Morning Report - Small Business Optimism still has a ways to go

Vital Statistics:

	Last	Change	Percent
S&P Futures	1931.2	-1.4	-0.07%
Eurostoxx Index	3039.6	-7.9	-0.26%
Oil (WTI)	97.28	-0.8	-0.82%
LIBOR	0.235	0.002	0.86%
US Dollar Index (DXY)	81.59	0.120	0.15%
10 Year Govt Bond Yield	2.42%	-0.01%
Current Coupon Ginnie Mae TBA	106.4	0.0
Current Coupon Fannie Mae TBA	105.5	0.3
BankRate 30 Year Fixed Rate Mortgage	4.26

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

Job openings increased slightly to 4.7 million in June, up about 100k from the May number. The hires rate was 3.5%, and the separations rate was 3.3%. Quits were 1.8% and layoffs were 1.2%. The best industries for hiring: manufacturing, leisure and hospitality, and professional / business services. Construction was actually down a little over the year. FWIW, the home builders have all been lamenting the lack of skilled labor. 

The NFIB Small Business Optimism Index slipped in July from 96.4 to 95.7. We are still well below any semblance of "normalcy" in the small business arena. Small business added .01 workers per firm in July, the 10th consecutive positive month. That said, capital expenditures remain low, and sales are deteriorating. It is hard to reconcile a relatively glum NFIB survey with the idea that the S&P 500 is just off record highs. Does small business need to catch up with the big multinationals, or is the stock market being levitated by the Fed and thus vulnerable once the Fed takes the punch bowl away? IMO the answer is "yes."

Of course the Fed may not be in any rush to raise interest rates. Federal Reserve Vice Chairman Stanley Fischer was warning about slow growth in the future. Bottom line: until you start to see wage inflation, you shouldn't worry too much about the Fed.

FHA head Carol Galante is stepping down as FHA Commissioner at the end of the year and returning to academia. Biniam Gebre, General Deputy Assistant Secretary for Housing will take over the role as Acting Commissioner. 

Bill Gross has been selling Treasuries and MBS in the PIMCO Total Return Fund. He rotated into non-US developed debt and held emerging market debt steady. Good trade as Euro sovereigns have been on a tear lately. 

As if the first time homebuyer didn't have enough issues with student loan debt and tight credit, they face another challenge: limited inventory at the low end of the price range. The number of US homes for sale in the bottom third of the market - below $198,000 - fell 17% in June compared to a year earlier, according to Redfin. The supply rose 3% in the middle market and 15% in the top third. Blame professional investors who are snapping up low-priced properties to turn into rentals. Prices are rising too, with the low end jumping 15%, the middle increasing 13% and the top end increasing 9%. 

Morning Report - Is the labor market at a tipping point?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1933.7	10.0	0.52%
Eurostoxx Index	3038.1	31.3	1.04%
Oil (WTI)	97.61	0.0	-0.04%
LIBOR	0.235	0.002	0.86%
US Dollar Index (DXY)	81.43	0.038	0.05%
10 Year Govt Bond Yield	2.42%	0.00%
Current Coupon Ginnie Mae TBA	106.4	0.0
Current Coupon Fannie Mae TBA	105.4	0.0
BankRate 30 Year Fixed Rate Mortgage	4.25

Markets are higher this morning on easing international tensions. Bonds and MBS are flat.

Not a lot of economic data this week - the highlights will be industrial production and capacity utilization on Friday and retail sales on Wednesday. Earnings season is winding down, with mainly the retailers left.

Goldman Sachs looked at student loan debt and the Millennial generation to determine how much student loan debt inhibits home ownership. It looks like $50,000 worth of debt is the tipping point - young adults with more than that in debt have a homeownership rate that is estimated to be 8 percentage points lower than graduates with less than $50,000 in debt. The conclusion of the study is this: The benefits of a college degree outweigh the costs, provided the degree helps boost income, and the student loan debt is not too large.

Bloomberg has a good backgrounder on the changing dynamics of the labor market. The balance of power is shifting more towards employees from employers. The missing piece of the puzzle has been wage inflation, and we may finally be at that point. Separately, eHarmony, the dating site, is getting into the career business.

