Morning Report: Fannie says no hikes this year

Vital Statistics:

	Last	Change
S&P Futures	2179.0	-3.0
Eurostoxx Index	340.7	-0.1
Oil (WTI)	47.8	-1.0
US dollar index	85.7	0.2
10 Year Govt Bond Yield	1.56%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.5

Stocks are slightly lower this morning after Stanley Fischer said the US economy was close to hitting all of the Fed's targets. Bonds and MBS are down small.

Not a lot of market-moving data this week, aside form the second revision to GDP on Friday. Note central bankers will be out in Jackson Hole this week, so there is the possibility of comments moving the markets. Otherwise, it looks to be a dull week in late August. 

The Chicago Fed National Activity Index came in better than expected at .27, but the 3 month moving average is negative, indicating the economy is growing slightly below trend. 

Fannie Mae is forecasting the Fed will maintain rates throughout 2016, and they believe the economy will strengthen. “Second quarter growth was a disappointment, but consumer spending appears solid heading into Q3, and we expect inventory investment to balance out after a surprising drawdown in Q2,” said Fannie Mae Chief Economist Doug Duncan. “Credit expansion, combined with improving labor market conditions and strengthening household balance sheets, should continue to support consumers, who will likely be the primary driver of growth again in the second half of the year. The positive July jobs report may encourage some Federal Open Market Committee members to argue for a Fed rate hike at the September meeting. However, we remain convinced that the Fed will hold the target rate steady this year given global uncertainties and anemic output growth. Although much of the financial volatility from Brexit has subsided, long-term Treasury yields continue to face downward pressure and we expect them to remain low for some time.”

More from Fannie on the housing market: “Housing market fundamentals remain a mixed bag. During the second quarter of 2016, both new and existing home sales rose to expansion highs, while single-family starts pulled back, remaining historically low for an expansion,” said Duncan. “Tight housing inventory from a lack of new construction continues to create affordability challenges, particularly at the lower end of the market. Robust rental demand during the second quarter of the year has created the lowest rental vacancy rate in decades. In addition, the homeownership rate dropped to below 63 percent in the second quarter, but we are seeing some tentative signs of older Millennials moving toward homeownership. We expect homebuyers will benefit from improving job and wage growth, more favorable lending standards, and continued low mortgage rates through the rest of the year, with the 30-year fixed-rate mortgage rate projected to average 3.4 percent during the fourth quarter.”

Talk about bad timing: Donald Trump got into the mortgage business in 2006. He did make an interesting point about bubbles and the madness of crowds. “Are you the type of person who takes advantage of positive situations when they present themselves, riding them out as long as they last? Or do you heed every message of doom and gloom, avoiding risks that could be some remarkable opportunities?” If you sold stocks in 1996 when Alan Greenspan discussed "irrational exuberance" in the stock market, you missed out on the lion's share of the growth. Also, the most money is made right at the end of the move when it goes parabolic. 

Following on Donald Trump, many recognize we have a bubble in sovereign debt. Black Rock believes that supply-demand imbalances will keep the bubble inflated for the near term. Meanwhile, Paul Singer suggests that bonds come with a warning label: "Hold such instruments at your own risk; danger of serious injury or death to your capital!"

Note that the European Central Bank and the Bank of Japan are now buying private placements from corporate issuers.  I guess the big question is "what happens when these bond issues go bad?" The European Central Bank is supporting 3.3 trillion euros of assets on 100 billion euros of capital, or about a 32:1 leverage ratio. The Fed is even worse, supporting $4.5 trillion in assets on just $40 billion worth of capital for a 112:1 leverage ratio. It won't take much of a move in asset prices to wipe out the equity of either entity. 

Morning Report: FOMC minutes not as hawkish as feared

Vital Statistics:

	Last	Change
S&P Futures	2177.5	-2.0
Eurostoxx Index	342.0	1.5
Oil (WTI)	47.0	0.2
US dollar index	85.5	-0.1
10 Year Govt Bond Yield	1.55%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.5

Stocks are flattish after the FOMC minutes came in less hawkish than feared. Bonds and MBS are up.

