Morning Report: Housing starts fall

Vital Statistics:

	Last	Change
S&P Futures	2561.0	4.0
Eurostoxx Index	392.0	1.5
Oil (WTI)	52.1	0.2
US dollar index	86.8	0.2
10 Year Govt Bond Yield	2.33%
Current Coupon Fannie Mae TBA	102.96
Current Coupon Ginnie Mae TBA	104.188
30 Year Fixed Rate Mortgage	3.86

Stocks are lower on no major news. Bonds and MBS are down small. 

Housing starts fell in September, as hurricane effects probably had an effect. Starts fell 4.7% from August, but are up 6.1% on an annual basis. Weather probably doesn't explain all of it, however as building permits were also down on month-over-month basis. Permits were also down on year-over-year basis. Housing starts fell in the North, South, and Midwest, but rose in the West. Permits rose in the Northeast and Midwest and fell in the South and West. We should probably see some improvement in these numbers as the flood waters recede and people rebuild. 

Mortgage applications rose 3.6% on an adjusted basis for the holiday-shortened week. Purchases rose 4% while refis rose 3%. The MBA said that mortgage rates decreased by 2 basis points overall last week. This was the first increase in the applications index in over a month. 

Treasury Secretary Steve Mnuchin predicts the stock market will slump if tax reform isn't passed this year. Since Democrats are uniformly against tax reform, it will have to be modest in order to pass it under a straight majority in the Senate. "There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done," Mnuchin said in the "Politico Money" podcast interview. "To the extent we get the tax deal done, the stock market will go up higher. But there's no question in my mind that if we don't get it done you're going to see a reversal of a significant amount of these gains." Note that there are some procedural hurdles to get this done. It all comes down to earnings. If there are no changes in taxes at the corporate level, then the forward earnings estimates are too high, which means the multiple is higher than people think. 

The Senate has a tentative deal to save Obamacare and the cost reduction subsidies, however the White House is lukewarm on it, and many in the House are outright hostile to anything that props up Obamacare. 

Trump is expected to name his nominee to be the next Fed Chairman by early November. The expected nominees are John Taylor, Kevin Warsh, Gary Cohn, Jerome Powell, or Janet Yellen. Trump meets with Yellen this week. Note a Reuters poll of economists think Powell will get the nod. 

One puzzling aspect of the current economy is the labor market and the lack of wage growth. Theory says that if the unemployment rate is as low as it is now, we should be seeing bidding wars for workers and general wage hikes across the board. The leading indicator for wage growth - the JOLTS quit rate - has been flat for 2 years. What is going on? The first (and biggest) is that the unemployment rate is sending a false signal about how tight the labor market is. While there is some tightness in the labor force, particularly in skilled labor, most people are not in the hot sector, and are reluctant to leave. Second, many could still be trapped in homes with negative equity, unable to move to where the jobs are. And finally, many are just not willing to move, for whatever reason. I think the answer is the first one: Our unemployment rate stops counting the unemployed at 6 months, which may have been a reasonable thing to do 30 years ago, but not today. The employment to population ratio is probably a better indicator. And according to that, we still have a ways to go. Note that demographic trends will play a part here as well. The low ratios in the 50s and 60s are explained by a lack of women in the labor force. And some of the drop in recent years is due to the retirement of the baby boomers, however their kids (the Millennials) should be replacing them. 

Morning Report: Obamacare repeal and Trump reflation trade dead

Vital Statistics:

	Last	Change
S&P Futures	2456.5	-2.0
Eurostoxx Index	383.9	-3.0
Oil (WTI)	46.0	0.0
US dollar index	87.0	-0.4
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.96

Stocks are lower this morning after healthcare reform fails. Bonds and MBS are up small. 

We are in the summer doldrums, with not much in the way of news or movement. Monday was so dull it felt like a 3 day weekend in the markets. 

Obamacare repeal (and the lower spending that ensued) was going to be the source of funds for infrastructure spend and tax reform. So that pretty much sticks a fork in the Trump reflation trade. This should send rates lower, at the margin. Don't forget the 10 year was trading below 1.9% before the election. Economists now see an even risk of overshooting and undershooting their GDP forecasts, the highest since the election.

The Fed Funds futures aren't really reacting to the news yet, with September futures pricing in only an 8% chance of a hike and the Dec futures pricing in a 47% chance of a hike. 

The Senate is considering a last-ditch attempt to simply repeal Obamacare without a replacement and then try and create a healthcare plan from scratch. 

Import prices fell 0.2% in June and are up 1.5% YOY. Export prices are down 0.2% as well and up 0.6% YOY. 

Homebuilder confidence slipped in July, according to the NAHB. “Our members are telling us they are growing increasingly concerned over rising material prices, particularly lumber,” said NAHB Chairman Granger MacDonald, a home builder and developer from Kerrville, Texas. “This is hurting housing affordability even as consumer interest in the new-home market remains strong.”

The House Appropriations Committee approved a bill to reform the CFPB. The biggest change will be to bring the agency under the normal appropriations umbrella, although there will be language regarding payday lending and mandatory arbitration. 