Confounded by the rally in bonds this year. You are not alone.

Ellie Mae is buying AllRegs for $30 million in cash.

Stonegate reported second quarter numbers last week. Originations grew 37% versus Q1 and were up 59% year-over-year. These are not "apples-to-apples" numbers are Stongate bought Medallian and Nationstar's wholesale business. Gain on sale margins increased 23 basis points. 

Morning Report - Strange revision to Q1 unit labor costs

Vital Statistics:

	Last	Change	Percent
S&P Futures	1909.9	4.7	0.25%
Eurostoxx Index	3015.6	2.8	0.09%
Oil (WTI)	97.53	0.2	0.20%
LIBOR	0.234	-0.003	-1.22%
US Dollar Index (DXY)	81.42	-0.100	-0.12%
10 Year Govt Bond Yield	2.39%	-0.02%
Current Coupon Ginnie Mae TBA	106.5	0.0
Current Coupon Fannie Mae TBA	105.9	0.1
BankRate 30 Year Fixed Rate Mortgage	4.24

Markets are higher this morning on no real news. Bonds and MBS are higher on international tensions. The 10 year bond yield is sporting a 2.3 handle this am. 

Nonfarm Productivity rebounded to +2.5% in the second quarter. The first quarter was revised downward to - 4.5%. Unit Labor Costs rose .6%, while the prior quarter was revised upward from +5.7% to + 11.8%. BLS attributes the increase in costs to the downward revision in productivity and and a big upward revision in compensation from .4% to 4.8%. Not sure why BLS's initial numbers were so far off.

Gutsy call on the bond market: Komal Sri-Kumar is predicting the 10 year will be trading with a 1 handle in six months. He thinks international tensions will be a drag on consumer confidence and he even suggests the Fed could re-start QE in 2015. 

FWIW, economists are predicting 2.9% GDP growth in Q3 and 2.6% growth in Q4. 

Wholesale sales and Wholesale inventories both came in lower than expected. 

Morning Report - Why the economic recovery has been so tepid

Vital Statistics:

	Last	Change	Percent
S&P Futures	1922.8	8.0	0.42%
Eurostoxx Index	3043.5	-6.9	-0.23%
Oil (WTI)	97.02	0.1	0.10%
LIBOR	0.237	0.000	0.00%
US Dollar Index (DXY)	81.51	0.063	0.08%
10 Year Govt Bond Yield	2.47%	-0.01%
Current Coupon Ginnie Mae TBA	106.3	0.0
Current Coupon Fannie Mae TBA	105.6	0.0
BankRate 30 Year Fixed Rate Mortgage	4.27

Markets are higher on earnings and a low initial jobless claims number. Bonds and MBS are down small.

Today is the first Thursday of the month, which means same store sales from the retailers. So far it looks like they are coming in a bit better than expected. 

Initial Jobless Claims came in at 289k, the lowest level in 8 years. Bloomberg's weekly consumer comfort index fell to 36.2. 

Mortgage delinquencies fell to 6.04% in the second quarter, according to the MBA. Foreclosures fell to 2.49%. 

Fannie Mae earned $3.7 billion in Q2, of which all went to Treasury. They modded 32,000 loans in the quarter as well. Delinquencies dropped to 2.05%. 

The next global economic headache is the bursting of China's real estate bubble and the potential for a protracted slowdown. There is a "buyer's strike" going on and so far developers are not lowering prices yet. So inventory builds. Inventory is 23 months worth of sales in the top 20 cities. To put that number into perspective, 6 months is considered normal, at least in the US. This is generally how busts begin. If it becomes "the one" then trophy properties in the US, particularly the West Coast will become vulnerable. 

The WSJ has a good piece on the weakness of housing, particularly housing construction. As we know, housing starts have been mired below 1 million units for what seems like forever. Normalcy is around 1.5 million units historically. When you look at residential construction's contribution to GDP, it is been about 2.5% - 3%, much lower than its pre-bubble level of 4% to 5%. Not only that, but residential construction usually leads an economy out of recession. I had hoped this would be the year starts got back to normalcy, but the homebuilders have seemed content to increase the top line through price hikes, not volume increases. 