Initial Jobless Claims came in at 262k last week. 

The Philly Fed Business Outlook Survey came in slightly positive, about in line with expectations. 

The FOMC minutes were not quite as hawkish as markets feared. The Fed noted that the two biggest fears at the June meeting (Brexit, which had just happened, and the terrible May jobs report) turned out to be non-events. That said, there is still some debate at the Fed over how much more work they have to do on the employment side of their dual mandate. Some at the Fed point to the unemployment rate and infer their job is largely done, while others point to the low labor force participation rate and say they have more work to do. The lack of language about the risks of the economy being more tilted toward the upside than the downside has been taken as a signal that the Fed isn't planning to move in September. Bonds rallied somewhat on the minutes, with the 10 year falling to 1.54% and the Fed Funds futures reducing the implied probability of a 2016 hike to a coin toss. 

The minutes did discuss housing a bit as well. In terms of housing construction, they noted that housing activity growth had slowed in recent months, which is a fair observation however housing starts have been in a 1.1 million to 1.2 million range for about a year. Not much improvement going on there at all, just steady state. Much of the growth is going to multi-fam construction, not single, however. 

In terms of credit, the Fed noted that mortgage credit became somewhat more easy between the June and July meetings. Apparently, a number of large banks said they had eased standards somewhat for GSE loans. Purchase and refi activity picked up as well. 

Speaking of GSE loans, everyone in DC realizes that the current state of affairs (with the GSEs as wards of the state) is unsustainable, however no one really knows what to do with them. The US taxpayer bears the credit risk of 90% of all new origination. Republicans would like the government less involved with the mortgage market, while Democrats would like to see them officially nationalized and made a government owned corporation. The point is moot, however in that there is nothing in the private sector capable of replacing them. 

Note that Fan and Fred used to be 100% owned by the government (Fannie Mae was a New Deal phenomenon), and LBJ made them a nominally private institution. The reason? Fannie Mae's debt was becoming a problem for the national balance sheet and was making it difficult to finance the Vietnam war. LBJ wanted Fannie Mae's debt off the official books of the US Government, so he spun off a piece to private investor. So, yes Virginia, the first user of off-balance sheet financing was Uncle Sam. 

Former Minneapolis Fed Head Narayana Kochlerakota compares the US recovery to that of Europe and Japan. People trumpeting the great performance of the US versus their peers (largely a partisan affair) are ignoring the fact that the US population has been increasing much faster than Europe, so comparing simple GDP growth isn't really all that meaningful. If you look at employment, the US looks worse. This has big implications for monetary policy. Perhaps QE hasn't been quite the elixir it has been held up to be. In Japan, banks are running out of JGBs to sell the Central Bank. To me, the glaring observation is that the 10 year bond yield where it was pre taper tantrum (Spring of 2013). It implies they could have achieved the same result doing nothing! As Art Cashin said, the Fed is beginning to resemble Casey Stengal's 1962 Mets. 

That said, it looks like fiscal policy might be ready to run with the ball. Hillary Clinton and Donald Trump both want to spend more money. Assuming Hillary wins and the GOP keeps the House, we will have to see if she can cut a deal with Republicans to allow for more spending. 

Morning Report: Probability of a 2016 rate hike back to pre-Brexit levels

Vital Statistics:

	Last	Change
S&P Futures	2176.0	0.0
Eurostoxx Index	341.5	-1.9
Oil (WTI)	46.4	-0.2
US dollar index	85.8	0.2
10 Year Govt Bond Yield	1.58%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.52

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

The FOMC minutes come out today at 2:00 pm EST. Be careful locking loans around then since we could see some volatility. 

Mortgage Applications fell 4% last week as both purchases and refis fell by 4%. 

Mohammed El Arian has a good piece on what to look for in the minutes. The main things to look for: labor (and what the Fed considers "full employment), productivity (and why we aren't seeing it), inflation (and why we don't see it), external threats (China slowdown, Brexit), and finally why ultra-low interest rates and QE aren't achieving the desired result (the elephant in the room). Expect the Fed to prod the government to use fiscal policy to help stimulate the economy. 

