Morning Report - Existing home sales fall

Vital Statistics:

	Last	Change	Percent
S&P Futures	2102.7	-4.4	-0.21%
Eurostoxx Index	3504.3	13.8	0.40%
Oil (WTI)	48.92	-1.9	-3.72%
LIBOR	0.263	0.001	0.42%
US Dollar Index (DXY)	94.72	0.465	0.49%
10 Year Govt Bond Yield	2.09%	-0.02%
Current Coupon Ginnie Mae TBA	102	0.0
Current Coupon Fannie Mae TBA	101.3	0.2
BankRate 30 Year Fixed Rate Mortgage	3.97

Markets are lower this morning in spite of a loan extension for Greece. Bonds and MBS are up small.

Existing home sales fell to a 4.82 million unit pace in January from an upward-revised 5.07 million pace in December, according to the National Association of Realtors. Inventory is still tight at 4.7 months (6.5 is more or less a balanced market), but it is up from 4.4 months in December. The median home price is $199,600, an increase of 6.2% year over year. All cash transactions were 27%, down from 33% a year ago, and distressed sales were 11%, down from 15% a year ago. 

Janet Yellen will make her semiannual trek to the Hill to discuss monetary policy in front of Congress. The prepared remarks will undoubtedly be closely parsed, and the sense on the Street is that Yellen wants to lower expectations somewhat for a June rate hike. Aside from that, HH is generally a waste of time for market watchers. These are generally for the benefit of politicians who like to use it as a platform to pontificate on issues important to them.  The left will try to get her to agree with their views on inequality and the minimum wage, while the right will probably go after the long-term risks of ZIRP. It will be interesting to see if someone asks about the "audit the Fed" movement. She testifies in front of the Senate tomorrow at 10:00 am EST, and in front of the House on Wed.

A deal in the servicing field this morning: New Residential is buying subprime servicer Home Loan Servicing Solutions for $1.3 billion. HLSS has been examining strategic alternatives since last November, and the stock is up smartly. The servicing sector as a whole has gotten slammed from the Ocwen mess and the drop in interest rates. 

Speaking of servicing, Ocwen is trying to sell a 9.8 billion servicing portfolio to Nationstar.

If the US economy is improving (and all evidence says it is), why are banks still piling into Treasuries?  There are a couple of reasons. First, is Basel III. They were required by the regulators to increase their holdings of Treasuries. Second, if you look at the Bloomberg total return index on US Treasuries over the past year, they returned 8.8% in 2014. That includes periodic interest and capital gains. Compare that to the typical rate on a business development loan, or a line of credit paying LIBOR + 200 or something. Treasuries are working. And given the yields in European bonds, and the strength of the dollar, there is an underlying foreign demand for Treasuries. Yes, at some point Treasuries will become an awful bet, but that won't happen until inflation kicks in and that isn't happening at the moment. 

Chart: Bloomberg 10 year Treasury total return index:

Morning Report - Wal Mart wage hike bodes well for wages in general

Vital Statistics:

	Last	Change	Percent
S&P Futures	2090.8	-4.5	-0.21%
Eurostoxx Index	3469.7	-18.4	-0.53%
Oil (WTI)	51.07	-0.1	-0.18%
LIBOR	0.261	0.004	1.52%
US Dollar Index (DXY)	94.67	0.270	0.29%
10 Year Govt Bond Yield	2.07%	-0.04%
Current Coupon Ginnie Mae TBA	102	-0.2
Current Coupon Fannie Mae TBA	101.4	0.2
BankRate 30 Year Fixed Rate Mortgage	3.88

Markets are lower this morning as the EU / Greek kabuki dance continues. Bonds and MBS are up. 

The Markit US Manufacturing PMI Index rose to 54.3 in Feb from 53.9 in January. Good reading, given the fact that the Northeast got slammed with snow all month. 

Greece is set to run out of cash as early as next month, so the talks with the EU are increasingly important. Remember, this is all a kabuki dance. Greek voters want to stay in the Euro, and German voters want Greece to stay in the Euro. They will get a deal done, although bonds will be buffeted by the day-to-day headlines.

