Morning Report: Why aren't we seeing wage growth?

Vital Statistics:

	Last	Change
S&P Futures	2382.3	0.8
Eurostoxx Index	391.4	-0.1
Oil (WTI)	51.0	0.6
US dollar index	88.6	-0.1
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	103.27
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.94

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

Economic activity picked up in April, according to the Chicago Fed National Activity Index. It rose to .49 (better than expectations) and the 3 month moving average rose to .23. Production and employment led the rise, while personal consumption and housing were negative. 

We have some Fed-speak at 10:00 EST today along with a bunch after the close. The biggest events this week should be the FOMC minutes on Wednesday and the second revision to Q1 GDP on Friday. We will also get a lot of housing data this week. 

One of the biggest issues for the Fed is wage inflation (or the lack thereof). The last time unemployment was this low, we were experiencing 4% wage growth. Why aren't we now? Here are a few explanations. They revolve around a few different theories. The first is that there has been a structural change in labor economics, and that the tradeoff between unemployment and inflation is over due to globalization, lack of union representation, etc. The second explanation is that wage negotiation dynamics have been colored by the economy since 2008: employers are training people internally instead of hiring outside at a higher price, employees don't feel comfortable asking for more, productivity is lousy, and the huge reservoir of the long-term unemployed means the market is not as tight as it may appear. The final one is a measurement problem: that the BLS numbers aren't accurately reflecting the reality of the marketplace. Take construction: Builders constantly complain that they can't find skilled labor, that they are offering signing bonuses, etc yet when you look at the actual BLS numbers, construction wages are only growing 2.1%. We are seeing in the mortgage business with ops folks as well. So maybe we are starting to see pockets of wage growth, however it isn't showing up quite yet in the rest of the economy or the numbers. 

The drop in construction spending hasn't only been in housing - it has also been in schools. State and local governments are spending about 1/3 less on school construction than they did before the crisis, yet enrollment is up 4%. This is just another problem for the first time homebuyer - finding affordable homes with good schools. 

NAR is predicting 5.6 million home sales in 2017, up 200k from last year, and new home sales of 620k, up from 560k last year. GDP will grow at 2.2% and inflation will remain tame. Sales would be higher if there was more inventory, and the group hopes that regulatory changes, especially with Dodd-Frank will ease up credit for smaller banks, who fund local homebuilders. 

Now that the REO-to-rental trade is largely played out, Wall Street is now building houses for rentals. Some are planned communities, where renters get the benefit of living in a single family detached homes, plus they get some of the advantages of apartment living, with gyms and common spaces. They also don't have to deal with maintenance.  Interestingly, many people intend to rent for only a short time period, but end up staying. For one landlord, 1/3 of the tenants have been on month-to-month arrangements for 7 years. The REITs behind this trade also get discounts from builders, lower maintenance costs, and about a 5% - 8% pickup in rental income for a new house. 

Morning Report: Treasury and FHFA disagree on the GSEs

Vital Statistics:

	Last	Change
S&P Futures	2370.5	6.8
Eurostoxx Index	390.7	1.5
Oil (WTI)	50.0	0.6
US dollar index	88.8	-0.4
10 Year Govt Bond Yield	2.24%
Current Coupon Fannie Mae TBA	103.27
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	4.03

Stocks are up this morning on no real news. Bonds and MBS are down small. 

Slow news day.

No economic data this morning, but we have Fed-speak at 9:45 and 1:40. 

Treasury Secretary Steve Mnuchin and FHFA Head Mel Watt disagree on what to do with Fannie Mae's dividends to Treasury. A week ago, Watt suggested that Fannie and Freddie may have to retain some of their earnings in order to build / maintain their capital base. Yesterday, Mnuchin said that he expected the dividend payments to continue. Despite a Republican president, Mel Watt is going nowhere - his term expires in 2019 and he can only be removed for cause. 

Ellie Mae's Origination Insight Report is out, and it shows that fallout increased, along with the purchase share of mortgages. Cycle times improved by a day across the board. 

St. Louis Fed Head James Bullard believes that the unemployment rate could fall further without igniting inflation. He seems to think the new normal is about 2% GDP growth and sees that sort of pace for the immediate future. That will probably be the case until wage inflation picks up, and who knows when that will be? 

Guess who's back? Ex-NJ governor, MF global collapse Jon Corzine, who is apparently fundraising for a new hedge fund...

