Morning Report: Exporters are cutting jobs

Vital Statistics:

	Last	Change	Percent
S&P Futures	2020.5	1.5	0.07%
Eurostoxx Index	3256.1	17.3	0.53%
Oil (WTI)	47.35	1.0	2.09%
LIBOR	0.317	-0.003	-1.08%
US Dollar Index (DXY)	94.56	0.184	0.19%
10 Year Govt Bond Yield	2.01%	-0.01%
Current Coupon Ginnie Mae TBA	105
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.8

Markets are flattish this morning as earnings come in. Bonds and MBS are flat.

Consumer sentiment increased in October, according to the University of Michigan.

Job openings fell in August to 5.37 million from 5.67 million the month before. 

Industrial production fell by 0.2% in September, and manufacturing production fell by 0.1%. The strong dollar and overseas weakness is obviously having an impact on exporters. Capacity Utilization fell to 77.5%. Capacity utilization hit a post-crisis high about a hear ago at 79% but has been falling ever since. This is going to concern the Fed, but keep in mind that manufacturing isn't the dominant economic force that it was 20 or 30 years ago. 

Needless to say, when exporters are facing headwinds like a strong dollar and weak overseas economies, they start cutting jobs. The biggest industries affected: transportation equipment, machinery, computer and electronic products, and primary metals. You can see below the trend in export employment versus employment overall. 

Inflation remains tough to find. Social Security recipients will get no cost of living adjustment this year. Yet another excuse for the Fed to stand pat in December. 

The Federal government now backs 50% of all mortgage loans made in the US. To put that number in perspective, in 1981, the Federal government backed about 7% of mortgages in 1981. Banks are reluctant to portfolio as many mortgages as they used to, which makes sense - anyone with grey hair knows how the banks got absolutely annihilated by their mortgage portfolios in the 1970s when rates went up dramatically to combat inflation. 

Morning Report: Earnings season is off to a rough start

Vital Statistics:

	Last	Change	Percent
S&P Futures	1994.0	10.0	0.50%
Eurostoxx Index	3230.5	38.9	1.22%
Oil (WTI)	45.66	-1.0	-2.10%
LIBOR	0.321	0.000	-0.08%
US Dollar Index (DXY)	94.55	0.618	0.66%
10 Year Govt Bond Yield	2.00%	0.03%
Current Coupon Ginnie Mae TBA	105.2
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.8

Stocks are higher this morning after some strong economic data. Bonds and MBS are down.

Initial Jobless Claims fell to 255k last week matching the low set in July. That 255k print is the lowest since 1973. Pretty amazing number given how much the population has increased. 

However that is translating into weak real wage growth. Last week real average weekly earnings increased 2.2%, We definitely have a tight labor market in some areas but wage growth has been hard to come by. 

Inflation at the consumer level fell 0.2% in September on a month-over-month basis and is flat year-over-year. Ex-food and energy, consumer prices rose 0.2% on a MOM basis and are up 1.9% YOY.

The Bloomberg Consumer Comfort Index edged up last week to 45.2 from 44.8. 

The Philly Fed manufacturing index improved to -4.5 in October. 

The Fed Beige Book survey reported that the US continued to experience modest economic expansion during the August - October period. Pretty much all districts reported growth except for Kansas City. Labor markets tightened in most districts and some are reporting shortages of skilled labor and are seeing upward wage pressure. 

Earnings season is off to a rough start as Alcoa, JP Morgan, Goldman, and Netflix all missed and Wal Mart guided lower. Wal Mart was down 10% yesterday after they announced profit will fall as they retool their stores and face higher labor costs. The strong dollar is weighing on manufacturing and the volatility in the markets over the summer is hurting the banks. 

Americans are more sanguine about the real estate market, according to the National Association of Realtors. House prices are up, less and less people are underwater and the economy has improved. 

