Morning Report Fed unemployment forecast

Vital Statistics:

	Last	Change	Percent
S&P Futures	1669.4	-0.7	-0.04%
Eurostoxx Index	2686.9	5.6	0.21%
Oil (WTI)	105.5	0.6	0.55%
LIBOR	0.268	-0.001	-0.19%
US Dollar Index (DXY)	83.05	0.306	0.37%
10 Year Govt Bond Yield	2.55%	-0.03%
Current Coupon Ginnie Mae TBA	103.9	0.8
Current Coupon Fannie Mae TBA	103.4	0.1
RPX Composite Real Estate Index	203	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.52

Markets are flat this morning after yesterday's big rally and good earnings reports from JP Morgan and Wells Fargo were offset by a miss from UPS. Bonds and MBS are up small.

The Producer Price Index (a measure of inflation at the wholesale level) increased .8% in June, but that was primarily driven by high energy prices. The core came in at .2%. Both readings were ahead of expectations. At 10:00, we will get the preliminary University of Michigan Consumer Confidence Survey for July.

The thing that jumped out at me from the Fed Minutes was the downward revision in unemployment expectations. The Fed lowered the 2013 unemployment forecast from 7.4% to 7.25%, they took down 2014 from 6.85% to 6.65% and took down 2015 from 6.25% to 6%. Given that GDP was not revised materially upward leads me to believe that they believe the labor force participation rate will remain low, which could be a drag on the economy. The other thing is that the market has had the expectation that a hike in the Fed Funds rate is going to be a 2015 event. Given that the Fed has given a threshold number for raising the Fed Funds rate of 6.5%, we could be looking at a late 2014 / early 2015 tightening. 

Morning Report - Job report aftermath

Vital Statistics:

	Last	Change	Percent
S&P Futures	1634.1	6.8	0.42%
Eurostoxx Index	2654.1	58.1	2.24%
Oil (WTI)	102.5	-0.7	-0.72%
LIBOR	0.269	-0.001	-0.48%
US Dollar Index (DXY)	84.31	-0.140	-0.17%
10 Year Govt Bond Yield	2.68%	-0.06%
Current Coupon Ginnie Mae TBA	102.6	0.1
Current Coupon Fannie Mae TBA	102.5	0.4
RPX Composite Real Estate Index	203.5	-0.7
BankRate 30 Year Fixed Rate Mortgage	4.64

Markets are higher this morning as European stock markets rally.  Bonds and MBS are up

Friday's jobs report turned into a bloodbath for bonds. The 10 year yield jumped 24 bps, as did the average 30 year fixed rate mortgage. Nearly 200,000 jobs were added in June, while May and April were revised upward by 70,000. Goldman and JPM moved up their estimate for the start of FEXIT (Fed exit) to the Sep FOMC meeting from the Dec meeting.

Given the unofficial 4 day weekend, trading desks were understaffed on Friday, which means the markets may have overshot. Thin markets tend to be volatile markets.

The jobs report did a number on mortgage backed securities as well. The Fannie Mae 4s had their worst day since the whole sell-off began as they lost nearly 2 points. That explains why the average 30 year fixed rate mortgage increased by 24bps on Fri.

Chart: Fannie Mae August 4s TBA:

We don't have much in the way of economic data this week, with the exception of the FOMC minutes on Wed. That is probably the only thing that would be market-moving this week. The Western MBA Secondary Conference is this week in San Francisco, so a lot of traders will be out there for that. 

Alcoa kicks off 2Q earnings season after the close. 

The MR will be spotty the rest of the week as I will be in SF for the secondary conference

Morning Report - positive jobs report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1620.0	10.9	0.68%
Eurostoxx Index	2625.8	-20.7	-0.78%
Oil (WTI)	101.8	0.5	0.53%
LIBOR	0.27	-0.001	-0.37%
US Dollar Index (DXY)	84.38	1.152	1.38%
10 Year Govt Bond Yield	2.68%	0.18%
Current Coupon Ginnie Mae TBA	103.9	-0.5
Current Coupon Fannie Mae TBA	102.6	-1.2
RPX Composite Real Estate Index	203.5	-0.7
BankRate 30 Year Fixed Rate Mortgage	4.4

Green on the screen after a strong jobs report. Stocks are up, while bonds and MBS are getting hammered

Note: many desks are going to be understaffed today as senior traders take a 4 day weekend. Thin markets tend to be volatile

The jobs report was pretty good, which is why bonds are selling off. Payrolls increased 195k vs the 165k expectations and the prior two months were revised upward by a total of 70k. The unemployment rate stayed the same at 7.6%. The labor force participation rate ticked up .1%. Hourly  earnings increased, while hours were unchanged. 

The employment report probably does not change anything with respect to the Fed's intentions. They plan on tapering back purchases this year, and plan to end QE entirely when the unemployment rate reaches 7%, which they expect to happen in mid 2014. 

With this report, the 10 year bond yield spiked to 2.68%. We should be best-exing into 4s at this point.

The MR will be spotty next week as I will be in SF for the Western Secondary Conference.

Morning Report - watch the PIIGS

Vital Statistics:

	Last	Change	Percent
S&P Futures	1603.2	-4.0	-0.25%
Eurostoxx Index	2558.8	-44.4	-1.71%
Oil (WTI)	101.4	1.8	1.78%
LIBOR	0.274	0.001	0.37%
US Dollar Index (DXY)	83.39	-0.151	-0.18%
10 Year Govt Bond Yield	2.46%	-0.01%
Current Coupon Ginnie Mae TBA	102.5	0.1
Current Coupon Fannie Mae TBA	101.4	0.0
RPX Composite Real Estate Index	204.2	-0.3
BankRate 30 Year Fixed Rate Mortgage	4.35

Early close today for stocks (1:00 pm) and bonds (2:00 pm). 