Morning Report: Odds of a June hike fading

Vital Statistics:

	Last	Change
S&P Futures	2350.5	-7.0
Eurostoxx Index	387.6	-3.5
Oil (WTI)	48.5	-0.5
US dollar index	89.0	0.1
10 Year Govt Bond Yield	2.19%
Current Coupon Fannie Mae TBA	103.27
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	4.03

Stocks are following through on yesterday's sell-off. Bonds and MBS are up again. 

Initial Jobless Claims came in at 232k last week which shows that firms are hanging onto their employees. Claims are at a 28 year low. Meanwhile, the Philly Fed Manufacturing Index put in another strong showing. 

The index of leading economic indicators increased 0.3% in April after a 0.3% increase in March.  “First quarter’s weak GDP growth is likely a temporary hiccup as the economy returns to its long-term trend of about 2 percent. While the majority of leading indicators have been contributing positively in recent months, housing permits followed by average workweek in manufacturing have been the sources of weakness among the U.S. LEI components.”

The DOJ named ex-FBI Director Robert Meuller to conduct the Russia / DJT investigation. This should (in theory) quiet things down for a while, as it satisfies a key demand from Democrats that someone independent of the White House conduct the investigation. The key question: Is this Watergate or Whitewater?

The DJT turmoil has affected the market's handicapping of the next FOMC meeting. The odds of a June hike have slipped from 80% to 60%. 

Meanwhile, The Bernank finds it strange that markets ignore political risk until the last moment. He also thinks DJT should re-nominate Janet Yellen and downplayed the market risk from the Fed tapering its reinvestment policy. 

Household debt has surpassed its 2008 peak, according to the Fed. It came in at $12.7 trillion as mortgage debt and student loan debt increased. Of course the difference between 2008 and today is that home equity is much higher, so it isn't necessarily a huge cause for alarm. 

Morning Report: More Trump trouble

Vital Statistics:

	Last	Change
S&P Futures	2386.3	-10.8
Eurostoxx Index	394.6	-1.4
Oil (WTI)	49.0	0.3
US dollar index	89.2	-0.3
10 Year Govt Bond Yield	2.29%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	4.04

Stocks are lower as the White House gets embroiled in yet another scandal. Bonds and MBS are up. 

Donald Trump has been hit with two damaging press reports over the past two days. The first one claims that he shared classified information with Russian diplomats. The second one is that he urged then FBI director James Comey to drop the investigation of Michael Flynn. The first story (if true) is probably not a crime, however the second one (again, if true) strays close to obstruction of justice. Note that both stories rely on hearsay from anonymous sources - basically some guy heard something from some other guy that Trump said this or that - and WaPo / NYT reported it. Suffice it to say, if this was about anyone else, these stories probably wouldn't have seen the light of day with such flimsy evidence. Doesn't mean the stories are not true, but the story's credibility is falling predictably along partisan lines. That probably won't change until we have some names to go with the story. 

What does this mean for the markets? As I said yesterday, the Trump reflation trade is dead. Nothing is going to get done legislatively in this Congress, unless it can get pushed through on party lines, and GOP moderates are no sure thing. So far the GOP establishment has not sided with Democrats and the press against Trump (they can't stand either), but their support is getting thinner and thinner. I suspect the next shoe to drop will be a high profile resignation, like Rex Tillerson, or Wilbur Ross, neither of whom needs this amateur hour headache. And that could be the "all-clear" signal for wavering Republicans to jump ship and turn their backs on the White House. 

The dollar is beginning to take notice, and is down again today. The bond market continues to rally, and I suspect one of the most crowded trades on the Street (short bonds) is going to get painful. Remember the pre-election bond yield was 1.81%. The stock indices are being supported by a few mega-cap stocks which makes it vulnerable to a sell-off. Remember the old saw "Sell in May and go away?" Might be good advice this year. 

Here is a chart of the Dow Jones Industrial Average for 1974, the year of Watergate:

Of course take that chart with a grain of salt. In 1974, the US economy was still reeling from the 1973 oil crisis, so markets were vulnerable to begin with. Second, if you sold the market during the Clinton impeachment kerfuffle you would have been killed (at least for a year or so), but then would have been correct. Note the Clinton impeachment didn't make a bit of difference to the Fed, which kept hiking rates. That could be a difference this time around, especially if the economic data starts turning down. 

Mortgage Applications fell 4.1% last week as purchases fell 3% and refis fell 6%. The refi share of mortgage apps hit a 9 year low at 41.1%. You can see below a chart of the MBA refinance index, which has been crushed since Brexit last June. 

