to the stability of a number of measures of inflation expectations in recent months, but a few others suggested that continuing low inflation expectations may have been a factor putting downward pressure on inflation or that inflation expectations might need to be bolstered in order to ensure their consistency with the Committee’s longer-term inflation objective." This statement was taken as dovish and bonds rallied a few basis points on it. The rest of the minutes were uneventful as nothing much had changed economically from the June meeting. There were a few members who wanted to announce the change in balance sheet policy at this meeting but most wanted to wait. That probably means that we will get no hike and an announcement on balance sheet reduction at the September meeting. We didn't see any reaction in the Fed Funds futures either, with December still a toss-up. 

Initial Jobless Claims fell to 232k last week, which remains near historical lows. The last time we were at similar levels, the population was much smaller and there was a military draft going on. 

Industrial Production rose 0.2% last month, while manufacturing production fell 0.1% Lower auto production drove the decline. Capacity Utilization was unchanged at 76.7%. There is still a lot of slack in manufacturing, which is why capital expenditures have been so low. Separately, the Philly Fed Manufacturing Survey increased. 

Average home sizes grew in the aftermath of the housing boom, as only the luxury end of the sector was working. With Millennials not in a position to buy, aging boomers were the only game in town. From the bottom, average square footage increased from 2388 square feet to 2,622 square feet. However we are seeing this reverse as builders pivot to selling more starter homes. Average and median home size is still above the 2006 peak however. 

Household debt increased in the second quarter to $12.84 trillion, which is up about 15% from the post-bubble trough. Mortgage balances increased, however new origination fell as higher interest rates took a bite out of refis. Auto loans increased, as incredibly easy financing is being used to sell cars these days, and credit card balances increased as well. 90 day delinquencies declined to 1.5% of all mortgage loans outstanding. 

Morning Report: Markets rebound after long weekend

Vital Statistics:

	Last	Change	Percent
S&P Futures	1879.3	21.0	1.13%
Eurostoxx Index	2828.2	-5.7	-0.20%
Oil (WTI)	29.44	0.0	0.00%
LIBOR	0.618	0.001	0.16%
US Dollar Index (DXY)	96.66	0.724	0.75%
10 Year Govt Bond Yield	1.76%	0.01%
Current Coupon Ginnie Mae TBA	105.3
Current Coupon Fannie Mae TBA	104.6
BankRate 30 Year Fixed Rate Mortgage	3.64

Green on the screen as investors return after a long weekend. Bonds and MBS are down small.

The Empire Manufacturing Index improved slightly to -16.64 versus -19.37 in the prior month. 

The NAHB Homebuilder Sentiment Index fell to 58 from 61 in February.

Saudi Arabia, Russia, Venezuela and Qatar agreed to freeze production at January levels provided the other members of OPEC agree to go along. Apparently this has been in the works for a while, so oil isn't having much of a reaction. 

Household debt increased 0.4% in the fourth quarter, according to the NY Fed. Student Loan and Auto loan financing are growing the most, while mortgage and HELOC is steady or falling. Credit quality for mortgage debt remains strong, however you can see the increase in low-FICO auto loans (the new subprime). Debt levels below:

As the Spring Selling Season begins, inventory remains tight, especially close to urban areas. The supply of homes is the lowest since 2005. 

Morning Report: Goldman predicting a March hike

Vital Statistics:

	Last	Change	Percent
S&P Futures	2008.9	17.0	0.85%
Eurostoxx Index	3269.0	8.3	0.25%
Oil (WTI)	34.44	-0.3	-0.84%
LIBOR	0.586	0.016	2.81%
US Dollar Index (DXY)	98.64	-0.063	-0.06%
10 Year Govt Bond Yield	2.19%	-0.01%
Current Coupon Ginnie Mae TBA	104.3
Current Coupon Fannie Mae TBA	103.3
BankRate 30 Year Fixed Rate Mortgage	3.82

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

We have a holiday shortened week, with markets closing early on Thursday. We do get some important data with the final revision to Q3 GDP, Existing Home Sales, New Home Sales, the FHFA House Price Index, personal spending and income, and inflation. Basically a week's worth of data crammed into 3 days. 

Oil continues to fall, hitting $34.23 a barrel for WTI. 

The Chicago Fed National Activity Index fell to -.3 from - .17. 

Goldman is predicting a March rate hike - a "fairly easy path."  They anticipate growth will remain above trend and employment growth to be well above breakeven. Inflation will pick up as the the big swoon in oil from $100 to $50 will be a year old and won't be pushing down the inflation numbers. 

What deleveraging? Household debt rose to $14.1 trillion in Q3, according to the NY Fed. This is just off the high of $14.3 trillion in the third quarter of 2008. Auto debt and mortgages drove the increase.