Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1374.5	-3.8	-0.28%
Eurostoxx Index	2312.0	-15.8	-0.68%
Oil (WTI)	102.1	-0.6	-0.58%
LIBOR	0.466	0.000	0.00%
US Dollar Index (DXY)	79.54	-0.002	0.00%
10 Year Govt Bond Yield	1.95%	-0.03%
RPX Composite Real Estate Index	172.8	0.6

Markets are flattish after a successful Spanish bond auction and generally good earnings reports from a slew of companies. Bank of America and Ebay were standounts. Spanish bond yields are starting to increase and the Spanish equity market (The IBEX) is under pressure. US Treasuries and MBS are flat to up.

US Leading economic indicators fell. The Philly Fed Business Outlook Survey noted regional manufacturing activity expanded modestly in April, but fell slightly from the previous month. Both indicators seem to imply the economy is still expanding, but not as rapidly as a few months ago. Existing home sales fell to 4.48 million.

The press is pointing out the strong demand for the Spanish bond auction. As Bill Gross mentioned, banks are buying all of the excess supply in the Spanish bond auctions, which he views as artificial demand. The interesting question is that sovereign bonds are treated as riskless assets for bank capital requirements. If it turns out they are not riskless... Investors are noticing, and bidding up credit default swaps for Spanish banks.

Initial Jobless claims came in at 386k, ahead of the 370k expected. Last week was revised upwards. Interestingly, when I re-ran the data series, the government had revised virtually every week up from the beginning of the year. Not sure what is going on there..

A University of Chicago economist gives a theoretical explanation why principal reductions are better for borrowers than interest rate mods which merely lower the payment. In effect, mods which target a percent of income (usually 31%) end up penalizing workers as they earn more - in effect they can be hit (in theory) with a 100%+ marginal tax rate. Not sure I buy the idea that this is influencing behavior, but it is an interesting take on payment vs principal mods.

The National Association of Home Builders weighs in on tax policy, urging Congress to increase certainty (read: extend the Bush tax cuts) into the tax code. As the economy slows, Washington will come under increasing pressure to push the 2013 tax hikes further into the future.

Do the government's inflation numbers seem to not jibe with your actual bills? One explanation is the change in methodology over the years. Someone went to the trouble of recalculating inflation using the older methodology, and unsurprisingly, it is higher. The government disagrees.

Chart: Initial Jobless Claims:

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1381.5	-2.1	-0.15%
Eurostoxx Index	2331.1	-35.9	-1.52%
Oil (WTI)	104.3	0.1	0.06%
LIBOR	0.466	0.000	0.00%
US Dollar Index (DXY)	79.78	0.307	0.39%
10 Year Govt Bond Yield	1.99%	-0.01%
RPX Composite Real Estate Index	172.2	-0.2

Equity markets are slightly weaker this morning on a disappointing earnings report from Intel. IBM and Yahoo also reported last night. Abbott Labs and Halliburton beat estimates this morning. Spanish bond yields are lower. Bonds and MBS are slightly higher. No economic data this morning.

Part of the reason for the strong market rally yesterday was a strong Spanish bond auction. Many have noted that the Spanish banks have been large buyers of Spanish government debt. Bill Gross called the market "artificially controlled" on CNBC, and he doesn't trust it. Bloomberg notes the bad debt exposure for Spanish banks, and the possibility for the government to take on contingent liabilities. Spain has the 12th largest GDP in the world (Greece is something like 35th), so don't think a crisis would be a repeat of last fall.

Housing advocates are worried that a President Romney will take aim at HUD. Of course HUD could remain as the alphabet soup of government housing agencies get re-organized. For all intents and purposes, the US mortgage market is nationalized, and while the GSEs may go away in name, their function will be handled by some other entity. It would take roughly 500 billion to fully capitalize the GSEs and that kind of money can't be raised in the private sector.

US Bancorp is noting that demand for credit is increasing. CEO Richard Davis told CNBC yesterday that mortgage demand was the highest in the bank's history. The Minneapolis-based bank had reported better than expected numbers earlier that morning. So, this is one positive data point to throw in the mix of negative ones we have been seeing lately.

Ever done a quick fix on your home with the intention of doing a full repair later, but never got around to it? Here are some good ones (note the uses of hockey pucks)

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1370.2	6.3	0.46%
Eurostoxx Index	2334.3	33.1	1.44%
Oil (WTI)	103.8	0.9	0.85%
LIBOR	0.466	0.000	0.00%
US Dollar Index (DXY)	79.54	-0.018	-0.02%
10 Year Govt Bond Yield	1.99%	0.01%
RPX Composite Real Estate Index	172.3	0.3

Markets are higher this morning on a better than expected German investor confidence data and a decline in Spanish bond yields. Bonds and MBS are lower. After falling out ifs narrow 140 -144 trading range, June 10 year bond futures are back in it again, driving mortgage rates back to February levels.

