Morning Report: Higher rates affecting high FICO refis more than low FICO refis.

Vital Statistics:

	Last	Change
S&P Futures	2373.8	-7.5
Eurostoxx Index	373.6	-1.6
Oil (WTI)	53.2	-0.1
US dollar index	91.5
10 Year Govt Bond Yield	2.48%
Current Coupon Fannie Mae TBA	101.86
Current Coupon Ginnie Mae TBA	103.19
30 Year Fixed Rate Mortgage	4.19

Stocks are lower this morning on overseas weakness. Bonds and MBS are flat.

Fed Funds futures are now fully pricing in a 25 basis point hike at next week's FOMC meeting. Now that we are in the quiet period, the only market-moving data should be late this week when we get productivity and the jobs report. 

Consumer spending has almost fully recovered from the Great Recession, with the February number coming in at $101, the strongest February since 2008. 

Factory orders increased 1.2% in January. Consensus was for a 1.1% increase. 

Over the weekend, the war between Democrats and Trump intensified, with Democrats calling for Attorney General Jeff Sessions to resign and Trump accusing the Obama administration of tapping the phones of Trump Tower. So far, markets are basically ignoring all of this as a sideshow. IMO, markets are sanguine about this simply because the deepening partisanship makes gridlock even more likely, and therefore a lot of the uncertainty is taken off the table. When and if that ever changes, the canary in the coal mine should be the dollar. 

Prepay speeds dropped by 30% in January, according to the Black Knight Financial Services Mortgage Monitor. Delinquencies declined by 4% versus December and are down 17% YOY. That said, foreclosure starts increased largely due to seasonal effects. Note the decline in prepayments was not uniform across the credit spectrum: 720+ FICO prepays declined by 32%, while sub 620 FICO prepays fell by 10%. Even with rates up here, it still makes sense for some borrowers to do cash-out refis in order to consolidate higher interest rate debt like credit cards. 

What should you do if you are upside down on your home? Zillow has you covered. 

Morning Report: The refinanceable population grows

Vital Statistics:

	Last	Change
S&P Futures	2160.8	-4.0
Eurostoxx Index	337.1	-3.0
Oil (WTI)	40.5	0.5
US dollar index	86.3	-0.5
10 Year Govt Bond Yield	1.56%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.51

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

Construction spending fell 0.6% last month as both private and public spending fell. Homebuilding was down 0.1% MOM and is up 2.4% YOY. The prior 3 months were revised downward as well. This at least partially explains why the Q2 GDP print was so low. 

Personal Incomes rose 0.2% in June while personal spending rose 0.4%. Just more evidence that the consumer is holding this economy together. The core PCE rate (the inflation measure preferred by the Fed) rose 1.6% YOY. 

The Fed Funds futures have been slowly taking down the probability of a September rate hike - it is now below 20%. Between the weak GDP numbers, the weakness in manufacturing, etc it is hard to make a case that the Fed needs to move in September. 

Governments worldwide are looking at policies intended to inflict capital punishment on investor portfolios. Whether the result is protectionism, Keynsian spending, or expropriation, look to own real assets (like real estate) versus financial assets. In terms of relative value, real assets are at their lowest ever. The world's central banks are on a mission to create inflation, and eventually they will succeed. Note that policies that attack corporate profitability are also inflationary - in fact that is the end the line for socialist economies like Venezuela: everyone has money in their pockets, but there is nothing to buy. 

Brexit has created a massive opportunity for lenders. According to Black Knight Financial Services, the refinanceable population is the highest since 2012. Below are charts of the number of candidates that are refinanceable, and the other is a histogram of mortgage rates.