Corporate balance sheets are deteriorating, as many took advantage of the record low interest rates to lever up and fund buybacks. Interest coverage ratios are at the lowest since 2009, and companies are returning 35% of EBITDA back to shareholders via dividends and buybacks. Interestingly, the markets are beginning to punish companies with big buyback programs. One thing to keep in mind: when companies spend money on buybacks, they are making a statement about the opportunity set they see for expansion. The other place corporate funds are going: mergers. AB Inbev plans to issue $55 billion of debt to fund its purchase of SABMiller. Dell will issue something like $40 billion in debt to purchase EMC. 

Good breakdown of what the Fed will want to see in order to raise rates in December. Punch line:

• No further market volatility
• Two good jobs reports
• Solid consumer spending and further improvement in housing
• No further deterioration in exports
• No protracted government shutdown

Morning Report - A historical examination of the last 3 tightening cycles

Vital Statistics:

	Last	Change	Percent
S&P Futures	1992.4	-1.5	-0.08%
Eurostoxx Index	3206.2	-15.1	-0.47%
Oil (WTI)	46.29	-0.4	-0.79%
LIBOR	0.321	0.000	0.05%
US Dollar Index (DXY)	94.28	-0.481	-0.51%
10 Year Govt Bond Yield	2.01%	-0.04%
Current Coupon Ginnie Mae TBA	105
Current Coupon Fannie Mae TBA	104.4
BankRate 30 Year Fixed Rate Mortgage	3.88

Markets are flattish as earnings season begins in earnest. Bonds and MBS are up.

Last night JP Morgan reported weaker than expected earnings. Mortgage originations are up 41% year-over-year and up 2% on a quarter-on-quarter basis. Charge-offs fell dramaticallyl.

Bank of America reported better than expected earnings. Originations for them were up 17%. 

Mortgage Applications fell 27.6% last week as the "beat the TRID deadline" effect was unwound. Purchases were down 34% and refis were down 22.5%.

Retail Sales rose 0.1% in September, while the control group, which ignores gasoline, autos, and building supplies, fell 0.1%. Where are consumers spending their money? Cars, furniture, apparel, and entertainment. 

The Producer Price Index fell 0.5% in September as the strong dollar depressed commodity prices. Ex- food, energy and trade the index is up 0.5% year-over-year. We have yet to see any sort of meaningful inflation at the producer level. 

Business inventories were flat in August. Commodity prices could be playing a role in this number. 

We know the Fed is going to start hiking rates soon. But does that necessarily mean that mortgage rates are going up? If you look at the historical record, at least over the past 3 tightening cycles. the Fed Funds rate increased, but the long term rate moved up much less, or not at all. If you look at the spread between long term and short term rates, the yield curve flattened dramatically and ended up inverting. The vertical blue lines are the 1994, 1999, and 2004 tightening cycles. The red line is the yield on the 10 year, which will most approximate mortgage rates, while the blue line is the Fed Funds rate. The green line is the difference between the two. The lower the green line, the more flatter the yield curve. 

What are the takeaways from this? 1) Don't necessarily fear a tightening in December - it might not affect mortgage rates at all, and 2) When the Fed starts tightening, that is the time to get people out of ARMS and into a 30 year fixed rate mortgage. LIBOR will increase with the Fed funds rate, resetting ARM rates, but if the 30 year fixed doesn't move (or barely moves), then that switch is a great trade for the borrower. 

Morning Report - Main street is hiring

Vital Statistics:

	Last	Change	Percent
S&P Futures	1998.5	-12.4	-0.62%
Eurostoxx Index	3193.5	-53.9	-1.66%
Oil (WTI)	46.82	-0.3	-0.59%
LIBOR	0.321	0.001	0.31%
US Dollar Index (DXY)	94.79	-0.053	-0.06%
10 Year Govt Bond Yield	2.05%	-0.04%
Current Coupon Ginnie Mae TBA	104.9
Current Coupon Fannie Mae TBA	104.3
BankRate 30 Year Fixed Rate Mortgage	3.9

Markets are lower this morning after weak economic data out of China. Bonds and MBS are up.