Johnny John reported better than expected numbers, as did Goldman, who also bumped up their dividend. Ex-highflyer First Solar is cutting 30% of its workforce.

Housing starts missed estimates by a wide margin, falling sharply from 694k in February to 654k in March. Remember, 1.5 million is more or less "normalcy," and having starts heading downwards for two months in a row this late in an expansion is not a good sign. Optimists will point to the unexpected increase in permits. Nevertheless, forward-looking economic indicators are starting to turn down, indicating the economy is slowing. Remember, the Bush tax cuts expire Jan 1, and that will provide a large fiscal drag. Business (and the markets) are going to start handicapping the possibility of an early 2013 recession, which should mean a slowing economy this summer and into the fall.

Industrial Production was flat in March, vs a .3% increase. Capacity utilization ticked down .1% to 78.6%, still below the historic 80% average. This shows there is still a lot of slack in the economy, which bodes well for the inflation numbers.

The rental market continues to outshine the purchase market, according to Zillow. The rent index increased 2% YOY in February, while the Zillow home value index dropped 4.5%. The huge backlog of foreclosures remains a wet blanket on the home value index, while ex-homeowners are driving rental prices higher. Localities like Chicago and Philadelphia showed huge divergences.

As if Spain didn't have enough headaches, Argentina is expropriating Repsol's 51% stake in YPF. Latin America has been one of the bright spots for Spanish banks, so if money starts fleeing the area, it will put further pressure on the Spanish economy. Granted, Brazil and commodity prices are going to be the main factor, but forced nationalization tends to make emerging markets investors nervous.

Are you trading gasoline futures? If so, the Obama administration is taking aim at you. Worried that high prices at the pump may endanger his re-election campaign, the administration has announced a series of measures aimed at reducing speculation in the gasoline futures market. The most significant measure would allow the CFTC to increase margin requirements (never mind that the exchanges can do this already..)

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1369.5	4.5	0.33%
Eurostoxx Index	2298.9	7.3	0.32%
Oil (WTI)	102.7	-0.1	-0.12%
LIBOR	0.466	-0.001	-0.11%
US Dollar Index (DXY)	80.09	0.206	0.26%
10 Year Govt Bond Yield	1.98%	-0.01%
RPX Composite Real Estate Index	172	0.8

Equity futures are rising this morning on better than expected retail sales data. Citi missed earnings estimates and traded down a couple of bucks early, but has recovered as people digest the internals of the earnings report.

Empire Manufacturing came in lower than expected on weakness in China and Europe. While still positive, the pace of expansion has slowed. The forward-looking indicators continue to weaken, which is something to keep an eye on.

Spanish credit default swaps continue to increase in price, and have passed their high from last November during the Greek crisis. 10 year CDS for Spain are trading at 476 basis points. Spain's GDP is the 12th largest in the world, so any default there will not be as tame as Greece. Their banks are much more household names - Banco Santander has the same market cap as Goldman. Paul Krugman is nonplussed.

11 state AGs sent a letter to Acting FHFA Ed DeMarco urging him to allow principal reductions on Fannie and Fred loans.

Earnings season gets in full swing this week.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1377.7	-8.2	-0.59%
Eurostoxx Index	2316.8	-35.4	-1.51%
Oil (WTI)	103.1	-0.5	-0.49%
LIBOR	0.466	-0.001	-0.11%
US Dollar Index (DXY)	79.53	0.249	0.31%
10 Year Govt Bond Yield	2.01%	-0.04%
RPX Composite Real Estate Index	171.3	0.3

Markets are weaker this morning after a disappointing GDP report out of China. The Consumer Price Index showed prices increasing 2.7%, which was more or less in line with expectations. Stocks and bonds didn't react much to the data. Google, JP Morgan, and Wells Fargo all reported better than expected earnings and are flat to slightly down pre-market.

JP Morgan reported better than expected earnings this morning. The highlight has been the mortgage origination which contributed $1.6 billion in revenue, an increase of 80% from Q111. Servicing revenue dropped 5% and the entire activity broke even. A Bloomberg story on Morgan's earnings cites a Friedman Billings analyst who thinks Q2 will be the best quarter for the mortgage business in a long time.

Christine Lagarde (head of the IMF) urged the US government to pursue a policy of principal reduction in mortgage debt. As I have discussed in prior posts, that probably isn't going to happen, at least with respect to conforming loans. Still, I don't rule out some sort of mortgage relief given that this is an election year.