Megan McArdle on why Wal-Mart raised wages. It was not due to labor activists - it was a business decision to try and minimize turnover and motivate employees. This is good news for wage growth in general, as companies may be forced to raise wages to compete. The great stagnation might be ending.

Morning Report - WMT is *not* rolling back wages

Vital Statistics:

	Last	Change	Percent
S&P Futures	2094.8	-0.6	-0.03%
Eurostoxx Index	3472.6	6.8	0.20%
Oil (WTI)	49.96	-2.2	-4.18%
LIBOR	0.257	0.001	0.20%
US Dollar Index (DXY)	94.3	0.099	0.11%
10 Year Govt Bond Yield	2.07%	-0.01%
Current Coupon Ginnie Mae TBA	102.2	0.0
Current Coupon Fannie Mae TBA	101.4	0.0
BankRate 30 Year Fixed Rate Mortgage	3.89

Markets are flattish after Germany rejected a loan extension request from Greece. Bonds and MBS are flattish as well.

Initial Jobless Claims fell to 283k last week, which is a good number given the drop in oil prices. Eventually layoffs will start in the energy patch. 

The Bloomberg Consumer Comfort Index rose to 44.6 last week, while the Philly Fed fell and the Index of Leading Economic Indicators ticked down from .5% to .2%. 

WalMart reported Q4 earnings that beat analyst expectations. The biggest news out of it, is that WMT is increasing starting wages to $9.00 / hour in April and by Feb next year, all current associates will be making at least $10 an hour, If this is due to market pressures, then that is great news for the economy. If it was due to political pressure (though no one is taking credit so far) then it tells you less. The raise will be part of a larger program to streamline scheduling and other operational issues, and should cost about 20 cents a share over the next year.

The minutes of the Jan FOMC meeting were considered more dovish than expected. Bonds rallied hard on the announcement, as it appears some members are beginning to get cold feet about raising rates this June. Janet Yellen and Ben Bernanke are students of the Great Depression and are probably going to err on the side of waiting too long versus tightening too early. 

Freddie Mac took down its numbers for Q1 GDP to 2.5% from 3%, raised 2015 origination forecasts to $1.3 trillion from $1.2 trillion, cut the forecast 30 year fixed rate mortgage rate to 3.9% from 4.2% and is predicting 3.9% home price appreciation. Forecasts for home sales (5.6 million) and housing starts (1.18 million) are unchanged. Affordability is still a tale of two Americas, with the NYC / DC / South Florida / West Coast being unaffordable, and the rest of the country being affordable. 

Morning Report - On the waterfront

Vital Statistics:

	Last	Change	Percent
S&P Futures	2093.6	-2.3	-0.11%
Eurostoxx Index	3459.2	20.8	0.60%
Oil (WTI)	52.39	-1.1	-2.13%
LIBOR	0.256	-0.001	-0.35%
US Dollar Index (DXY)	94.28	0.223	0.24%
10 Year Govt Bond Yield	2.12%	-0.02%
Current Coupon Ginnie Mae TBA	101.8	0.1
Current Coupon Fannie Mae TBA	101.1	0.0
BankRate 30 Year Fixed Rate Mortgage	3.83

Markets are lower as Greece seeks to limit some of the reforms being demanded from other Euro area members as a condition to extending the country's 240 billion euro rescue package past February. Bonds and MBS are up small.

Mortgage Applications fell 13.2% last week as purchases fell 7.1% and refis fell 16%. It looks like mortgage rates didn't move tremendously, at least according to the Bankrate 30 year fixed rate mortgage numbers. Mortgage rates had lagged the move downward in the 10 year, so it is unsurprising they are lagged the move back up. It appears they are beginning to move up with bond yields this week, however.

Housing starts fell 2% in January to an annualized pace of 1.065 million units. Building permits fell .7% to an annualized pace of 1.053 million. 

Inflation remains muted at the wholesale level, with the Producer Price Index falling .8% month-over-month. Stripping out food and energy, it fell .1%, month over month, and increased 1.6% year over year. 