Markets are down small after political issues in Europe are pushing PIIGS spreads out. The Portuguese 10 year yield is 117 basis points higher to 7.89% and Greece is out 58 bps. Want to know what can stop the bond market selloff in its tracks?  Risk off trade due to European sovereign bond problems

We have a slew of economic data this morning, and Friday's jobs report looms large. Mortgage applications fell 12%. Purchases were down 3%, while refis dropped 16%. The ADP Employment Change report which foreshadows the private part of Friday's jobs report came in better than expected at +188k. Initial Jobless Claims were 343k, better than expected. 

The Fed approved Basel III capital requirements yesterday. The Fed apparently relaxed some of the capital requirements for mortgages, but it appears this would only apply to community banks. I haven't seen anything with regards to MSRs.

Morning Report - Highest home price appreciation since Feb 2006

Vital Statistics:

	Last	Change	Percent
S&P Futures	1606.5	-0.2	-0.01%
Eurostoxx Index	2597.2	-25.4	-0.97%
Oil (WTI)	98.8	0.8	0.83%
LIBOR	0.273	0.000	-0.07%
US Dollar Index (DXY)	83.42	0.368	0.44%
10 Year Govt Bond Yield	2.48%	0.00%
Current Coupon Ginnie Mae TBA	102.8	0.1
Current Coupon Fannie Mae TBA	101.5	-0.1
RPX Composite Real Estate Index	204.5	-0.8
BankRate 30 Year Fixed Rate Mortgage	4.34

Markets are flattish on no real news. Later on today, we will get the ISM New York, Factory Orders, IBD / TIPP Economic Optimism and Vehicle Sales. None of these releases should be market moving. Bonds and MBS are flat.

The Fed votes on the Finalized Basel III rules today. For originators, the most important part of this will be the treatment of mortgage servicing rights. Basel III requires banks to over-reserve for MSRs once they reach a threshold point as a percent of capital. MSRs had been under pressure for quite some time in anticipation of the rule, but now that rates are rising, you are starting to see cheeky bids for newly-originated MSRs. For LO's, the value of MSRs affects the value of SRPs which influences your ratesheet.

The CoreLogic Home Price index rose 12.2% in May, which was the highest price increase since Feb 2006. Excluding distressed sales, prices rose 11.6%. Home prices nationwide remain 20.4% below their peak which was set in April 2006. The Pending Home Price Index indicates that prices are expected to rise even more (13.2%) in June. These sales would have had contract signings before interest rates started backing up, so you can't read too much into how higher rates are affecting home prices, but the pending home price index is encouraging. 

12 month home price appreciation:

• Arizona - 16.9%
• California - 20.2%
• Connecticut - 3.8%
• Florida - 11.1%
• Nevada - 26%
• New York - 9.8%
• North Carolina - 5.6%
• Tennessee - 5.3%
• Texas - 8.5%

In anticipation of Friday's jobs report, here is a cool little widget courtesy of the Federal Reserve Bank of Atlanta. The jobs calculator shows you how many jobs need to be created to get the unemployment rate down to a target rate. You can play with the labor force participation rate, population growth rate, etc. If you  take Ben Bernanke at his word that the Fed will end QE when unemployment hits 7%, you can use the calculator to figure out whether we are on pace or not.

Finally, I did an interview on Capital Markets Today where I discussed the recent rise in rates and its implications for housing and the economy. Check it out.

Latest interview on Capital Markets Today

I discuss the Fed, interest rates, and real estate.

http://www.blogtalkradio.com/capitalmarketstoday/2013/07/01/special-edition-market-turmoil-bond-market-interest-rates

Morning Report - Record outflows for bond funds.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1607.5	8.2	0.51%
Eurostoxx Index	2618.1	15.5	0.60%
Oil (WTI)	97.87	1.3	1.36%
LIBOR	0.273	0.000	0.00%
US Dollar Index (DXY)	83.16	0.022	0.03%
10 Year Govt Bond Yield	2.53%	0.04%
Current Coupon Ginnie Mae TBA	102.3	-0.2
Current Coupon Fannie Mae TBA	101.3	-0.2
RPX Composite Real Estate Index	205.3	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.39

Markets are higher on no real news. The Markit US Purchasing Managers Index came in a little lower than expected. Later this morning we will get construction spending and the ISM manufacturing. ISM could be market moving. Bonds and MBS are down.

This week is relatively data-light, with the 4th of July holiday in the middle. The highlight of the week will be the jobs report on Friday. 

A record $80 billion was pulled out of bond funds and bond ETF funds in the month of June, according to Trim Tabs. This record outflow is also based on people who follow the news closely. Q2 statements are coming out soon and a lot of people who don't follow their investments closely may be in for a shock. Which means we could face another deluge of selling.

Delinquencies are falling again, with serious delinquencies dropping to 2.83% in the month of May, according to Fannie Mae's monthly summary. Serious DQs were 3.57% a year ago. Separately, Citi paid just under $1 billion to settle buyback claims on mortgages originated from 2000 to 2012.

I will be on Capital Markets Today later this afternoon discussing the latest from the bond markets