Morning Report: Strong jobs report

Vital Statistics:

	Last	Change
S&P Futures	2389.0	3.5
Eurostoxx Index	391.7	-0.3
Oil (WTI)	45.1	-0.4
US dollar index	89.9
10 Year Govt Bond Yield	2.34%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.625
30 Year Fixed Rate Mortgage	4.02

Stocks are up after the strong jobs report. Bonds and MBS are up as well.

Jobs report data dump:

• Nonfarm payrolls + 211,000
• Unemployment rate 4.4%
• Labor force participation rate 62.9%
• Average hourly earnings up 0.3% MOM / 2.5% YOY

Overall a strong jobs report. The unemployment rate is the lowest in a decade, reaching close to the cyclical low right before the real estate bubble blew up. Despite the low numbers we have yet to see much in the way of wage growth. The employment-to-population ratio, which is the Fed's preferred employment indicator, rose to 60.1%.  The U-6 unemployment indicator (which is more broad and includes the long-term unemployed) fell sharply during the month from 8.9% last month to 8.6%. U-6 is down 1.1% YOY. U-6 measures how much slack there is in the labor market, and as that slack is taken up wage inflation should return. This report shouldn't really move the needle for the June FOMC meeting and the Fed. 

Yesterday, the House passed narrowly its Obamacare replacement bill, and it will now head to the Senate where it will be ignored and slow-walked. The House bill was never scored by the CBO, and pushed through on short notice, which pretty much tips the GOP's hand that this was never intended to actually become law and has a 0% chance of surviving intact. FWIW, the bill is really the Republican Primary Prevention Act of 2017, which is to say merely a political gambit. The Senate may also be waiting to see what insurance rates look like for 2018 and also how many drop out of the exchanges. The only way to get Democrats and moderate Republicans on board is if they see the Obamacare exchanges failing.  

Now that Obamacare is out of the way in the House, their attention will turn to tax reform. Individual tax reform will get zero support from Democrats, however there might be some common ground on corporate taxes. 

Fannie Mae reported income of $2.8 billion for the first quarter, all of which will go to the government sometime in June. Total equity has fallen from $6.1 billion at the end of last year to $3.4 billion at the end of Q1. This is the problem the government has to address with the current regime: sending all profit to Treasury is eroding Fannie's capital. This is one motivation to get the government serious about GSE reform, although it isn't a high priority in Washington at the moment. 

Inflation continues to be tame, and part of that is being driven by oil, which has fallen 15% over the past few weeks. The rally in oil that began with OPEC's plan to cut production has been completely given back. While the Fed will undoubtedly characterize oil as a transitory phenomenon it does flow through to other products and can help drive inflation. 

Morning Report: Investor optimism at a 16 year high

Vital Statistics:

	Last	Change
S&P Futures	2344.5	4.5
Eurostoxx Index	376.0	-1.3
Oil (WTI)	47.5	-0.7
US dollar index	90.0
10 Year Govt Bond Yield	2.41%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.32
30 Year Fixed Rate Mortgage	4.17

Stocks are higher this morning after durable goods orders came in strong. Bonds and MBS are flat

We have a lot of Fed-speak today with 5 speakers, mainly in the morning. 

Durable Goods orders rose 1.7% last month versus a 1.5% expectation. Aircraft orders drove the increase. Ex-transportation they rose 0.4%. The only disappointing part was capital goods orders, which fell 0.1% versus expectations of a 0.1% gain. Capital Goods orders is a proxy for business capital investment, and this number shows that while business may be more optimistic for the future, they aren't putting their money where their mouth is quite yet. 

Donald Trump challenged the GOP to either pass health care reform today or to forget it. Health care reform is being fought by both Democrats (who oppose any cuts whatsoever) and the GOP Freedom caucus (who oppose the program on general principles). Here are some of the proposed amendments and negotiation points. Health care reform is a critical piece of his planned infrastructure spending plan, so if that goes, then it will be much smaller than advertised and tax reform will probably have to be revenue-neutral. Note that revenue-neutral tax reform could still do a lot for the economy just by getting rid of the distortions caused by the tax code. At the margin, the failure to pass health care reform should make the Fed slightly less hawkish. 

Regardless of the state of health care reform, Treasury Secretary Steve Mnuchin says tax reform will get done by the August recess. 

Investor optimism is at a 16 year high, according to Wells Fargo. Interestingly, this is not based on taxes, as more people expect their taxes to increase (39%) than decrease (29%). Investors are also sanguine about the Fed's proposed interest rate hikes, with equal percentages thinking they will be good, bad, or have no effect. 60% say now is a good time to invest, which is the highest number since 2011, when Wells started tracking that number. Note that extremely high investor sentiment can be a contrary indicator, however betting on that is usually a losing trade. 

Suburbs and exurbs are again out-growing cities and their near suburbs, according to new Census data. This trend was upended during the post-bubble years as young Millennials stayed in the city.