Industrial Production rose .2% in January, and capacity utilization fell from 79.7% to 79.4%. 

Speaking of inflation, there is a labor dispute between the longshoremen and the ports on the West Coast. We are starting to see some stirrings from labor unions, which could mean we are finally seeing the start of wage inflation. That said, the two labor unions involved are in industries which are in the middle of dramatic change. Ports are becoming more and more automated, and quite frankly do not need as many workers as they used to. The longshoreman are simply trying to delay the inevitable and are fighting over work rules that require two people supervise an automated crane. The steelworkers decided to pick a fight just as oil prices are falling and a labor surplus in the oil patch is being generated. Neither side has much in the way of negotiating leverage. That said, it will be interesting to see if they win. 

Another data point for the energy patch: Buffett sold all of his Exxon Mobil and ConocoPhillips. 

The minutes from the last Fed meeting should be released around 2:00 pm EST, so there is a chance for some bond market volatility around that time. 

While it seems like Democrats and Republicans are in a death match struggle over the direction of this country and the days of genteel civility are in the past, here is some perspective. Turkey's President Recep Tayyip Erdogan has filed a lawsuit against the head of Turkey’s central bank, Erdem Basci, charging him with mismanaging the country's interest rate policy and not lowering rates as demanded by the government. He faces two years in jail.

Morning Report - The week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	2090.6	-2.9	-0.14%
Eurostoxx Index	3427.2	-6.1	-0.18%
Oil (WTI)	52.24	-0.5	-1.02%
LIBOR	0.257	-0.001	-0.39%
US Dollar Index (DXY)	94	-0.197	-0.21%
10 Year Govt Bond Yield	2.04%	-0.01%
Current Coupon Ginnie Mae TBA	102.7	0.2
Current Coupon Fannie Mae TBA	101.7	0.0
BankRate 30 Year Fixed Rate Mortgage	3.83

Stocks are lower this morning as Greek talks break down. Bonds and MBS are up small.

The Empire Manufacturing Index fell in Feb and came in slightly light. There is almost certainly some weather-related noise in that report. 

The NAHB Housing Market Index fell to 55 in February from 57 in January. The index increased in the Northeast and fell in the Midwest. The South and West were more or less unchanged. 

We have a lot of data this week with housing starts tomorrow, industrial production / capacity utilization, and finally the FOMC minutes. The minutes should be the big event for the week. The focus will be on handicapping a June rate hike.

Speaking of rate hikes, wage inflation continues to be the missing piece of the puzzle for the economy. That said, Big Labor is waking up, with refinery strikes and a longshoreman's strike on the West Coast. Strike activity is still well below where it was in the 70s and 80s, but it could be the start of wage inflation. 

One in three FHA borrowers could save money by refinancing today. Of course many will find the savings to small to make it worthwhile, but the drop in annual MIP is a big deal. Certainly MBS investors think so as Ginnie Mae TBAs continue to underperform Fannie Mae TBAs.

Finally, I appeared on Capital Markets Today and did a deep dive into the economy and housing. You can listen to the podcast here.

Morning Report - Bill Ackman's Fannie Mae trade

Vital Statistics:

	Last	Change	Percent
S&P Futures	2088.2	4.1	0.20%
Eurostoxx Index	3458.4	40.8	1.19%
Oil (WTI)	52.73	1.5	2.97%
LIBOR	0.258	0.000	0.00%
US Dollar Index (DXY)	94.19	0.091	0.10%
10 Year Govt Bond Yield	2.01%	0.02%
Current Coupon Ginnie Mae TBA	102.8	0.2
Current Coupon Fannie Mae TBA	101.9	0.0
BankRate 30 Year Fixed Rate Mortgage	3.83

Happy Friday the 13th.

Markets are higher this morning on optimism of a deal in Greece and encouraging economic data out of Germany. The Greek 10 year yield is down almost 100 basis points this morning and is approaching 9%. The market has a risk-on feel with stocks up and bonds / MBS down.

Import prices fell 2.8% MOM and 8% YOY. Consumer sentiment fell from 98.1 to 93.7. 