For those complaining that US fiscal policy has been in austerity mode, I would remind them that the biggest post WWII deficits as a percentage of GDP are (in order) 2009, 2010, 2011, 1983, 2012, 1946, 2013. 

Yesterday, William Dudley suggested that a September rate hike is still on the table and the markets may be underestimating the chance of one. The Fed Funds futures market have now back to pre-Brexit levels in terms of predicting the probability of a rate hike this year. 

The lack of inventory is going to get worse, as we aren't building enough homes to keep up with population growth, let alone obsolescence. I keep saying this, but we should be hitting 2 million starts a year given the shortage and the need to house Millennials. This is the difference between 2% GDP and 3% GDP. Unfortunately, Washington seems to think the biggest problem is that we aren't slugging the banks hard enough. 

Morning Report: Freddie thinks 2016 could see $2 trillion in origination

Vital Statistics:

	Last	Change
S&P Futures	2182.0	-4.0
Eurostoxx Index	343.7	-2.0
Oil (WTI)	45.9	0.2
US dollar index	85.6	-0.6
10 Year Govt Bond Yield	1.54%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.45

Stocks are lower this morning on no real news. Bonds and MBS are mixed

Inflation at the consumer level continues to be well-contained. The consumer price index was flat month-over-month and is up 0.8% year-over year. Ex-food and energy it was up 0.1% MOM and 2.2% YOY. The biggest contributors to inflation were health care costs (up 4% YOY) and housing (up 2.4% YOY).

Housing starts were 1.211 million annualized in July, coming in higher than expected. The driver was multi-fam, which can be extremely volatile. Single fam continues to plug along. Building permits were more subdued, coming in at 1.15 million. Same situation in permits: multi-fam permits rose while single fam declined. 

Industrial production increased 0.7% in July versus expectations of a 0.3% increase. Manufacturing production increased 0.5%. Capacity utilization increased to 75.9%. So some signs of life in the manufacturing sector after a dismal Spring and early summer.

An idea that is percolating at the Federal Reserve is the idea that this low productivity / low growth economy is a new normal, which implies a lower neutral interest rate. This in part explains why the Fed has been so reluctant to raise rates despite unemployment being at levels historically associated with full employment. One idea is that the Fed should either raise its inflation target or begin targeting nominal GDP. The big question is whether the PhD standard, which has pushed interest rates to the floor, is part of the reason why productivity and growth are so low. By creating a bubble in sovereign debt, you have a misallocation of resources (by definition - that is what bubbles are) and that could account for our disappointing growth and productivity. Certainly business capital expenditures remain low and focused on saving labor costs. 

Meanwhile, William Dudley thinks the market may be too complacent about a September rate hike. The market has been calling the Fed's bluff for over a year now.

Freddie Mac thinks 2016 could be the best year for mortgage origination since 2012, with total origination topping $2 trillion. The unexpected gift of lower rates is the reason why. For 2017, they are forecasting a drop back to $1.7 trillion as home price appreciation falters and interest rates rise, although rising rates shouldn't be too bad given they are forecasting 2017 GDP growth to be below 2%. They anticipate the mortgage rate to increase 10 basis points to 3.7%. 

Morning Report: foreigners are investing in MBS again

Vital Statistics:

	Last	Change
S&P Futures	2185.0	5.0
Eurostoxx Index	346.5	0.4
Oil (WTI)	44.8	0.3
US dollar index	86.3	-0.2
10 Year Govt Bond Yield	1.54%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.52

Markets are higher this morning as emerging markets rally. Bonds and MBS are down

We will get a lot of data this week with housing starts and the FOMC minutes on Wednesday. The minutes are probably the most likely event to affect bonds. Earnings season is largely over except for the retailers.

The Empire State Manufacturing Survey fell in August, according to the NY Fed. New orders were flat. Employment contracted.The 6 month outlook dimmed as well. 

Foreign investors are beginning to wade into TBAs again as sovereign debt yields continue to offer nothing. Ginnie Mae TBAs stand to benefit the most, which means FHA and VA pricing should improve relative to Fannie Mae pricing. The next event to watch from the Fed will be their own TBA purchasing. The Fed is still re-investing maturing proceeds of their MBS portfolio back into the market. Part of policy normalization will involve ending this practice. 