Google is trying a new wrinkle in corporate governance. As part of their earnings release last night, they announced a stock split. Sort of. Google has two classes of shares - the supervoting shares held by the founders, and the reduced vote shares that currently trade. They are introducing a third share which will be nonvoting. Google shareholders will get as a dividend 1 share of nonvoting stock. The new stock will be used for employee equity-based compensation and other corporate uses, which means Google can issue stock without diluting Sergey and Larry's control over the company.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1365.9	1.9	0.14%
Eurostoxx Index	2318.7	-22.7	-0.97%
Oil (WTI)	102.8	0.1	0.06%
LIBOR	0.467	-0.002	-0.43%
US Dollar Index (DXY)	79.57	-0.230	-0.29%
10 Year Govt Bond Yield	2.02%	-0.02%
RPX Composite Real Estate Index	171	0.2

Equity markets are generally flat after early strength was given back on disappointing economic data. Bonds have reversed earlier declines and MBS are up as well.

The PPI showed that wholesale price inflation remains broadly in check, although the core numbers (ex-food and energy) were slightly higher than expected, running at 2.9%. Initial Jobless Claims were much higher than expected, 380k vs 355k. The trade deficit was lower than expected due to a drop in imports. Futures sold off on the numbers. Some of the other indicators (NAPM, ISM) have been coming in weak as well, signalling the economy might be headed for a slowdown.

The market may be picking up on the sheer amount of fiscal tightening that is scheduled to begin on Jan 1, as the Bush tax cuts expire and the budget cuts from the debt ceiling debates kick in. Of course, no one really wants this to happen, but it is an election year, and they will take effect if nothing happens to stop it. So the market is probably going to start handicapping this a little.

Bill Gross continues to cut Treasuries and buy MBS. This is basically a bet that the Fed will continue Operation Twist in a different way after it expires in June - by trying to influence mortgage rates directly by buying current coupon MBS and repoing short.

RealtyTrac released its US Foreclosure Market Report for Q1, noting that foreclosure activity was the lowest since Q407. Activity dropped in the non-judicial states and increased in the judicial ones. Foreclosure starts have been ticking up, and everyone expects a wave of foreclosures to hit the market as the shadow inventory gets liquidated.

Janet Yellen said that the Fed may have to maintain ultra-low interest rates even beyond 2014. Yellen is one of the more dovish members of the FOMC, and her statements stand in contrast to other members who are noting pricing pressures.

In earnings, Google and Nationstar report after the close. JP Morgan and Wells Fargo report Friday before the open.

Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1367.0	9.9	0.73%
Eurostoxx Index	2353.9	32.4	1.39%
Oil (WTI)	101.25	0.2	0.23%
LIBOR	0.4687	-0.001	-0.11%
US Dollar Index (DXY)	79.641	-0.219	-0.27%
10 Year Govt Bond Yield	2.03%	0.04%
RPX Composite Real Estate Index	170.77	0.2

Equity markets are firmer as the sell-off takes a breather and investors digest Alcoa's numbers. Spanish yields are lower as well. Italy sold 11 billion euros of T-bills at 2.84% vs 1.405% a month ago. Bonds are a touch weaker and MBS are flat. Mortgage applications were down 2.4% last week.

As Spain becomes the latest worry, the natural question becomes "Who holds the old maid?" Not the Japanese, who cut their exposures to all but the highest Euro credit last year.

The CFPB has put out proposed rules for servicers aimed at improving transparency and accountability. Certainly the tone of the piece (putting "service" back into servicing and "preventing runarounds") suggests the government is going to regulate servicers more closely, and partially explains why you can't give away MSRs these days.

Everyone is trying to read the tea leaves on Acting FHFA Director Ed DeMarco's comments regarding principal forgiveness for conforming loans. Some saw a change in tone. Others did not. The problem with principal forgiveness is that someone has to eat the losses. There certainly does not appear to be the political appetite to pass losses on underwater homes to taxpayers, and members of Congress realize their state pension funds (not to mention their own!) would get slammed if the losses were passed to them. Neither option is particularly appetizing to politicians on either side of the aisle. So, Ed DeMarco remains a very convenient guy in Washington, allowing the Left to fulminate over his obstinate refusal to budge on principal reductions, safe in the knowledge that they won't have to face the consequences of what they advocate.

Are lenders moving back out on the risk curve? Seems like it, at least as far as credit cards and auto loans are concerned. Aside from a few hard money lenders, we aren't seeing this in the mortgage business yet, as it remains impossible to securitize this sort of paper.