Bloomberg has a good piece on Mel Watt and the issues surrounding principal mods for Fan and Fred loans. The biggest question remains: how can you help underwater homeowners without triggering a wave of strategic defaults? 85% - 90% of people whose mortgage is underwater are current on their payments. The last thing you want to do is encourage them to stop paying in order to get a principal mod. Luckily, time has been doing the heavy lifting here, as the number of homes with negative equity has fallen from 31% in 2012 to just about 17% today. Second, many of those homes are not Fan and Fred loans in the first place, and FHFA is only looking at cutting principal on Fan and Fred loans that it owns. The FHFA Home Price Index, which tracks the prices of homes with a conforming mortgage is within 5% of the peak. 

Bob Shiller warns of a bond bubble. He is probably right, although it could last some time. Interest rate cycles are long: the current cycle began in 1981 or so. Note that in the 1950s, the bond market crashed and the generation that lost their shirts in the stock market crash of 1929 ended up blowing up in levered flattening trades. Persistently low interest rates can wreak all sorts of havoc, especially with pension funds and insurance companies. They have a return bogey they must meet, and the actuarial tables couldn't care less that interest rates are zero. Note that Dr. Cowbell is copacetic with all of this. Note that the 4 most dangerous words in investing are: This Time Is Different.

Bill Ackman sees the common stock of Fannie Mae and Freddie Mac as "the best trade in capital markets" He is betting that Congress will eventually stop taking all of Fannie's profits and allow them to recapitalize in private markets. The thing is, this is a litigation lottery ticket. It is either worth a lot, or worth nothing. If it actually had access to its profits - it doesn't - all p/l goes to Treasury - it would have a P/E of 1. FWIW, the Administration is bound and determined to see that Fannie Mae common shareholders do not see a dime. But administrations could change, and Congress may decide that housing reform is simply too tough and we go back to the old F&F. 

How bad are things in the energy patch? We have another arctic blast hitting the Eastern part of the country and natural gas cannot get out of its own way.  Kind of amazing, really. 

Morning Report - layoffs in the energy patch could be good news for housing

Vital Statistics:

	Last	Change	Percent
S&P Futures	2077.7	12.0	0.58%
Eurostoxx Index	3420.1	46.0	1.36%
Oil (WTI)	50.99	2.2	4.40%
LIBOR	0.258	0.000	-0.10%
US Dollar Index (DXY)	94.25	-0.737	-0.78%
10 Year Govt Bond Yield	1.97%	-0.05%
Current Coupon Ginnie Mae TBA	102.7	0.0
Current Coupon Fannie Mae TBA	101.8	0.2
BankRate 30 Year Fixed Rate Mortgage	3.87

Markets are higher this morning on news of a cease-fire in Ukraine. Bonds and MBS are up.

Greek bonds are rallying with bonds globally. Unusual, as a rally in Greek debt has been triggering the risk-on trade lately. 

Retail Sales disappointed in January. The headline number fell .8%, however falling gas prices were a big contributor (gas is measured in dollars, not gallons). However, the control group, which strips out volatile segments like autos, gas, and building materials only rose .1%, versus Street expectations of .4%. The strength appears to be in autos and food service. Bad weather in the Northeast may have played a role in the number, however. 

Business Inventories rose .1% and the Bloomberg Consumer Comfort Index fell to 44.3. 

Initial Jobless Claims rose to 304k last week. This is going to be a number to watch - falling energy prices are triggering layoffs in the energy patch. Interestingly, part of the reason why labor has been so tight in construction was due to workers moving from the construction sector to the energy sector after the housing bust. As energy prices fall and construction begins to ramp up, this could be good news for the housing sector and especially the homebuilders. The builders have been frustrated by an inability to find skilled labor, and a reversal of the migration from construction to the energy sector should help them. 

Julian Castro appeared before the House Financial Services Committee yesterday. His prepared remarks are here. He was there to defend the cut in mortgage insurance and to rah-rah everything the Administration has done to get housing (and the economy) moving. It was basically a defense of an activist government role in the housing market.