Morning Report - Bonds hit yearly lows - are they telling us something about the economy?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1905.9	-7.1	-0.37%
Eurostoxx Index	3035.4	-36.8	-1.20%
Oil (WTI)	97.57	0.2	0.20%
LIBOR	0.237	-0.001	-0.42%
US Dollar Index (DXY)	81.62	0.294	0.36%
10 Year Govt Bond Yield	2.44%	-0.04%
Current Coupon Ginnie Mae TBA	106.3	0.1
Current Coupon Fannie Mae TBA	105.7	0.1
BankRate 30 Year Fixed Rate Mortgage	4.25

Stocks are lower after some bearish economic news out of Europe. Bonds and MBS are rallying. The 10 year bond is right at its May highs. 

Mortgage Applications increased 1.6% last week, according to the MBA.  Purchases fell 1.3% while refis increased 3.8%. It looks like overall mortgage rates increased 3 basis points or so over the week, while the 10 year was flat. Refis accounted for 55% of all loans, the highest percentage since May.

Wells is getting even more aggressive in the jumbo space. Minimum FICOs for a fixed rate jumbo have been lowered to 700 from 720. They also now do cash-out refis on jumbos and are buying jumbos on second homes on a correspondent basis. This is why the jumbo space is so competitive - banks can subsidize the jumbo mortgage and use that as an opening to pitch other bank services to the customer, particularly asset management. 

Walgreen's has decided to not pursue the tax inversion trade after intense political pressure from Washington. They will still purchase the remaining part of Alliance Boots, but will keep their headquarters in Chicago. This change will cost the company about a billion in excess taxes. If I was an arb, I would be nervously looking at my Abbvie / Shire position, and my Covidien / Medtronic positions, which are blowing out this morning.

Corporate inversions are going to be a political football going into midterms. First of all, nobody likes them. Companies don't really want to do them, but they have to honor their fiduciary responsibilities. Politicians on both sides of the aisle despise them. The tax code is going to be changed to prevent them in the future. However, Republicans don't feel much need to negotiate now, as they are pretty much guaranteed to keep the House and may in fact take the Senate. So their negotiating power can only get bigger. The Administration is pushing the "fix the inversion part of the tax code first, and then let's do full tax reform later" argument. Of course Obama knows that he is going to have to trade closing loopholes for lower rates, so he wants to sneak in a freebie before negotiations start. That is a nonstarter for Republicans. Which gives Obama an opportunity to demagogue the issue and paint Republicans as defenders of corporate tax dodgers as the consolation prize. 

Arbs are already reeling as Rupert Murdoch withdrew his offer for Time Warner last night. Fox also announced a big buy back, so arbs are getting killed on both sides of the trade. Tough, tough day to be in the risk arbitrage business...

Watch the data. The latest ISM numbers were quite strong, and Dallas Fed President Richard Fisher is predicting that rates will have to increase sooner than it projected in the June dot plot if this economic strength continues. Remember the Fed's "dot graph" - the dots for a tightening will move up. Fisher also said that the debate among the central bankers is "coming in my direction." Bottom line - for the last 6 years you have been able to dismiss the hawks. The ground is shifting.

Counter-argument: The bond market is warning about a slowdown. At least one market strategist thinks the 10 year is heading to 2.2%. True, when the stock market and the bond market disagree, you usually want to side with the bond market. However, you have to keep in mind what is happening overseas and the concept of relative value. The German 10 year Bund yield has hit fresh lows - 1.104%. When rates are falling overseas, they will inevitably drag US Treasuries with them, simply due to relative value. FWIW, I don't think the US bond market is signalling weakness in the US economy. Nor does Goldman.