The NFIB Small Business Optimism index rose to 96.1 from 95.9 the prior week. Good news on the labor front - small businesses are hiring or trying to hire despite the volatility in the markets. This actually points to a bit of dichotomy we have seen since the financial crisis - a bifurcation of the "S&P 500 economy" and the "main street economy." The S&P 500 economy has a lot of international exposure and this acted as a tailwind for the stock markets as the US economy began recovering. Many people were perplexed that the economy could feel so tepid yet the stock market was hitting new highs. Now the phenomenon seems to be reversing. Companies with big international exposure are feeling the effects of the commodity sell-off and emerging markets pain, while the small manufacturer who serves the local area is thinking about expanding and hiring. 

Low oil prices are here to stay, at least through 2016, according to the IEA. You have a combination of decreasing demand as China slows combined with an additional million barrels of oil a day coming out of Iran. Rig count has already fallen and is at 5 year lows.

There were 36,000 completed foreclosures in August, according to CoreLogic. This is up 0.8% versus July, but down 20% year-over-year. The foreclosure rate of 1.2% is back to January 2008 levels. The non-judicial states have largely worked through their inventory, however the judicial states (especially in the Northeast) still have some wood to chop. 

UBS has a piece out on hybrid funds - funds that hold stocks and high yield debt. If we continue to see a sell-off in junk bonds, these funds will face redemptions, and that meant that the stocks will get sold as well. This is an issue in particular for the energy patch. 

Morning Report: Slow news day

Vital Statistics:

	Last	Change	Percent
S&P Futures	2006.1	-1.3	-0.06%
Eurostoxx Index	3239.8	-10.6	-0.32%
Oil (WTI)	49.42	-0.2	-0.42%
LIBOR	0.321	0.001	0.31%
US Dollar Index (DXY)	94.74	-0.075	-0.08%
10 Year Govt Bond Yield	2.09%	0.00%
Current Coupon Ginnie Mae TBA	104.8
Current Coupon Fannie Mae TBA	104.1
BankRate 30 Year Fixed Rate Mortgage	3.89

Markets are flattish on no real news. Bonds and MBS are closed for the Columbus Day holiday.

No economic data this morning, but we will get a slew of data this week. We will get retail sales on Wednesday, which promises to be a big number as well as inflation data. On Friday we get some big manufacturing data. 

Earnings season kicks off in earnest this week with many of the big banks reporting. We will hear from JP Morgan after the close. 

The CFPB is going after mandatory arbitration clauses in banking and credit cards. This will make it easier for consumers to sue. Separately, the SEC is reducing its use of in-house administrative law judges, which critics have said gives it a "home court" advantage.

The rental market has been on fire, and has been doing much better than the single family construction market. Is that about to change? As the Millennials age, they will become house buyers. The demographics are changing, and 2015 may be the known as "peak rentals" The one thing our economy needs more than anything right now is more housing construction. We have a shortage, and housing construction employs a lot of people with jobs that pay good wages. The difference between 1.2 million housing starts and 2 million in terms of growth is very meaningful. 

Last week the House passed a bill that would extend a hold-harmless period for TRID until February. Its fate in the Senate is unclear. The CFPB has said it will take into account whether a company is making a good faith effort to comply but does not support a hold harmless period. 

Shortest honeymoon ever. After agreeing to a deal to stop developing nuclear weapons in exchange for the lifting of sanctions, Iran tested a long range ballistic missile with a range of around 800 miles, potentially violating the agreement signed in July.

Morning Report: FOMC minutes confirm Fed is worried about the global economy

Vital Statistics:

	Last	Change	Percent
S&P Futures	2010.8	4.2	0.21%
Eurostoxx Index	3265.5	40.6	1.26%
Oil (WTI)	50.18	0.8	1.52%
LIBOR	0.319	0.001	0.19%
US Dollar Index (DXY)	94.81	-0.509	-0.53%
10 Year Govt Bond Yield	2.12%	0.01%
Current Coupon Ginnie Mae TBA	104.8
Current Coupon Fannie Mae TBA	104.3
BankRate 30 Year Fixed Rate Mortgage	3.83

Markets are higher this morning as commodities continue to rebound. Bonds and MBS are down.

Import Prices fell 0.1% in September and are down almost 11% on a year-over-year basis. 

