Morning Report: The Bank of England cuts rates, pushing Treasuries higher

Vital Statistics:

	Last	Change
S&P Futures	2160.0	3.0
Eurostoxx Index	336.9	1.0
Oil (WTI)	40.8	0.0
US dollar index	86.5	-0.5
10 Year Govt Bond Yield	1.51%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.5

Stocks are higher this morning after the Bank of England cut rates and instituted QE. Bonds and MBS are up. 

In response to Brexit, the Bank of England cut rates and introduced a bond-buying program for corporate and sovereign debt. This is causing global sovereigns to rally, and the German Bund is now trading at -7 basis points again. The US 10-year seems to correlate the most with the German Bund lately, so if it continues to rally, look for lower rates in the US. 

Job cuts increased in July to 45,346, which is up 19% from last month, but is down 57% from a year ago. Military discharges and continued cuts in the energy sector drove the increase. Texas and California bore the brunt of the job cuts. 

Initial Jobless Claims ticked up to 269k last week, however we have been below 300k for months, which is a very low level. 

The Bloomberg Consumer Comfort index ticked up slightly last week to 43 from 42.9. 

Factory Orders fell 1.5% from a downward-revised -1.2% in May. The manufacturing sector continues to exhibit a slowdown. 

The ISM Services Index ticked down to 55.5 from 56.5 last month. The ISM Services index has been much stronger than the manufacturing index. 

Nationstar reported better than expected earnings in the second quarter, although they took a big hit on their servicing portfolio. That said, while others are running from the servicing business, Nationstar is doubling down, and looks to build their business, with the addition of Seneca and USAA as clients. USAA had used Dovenmuhle in the past. Originations were up 24% QOQ and consumer direct accounted for 60% of the volume. Nationstar was up 12% for the day and is the highest in 9 months. 

Mortgage REIT Annaly Capital reported a drop in book value per share as volatility hurt results. Given the widening of MBS spreads at the end of the second quarter, this is to be expected, although peer American Capital Agency did report a small increase. Annaly just completed its acquisition of Hatteras. Aside from the Fed, mortgage REITs are some of the biggest purchasers of mortgage backed securities, and can move around TBAs which influences mortgage rates, so it pays to keep tabs on how they are doing. 

Separately, Fannie Mae reported a drop in net income. 

Morning Report: Tough go of it for mortgage originators, servicers, and REITs.

Vital Statistics:

	Last	Change	Percent
S&P Futures	2099.1	4.4	0.21%
Eurostoxx Index	3465.3	26.2	0.76%
Oil (WTI)	45.89	-0.4	-0.93%
LIBOR	0.334	-0.001	-0.15%
US Dollar Index (DXY)	97.97	0.023	0.02%
10 Year Govt Bond Yield	2.23%	0.00%
Current Coupon Ginnie Mae TBA	104.4
Current Coupon Fannie Mae TBA	103.7
BankRate 30 Year Fixed Rate Mortgage	3.74

Markets are higher this morning on no real news. Bonds and MBS are flat.

Initial Jobless Claims ticked up to 276k from 260k last week. Still strong numbers - the lowest since the Nixon Administration, which is even more impressive given the growth in the population over that time period. 

Challenger, Gray and Christmas announced job cuts fell 1.3% in October after rising 93.2% the month before. We are continuing to see layoffs in the energy patch. 

Nonfarm productivity rose 1.6% in the third quarter and unit labor costs rose 1.4%. Productivity tends to be somewhat volatile. Productivity growth is necessary if we are going to see real wage growth. 

The Bloomberg Consumer Comfort Index fell to 41.1 last week.  

Mortgage originator Stonegate reported lower-than expected earnings yesterday. Originations in Q3 were up 1% on a quarter-over-quarter basis and down 2% on a year-over-year basis. The stocks of the originators / servicers have gotten absolutely hammered this year, with Nationstar down 2/3 over the past year, Stonegate down 60%, and Ocwen down 72%. 