Morning Report - retail sales

Vital Statistics:

	Last	Change	Percent
S&P Futures	1627.3	-2.3	-0.14%
Eurostoxx Index	2776.9	-8.4	-0.30%
Oil (WTI)	95.43	-0.6	-0.64%
LIBOR	0.275	0.000	0.00%
US Dollar Index (DXY)	83.31	0.165	0.20%
10 Year Govt Bond Yield	1.94%	0.04%
Current Coupon Ginnie Mae TBA	104.8	-0.4
Current Coupon Fannie Mae TBA	102.8	-0.3
RPX Composite Real Estate Index	196.3	0.5
BankRate 30 Year Fixed Rate Mortgage	3.58

Markets are slightly lower after vaulting to new heights last week. Earnings season is largely over; the only ones left are the retailers who start reporting this week. We will hear from Wal Mart and Kohls later this week. Bonds and MBS continue to sell off - the 30 year fixed rate mortgage closed the week at 3.58% after bottoming at 3.4% a week and a half ago.

Does the back up in bond yields mean the refi boom is over? Perhaps. At any rate, since we have been in this range of interest rates for so long, the people who have the ability to refinance already have. This is called prepayment burnout. Now, it will take home price appreciation to drive refinances. That said, there is talk of a HARP 3.0, which would allow late 2009 and 2010 vintage underwater mortgages to refinance, and there is talk that the government may allow people who have already refinanced under HARP to do so again.  New government initiatives may help keep the refi boom alive for a little bit longer.

Retail sales increased .1% in April, higher than the -.3% estimate. The movement of the Easter holiday played some role in the increase. Ex autos and gasoline, the increase was .6%. Gasoline is usually stripped out, because simple price changes can move the index. Joseph H Banks (JOSB) missed earnings estimates this morning. It is an old saw that in weak economic times, the only apparel that is purchased is children's clothing. As the economy improves, women's apparel starts to pick up, and when the economy really starts heating up, men's suits start being purchased. We'll get a read on women's apparel when Nordstrom reports on Thursday. Bonds sold off on the retail sales number, although equities didn't really react.

I said it on Friday and I'll say it again. This Obama / IRS thing could be market negative in a lot of ways - first, if there is something there, it will inevitably cause marginal foreign investment money to flee the dollar, which is equity negative. Plus it will make the debt ceiling negotiations all that more acrimonious. With the S&P 500 at record highs, it is worth bearing this in mind. You could also see a serious snap-back rally in the bond market.

Morning Report - CoreLogic Market Pulse

Vital Statistics:

	Last	Change	Percent
S&P Futures	1518.8	2.6	0.17%
Eurostoxx Index	2656.9	8.1	0.30%
Oil (WTI)	97.85	0.3	0.35%
LIBOR	0.29	-0.002	-0.68%
US Dollar Index (DXY)	79.98	-0.125	-0.16%
10 Year Govt Bond Yield	2.00%	0.02%
RPX Composite Real Estate Index	193.5	0.3

Markets are up slightly after retail sales came in as expected. Ex auto and gas, they disappointed. However, there was some fear that the Jan 1 tax hikes would curtail consumer spending.  At least this data point shows it hasn't.  Although to be fair, a +.1% increase is nothing to write home about. Mortgage applications fell.

CoreLogic's latest Market Pulse previews 2013. They predict that the refi boom is over, but it will be some time before the purchase market comes back. They note that 2012 census data indicates that household formations increased by 1 million, which is getting back to normalcy.  As I have said before, there is a lot of pent-up demand here, as the low household formation numbers of the last 5 years have been driven by economic weakness, not demographics. They do forecast that margins may get compressed as lenders fight over a declining amount of activity. That said, you can't turn a refi shop into a purchase shop overnight. They also do an interesting analysis of the expected effect of QM loans. Near term, it will probably increase the profile of the GSEs.  Longer term, it will greatly increase performance characteristics.  Anyway, lots of good stuff in here.  RTWT.

27% of borrowers who refi are shortening their terms, according to Freddie Mac.  Cash-out refis account for just 16% of refinances, while cash in refis have jumped to 39%.  Ironic that consumers are getting more conservative when the Fed is using every tool in its toolbox to get consumers to do the exact opposite.

Looks like the sequestration cuts are going to happen.