Wholesale inventories rose 0.1% in August, while wholesale sales fell 1%. Both numbers were worse than expectations. The increase in the inventory to sales ratio is a worrisome sign., You typically see the ratio build ahead of a cyclical recession. 

The FOMC minutes confirmed what everyone suspected - that international worries prompted the Fed to hold interest rates steady at the September FOMC meeting. Overall, the Committee seemed rather constructive on the US economy in general. The Fed Funds futures are currently handicapping a 10% probability of a hike at the October meeting and something like 40% in December. 

Note that while the Fed is sanguine on the US economy, economists are generally more cautious. A survey of strategists and economists puts the chance of a US recession at 15% over the next 12 months. It is important to note that the Fed's forecasts for economic growth have been consistently high since the Great Recession. 

Representative Kevin McCarthy withdrew his name from consideration for the next House speaker after allegations of an affair ended up on a Wikipedia page. This leaves current speaker John Boehner in charge for the time being. Interestingly, the Wikipedia edit emanated from the US government itself - someone in the Department of Homeland Security. After the Secret Service started distributing confidential information on Representative Chaffetz, it looks like the worker bees in the government are going directly after Republican politicians. It will be interesting to see if anyone in the Obama administration actually cares. 

Hillary's plan for the financial system. A surtax on banks with over $50 billion in assets, an increase in the statute of limitations for financial crimes, and toughening the Volcker rule regarding proprietary trading. 

Note that margin debt is falling on the stock exchanges. This could be a reaction to the turmoil in overseas markets. Generally speaking margin selling tends to exacerbate downward moves, so having less margin debt is actually a good thing. 

The share of foreign homebuyers is at an 8 year low in California. 

Morning Report: Awaiting the FOMC minutes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1979.3	-7.9	-0.40%
Eurostoxx Index	3217.2	-9.2	-0.29%
Oil (WTI)	48.24	0.4	0.90%
LIBOR	0.318	-0.005	-1.61%
US Dollar Index (DXY)	95.49	-0.008	-0.01%
10 Year Govt Bond Yield	2.05%	-0.01%
Current Coupon Ginnie Mae TBA	104.9
Current Coupon Fannie Mae TBA	104.5
BankRate 30 Year Fixed Rate Mortgage	3.8

Markets are lower this morning on overseas weakness. Bonds and MBS are up.

Third quarter earnings season starts tonight with the traditional report out of Alcoa. 

Initial Jobless Claims fell to 263k last week, the lowest since July.

The minutes from the September FOMC meeting will be out at 2:00 pm EST. Be aware of possible bond market volatility as the market digests it.

The Bloomberg Consumer Comfort Index rose to 44.8 from 43 last week. 

Fannie Mae is announcing further reps and warranties guidance for loans starting Jan 1. It will include new alternatives to repurchase if the loan has a defect. The government is sick and tired of tight credit, especially at the lower end of the credit spectrum. These are intended to ease credit by giving lenders more certainty. The government is clearly worried given that the big banks like JP Morgan are backing away from FHA originations.  

A case for allowing student loan debt to be discharged in bankruptcy is winding its way through the courts. There is about $1.2 trillion in student loan debt outstanding. 

It looks like a strike at Fiat-Chrysler has been avoided. It sounds like the union got some of what they wanted so we could start seeing the beginnings of increasing wages. 

Larry Summers makes the case for going big on expansionary fiscal policy. His argument is that China's slowdown threatens to drag the global economy into a secular stagnation similar to what Japan has been going through. He argues that monetary policy is pretty much played out: rates are at zero, and the stimulative effect of additional QE with the 10 year at 2% would be de minimus. He argues for a new "New Deal" where the government deficit spends on infrastructure spending. Of course this isn't a new idea in the modern age: Japan has been doing precisely that for 25 years and has nothing to show for it except for a debt to GDP ratio of 2.3x. That would be like the US spending $40 trillion over 25 years. Before we advocate spending that kind of money, we should figure out  why it hasn't worked in Japan.. And if over 1 quadrillion yen is not enough, then what is? We need a better answer than the un-falsifiable "More Cowbell." If the Rx only works in theory, then maybe the answer is to just slug it out until the economy corrects on its own.