Not only has it been rough for the mortgage originators and servicers, mortgage investors have had a rough go of it as well. Pretty much all of the agency mortgage REITs got roughed up last quarter and reported decreases in book value. The volatility in the financial markets over the third quarter pushed out MBS spreads. All of the REITs are switching out of interest-rate sensitive MBS (things like 30 year fixed rate securities, or what originators are typically selling) into more commercial and credit sensitive instruments. It is a bet that the economy is recovering. At the margin, the fact that these entities are pulling back in the MBS market means that mortgage rates are a little higher than they otherwise would be. 

Citi's Head of North American Economics thinks Janet Yellen and the Fed are making a big mistake, letting the markets influence their decision-making. Economists are starting to discuss the possibility that the Fed is really subject to a triple mandate these days - not only are they supposed to keep inflation expectations in check and to minimize unemployment, they also have an unspoken mandate to keep the financial markets stable. The genesis of this really started with the Crash of 1987 when Alan Greenspan said the Fed stood buy to provide liquidity in the aftermath. The Fed rode to the rescue again after the Asian Tiger Crisis, the Long-Term Capital Management crisis, and even took prophylactic measures to prevent Y2K from becoming a crisis. Eventually this all became known as the "Greenspan put" and we have seen the endgame, which is the serial inflating of asset bubbles. 

Morning Report - Basel III

Vital Statistics:

	Last	Change	Percent
S&P Futures	1455.6	-2.1	-0.14%
Eurostoxx Index	2697.9	-11.4	-0.42%
Oil (WTI)	92.64	-0.5	-0.48%
LIBOR	0.305	0.000	0.00%
US Dollar Index (DXY)	80.56	0.061	0.08%
10 Year Govt Bond Yield	1.90%	0.00%
RPX Composite Real Estate Index	192.4	0.3

Markets are slightly lower this morning after last week's big rally.  This week looks to be relatively light data-wise.  4Q earnings season kicks off tomorrow with Alcoa announcing after the close. Bonds are up small after last week's sell-off and MBS are flat.

Basel has relaxed some of the requirements for the liquidity coverage ratio, and delayed the implementation in response to requests from the ECB. The ECB feared that the new requirements would lead to a credit crunch and would require banks to be over-invested in sovereign debt. Now banks will be allowed to count corporate debt, residential MBS, and even equities as liquid assets.  While MBS and bond price behavior is dominated by the Fed and QE, the net effect will push banks to hold MBS and sell Treasuries, so you should be aware that the 10-year could sell off and MBS could rally.

On the other side of the coin, last week's sell off in bonds and MBS has fueled fears that the housing recovery may stall as rates rise. Much of the boom in prices last year was in areas hit hard by distressed sales, as professional investors snapped up properties in places like Phoenix, Las Vegas and Detroit.  The 20% price increases there have probably run their course.  Rising rates would certainly end the refi boom that banks have feasted on for the past year, meaning originators will have to go back to the ground game of building relationships with realtors and focusing on purchase activity.

The worst merger in history continues to plague BOA.  They agreed to pay Fannie Mae $3.6 billion to settle repurchase claims and to repurchase another $6.75 billion of bad mortgages. Worst merger since Steve Case sold Ted Turner a bill of goods just as the internet bubble was bursting. Separately, Nationstar purchased a $215 billion servicing portfolio from BOA as well. Half is GSE / Govvie and half is private label. They paid $1.3 billion.

Republicans have declared tax increases off the table for the upcoming negotiations on the debt ceiling and the sequestration. Obama has already said that cutting spending has to go "hand-in-hand with tax law changes so that the wealthiest corporations and individuals can't take advantage of loopholes and deductions that aren't available to most Americans." My guess is that he is talking about carried interest and oil "subsidies" and not about further increases in marginal tax rates or further limiting the mortgage interest deduction. Oh, and we need a clever name for the upcoming negotiations on the sequestration and debt ceiling.