Morning Report - Good ISM services number

Vital Statistics:

	Last	Change	Percent
S&P Futures	1924.7	-7.4	-0.38%
Eurostoxx Index	3079.3	8.8	0.29%
Oil (WTI)	98.13	-0.2	-0.16%
LIBOR	0.238	-0.001	-0.42%
US Dollar Index (DXY)	81.49	0.157	0.19%
10 Year Govt Bond Yield	2.50%	0.02%
Current Coupon Ginnie Mae TBA	106.3	0.1
Current Coupon Fannie Mae TBA	105.5	-0.1
BankRate 30 Year Fixed Rate Mortgage	4.16

Markets are lower on no real news. Bonds and MBS are down small.

The ISM Non-Manufacturing Index increased to 58.7 in July, a strong number. In fact, this is the highest reading since inception (with the caveat the index started in Jan 2008). Employment ticked up again, and new orders are accelerating. Prices are not increasing. 

Factory orders increased 1.1% as well, but the IBD / TIPP economic optimism index declined.

The Fed Senior Loan Officer Survey is out, and it discusses non-QM lending. The majority of banks reported that the rule had no effect on prime conforming mortgages (unsurprising since if it is conforming, it is QM compliant), but about half the respondents indicated QM reduced approval rates on applications for prime jumbo loans and non-traditional mortgages. That said, it is clear from the charts below that credit is easing, and demand is picking up.

Yet another unintended consequence of financial regulation - closing costs for mortgages have increased 6% YOY and in some places are up 20% +.

Home prices are up 1% month-over-month, and are within 13% of their April 2006 peak, according to CoreLogic.  

The out-of-office email reply, deconstructed.

Obama to business: Stop complaining!

Morning Report - Deluge of data

Vital Statistics:

	Last	Change	Percent
S&P Futures	1922.3	-2.5	-0.13%
Eurostoxx Index	3090.5	-25.1	-0.80%
Oil (WTI)	97.71	-0.5	-0.47%
LIBOR	0.24	0.003	1.05%
US Dollar Index (DXY)	81.51	0.053	0.07%
10 Year Govt Bond Yield	2.54%	-0.02%
Current Coupon Ginnie Mae TBA	106	0.1
Current Coupon Fannie Mae TBA	105.3	0.2
BankRate 30 Year Fixed Rate Mortgage	4.2

Stocks are lower this morning after yesterday's bloodbath. Bonds and MBS are up.

The jobs report came in weaker than expected. Payrolls increased by 209,000, and the two-month payroll revision was +15,000. The unemployment rate ticked up to 6.2% and the labor force participation rate rose to 62.9% from 62.8%. However hourly earnings were flat and average weekly hours were flat as well. The lack of wage pressure cheered the bond market, which is clawing back yesterday's losses. FWIW, the employment cost index showed a .8% increase in wages yesterday (benefits are calculated separately), so the lack of wage growth as reported by BLS is surprising. 

By the way, for the bond market to start worrying about wage inflation, you will need to see increases in average wages of about 4%, not the 2% inflation target. Why? Productivitiy, which is running about 2% (notwithstanding the lousy print in Q1). Wage inflation that is offset by productivity increases is not inflationary. So, when you think about the US needing 4% wage growth just to get to the Fed's inflation target, you can see we have a long way to go.

Still, we aren't going to see a robust economy until the labor force participation rate gets back to normal levels. As you can see from the chart below, about half of the increase in the labor force participation rate that was attributable to women entering the workforce starting in the 1960s has been given back. That low number represents excess capacity that isn't being captured with the headline unemployment number. Which is why wage growth is so hard to come by (the other reason being technology). 

Personal Spending rose .4% in June, and Personal Income rose .4% as well. The core personal consumption expenditure index rose 1.5% year-over-year, still below the 2% target the Fed would like to see.

The ISM numbers came in stronger than expected, showing that manufacturing continues to do well, A 57.1 number would correspond to GDP growth of 4.6%. Of course manufacturing doesn't dominate the economy (and employ people) like it used to, but it is still a good, strong number. 

Finally, construction spending slipped 1.8% in June after increasing an upwardly-revised .8% in May. Resi construction fell .2% month-over-month but is up 7.1% year-over-year.