Friday's weak retail sales data caused some strategists to take down their Q3 GDP numbers from the mid 2% to the low 2% range. 

Homebuilder sentiment improved in August to 60 from 58. We are entering the seasonal slowdown for the builders, which coincides with football season. 

Morning Report: Delinquencies are at a 10 year low

Vital Statistics:

	Last	Change
S&P Futures	2180.0	10.0
Eurostoxx Index	346.0	-1.2
Oil (WTI)	43.7	0.1
US dollar index	86.1	-0.2
10 Year Govt Bond Yield	1.49%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.52

Stocks are higher this morning on strong economic news out of Europe. Bonds and MBS are up.

Retail Sales were flat in July. Ex-autos and gas they were down. Basically autos and ecommerce did okay, and everything else was lousy. Speaking of lousy, we are getting retailer earnings and for the most part they are disappointing. 

Inflation at the wholesale level is nowhere to be found, with the producer price index falling .4% in July versus expectations of a .1% increase. The core PPI was up .8% YOY. 

Business inventories barely moved in July, increasing by 0.2%.

Consumer sentiment came in lower than expected as well. 

The National Association of Federal Credit Unions blames high prices and tight regulation for the lack of housing that people in the middle class can afford. 

Delinquency rates hit a 10 year low in the second quarter according to the MBA. The number of homes in foreclosure hit 1.64%, down 10 basis points from the first quarter and 40 basis points from a year ago. VA loans are performing the best, while FHA are performing the worst.

Partisan conflict is the highest since 1984, according to the Philly Fed. This conflict supposedly suppresses economic growth. 

Morning Report: Bond trading is now like trading commodities

Vital Statistics:

	Last	Change
S&P Futures	2177.0	58.0
Eurostoxx Index	345.0	4.0
Oil (WTI)	41.6	-0.2
US dollar index	86.0	-0.2
10 Year Govt Bond Yield	1.51%
Current Coupon Fannie Mae TBA	103.8
Current Coupon Ginnie Mae TBA	105.2
30 Year Fixed Rate Mortgage	3.52

Markets are flattish this morning on no real news. Bonds and MBS are flat as well.

Slow news day (again)

Initial Jobless claims dipped ever so slightly to 266k last week. 

Import prices rose 0.1% month-over-month, but are down 3.7% on an annual basis. Inflation remains in a deep freeze. 

Housing has historically been the vehicle people use to build wealth. For most people, it is their biggest assets. Home prices have been rising since bottoming in 2012, but aspiring homeowners have been shut out as the homeownership rate hits levels not seen since the 1970s. For young Millennials with student loan debt and difficult job prospects, home price increases have made the dream of homeownership further out of reach. Meanwhile, rental inflation (driven by the same scarcity issues that are driving home price appreciation) mean that rent accounts for a bigger and bigger percentage of disposable income. 

The homeownership rate fell to 62.9% in the second quarter, which is a 51 year low. You can see the big jump in homeownership that started in the mid 90s has been reversed. That jump in homeownership was a function of Bill Clinton's social engineering via the housing market and the development of a securitization market. Tight credit post-financial crisis remains an issue as well, as the US taxpayer bears the credit risk for 90% of all origination. If a loan doesn't fit into the government / conforming box, it likely isn't getting done. 

That said, this does represent pent-up demand that will be unleashed at some point, and with housing starts still well below historical averages, could provide a massive boost to the economy once it turns around. Don't forget the Millennial generation is bigger than the baby boomers. Amidst the gloom however, is evidence that the Millennials are finally buying. 

Interesting observation, and spot-on: Negative interest rates have made bond investing similar to commodity investing. As Warren Buffett would say that with commodities you are simply betting on what someone else might pay for them at some future moment. Commodities cost money to hold (because storage isn't free) and now bonds with negative yields exhibit the same characteristics. The only way to make money in bonds has been to find a greater fool to sell to. If this causes volatility to spike (which in theory it should), then that will have major effects on mortgage rates and pipeline hedging.