Morning Report: Housing starts disappoint again

Vital Statistics:

	Last	Change
S&P Futures	2399.0	0.5
Eurostoxx Index	395.5	-0.5
Oil (WTI)	49.0	0.1
US dollar index	89.9	-0.1
10 Year Govt Bond Yield	2.34%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	4.09

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

Housing starts for April disappointed, rising 0.7% YOY to an annualized rate of 1.17 million. The Street was looking for 1.26 million. This was the lowest reading in a year. Building Permits rose to 1.26 million on an annualized basis, up 5.7% YOY. It is strange to see disappointing starts alongside the strong builder sentiment number reported yesterday, but builders seem content to build fewer homes and to grow the business by raising prices. 

Industrial and manufacturing production came in stronger than expected however, growing 1% in April. Capacity Utilization rose to 76.7%. Auto assembly drove the increase, pardon the pun. 

The Washington Post broke a story that Donald Trump shared classified info with Russia. There seems to be a shift in the political winds. You are starting to see mainstream Republicans distance themselves from the Administration. Don't know if this becomes a stampede, but the crowd is looking for their coats and nervously eyeing the exits. I don't think this is impeachment material (what he did was legal) however, you can probably stick a fork in the Trump legislative agenda. 

The machinations in Washington so far are not affecting the stock market, but the dollar is beginning to take notice. Bonds are not yet reacting however don't forget the 10 year was trading around 1.8% before Trump's surprise victory. The Trump reflation trade is running on fumes at this point. 

The National Association of Realtors estimates that if the mortgage interest deduction and the state & property tax deduction is eliminated, you would see a 10% drop in real estate values. The Trump plan would double the size of the standard deduction, which will go from roughly 12k to 24k. The increase in the standard deduction will make the mortgage interest deduction meaningless for anyone with a sub $600k mortgage because they will be better off taking the standard deduction. This will eliminate one of the advantages of buying versus renting for first time homebuyers, which in theory should create more renters and less buyers. Given all the other advantages of buying, this will probably be a second-order effect. I have a hard time seeing a 10% drop in prices - the FHFA House Price Index only had a 22% drop peak to trough - and inventories are tight. 

Absent any changes to the tax code, NAR is looking for prices to rise 7% - 8% this year.

Ex Fed Head Narayan Kocklerakota recommends that the Fed maintain its balance sheet and not let its QE assets run off as they mature. 

Morning Report: Washington eyes contract for deed transactions

Vital Statistics:

	Last	Change
S&P Futures	2393.0	4.3
Eurostoxx Index	395.1	-0.5
Oil (WTI)	49.5	1.7
US dollar index	89.8	-0.3
10 Year Govt Bond Yield	2.33%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	4.09

Stocks are up this morning with oil. Bonds and MBS are down.

Russia and Saudi Arabia made a joint statement saying they intend to keep production down through Q118. This is providing a boost. Separately, China said it intends to import more oil and natural gas from the US. 

The Empire State Manufacturing Survey contracted in May after a torrid start to the year. Expectations remain strong however. 

Several politicians are urging the FHFA to no longer sell foreclosed homes to firms that intend to follow "rent to own" or contract for deed transactions. The objection to these transactions is that the properties are sold as-is and the onus is on the renter to fix any issues like lead paint. This allows the landlord / lender to skirt property maintenance laws. Ultimately, this could be good for the market in that it brings some much-needed supply to the starter home space (and perhaps demand for 203k loans). 

Speaking of first time homebuyers, here are the best cities for them. Needless to say, the big coastal cities are generally not the best places as home prices are elevated there. There is more in the Midwest and the South. There is an interactive map that gives good info on the state of individual markets. Wonder how much size 300k gets you? Depends on the state - on one extreme is Indiana, which gets you almost 3500 square feet. The worst? DC, which gets you 600. Note that 300k is just a hair over the median price in the US. 

Homebuilder sentiment rose in April, according to the NAHB. The sentiment index rose to 70, higher than expectations. Note we will get housing starts tomorrow. 

Morning report: Weak retail sales and inflation

Vital Statistics:

	Last	Change
S&P Futures	2386.0	-5.0
Eurostoxx Index	394.7	0.3
Oil (WTI)	47.9	0.1
US dollar index	90.2	-0.2
10 Year Govt Bond Yield	2.36%
Current Coupon Fannie Mae TBA	102.33
Current Coupon Ginnie Mae TBA	103.78
30 Year Fixed Rate Mortgage	4.08

Stocks are lower this morning as retailer earnings disappoint. Bonds and MBS are up on weak inflation data.

Inflation remains tame according to the Consumer Price Index which rose 0.2% MOM and is up 2.2% YOY. Stripping out food and energy, it is up 0.1% MOM and 1.9% YOY. This 1.9% YOY print in the core CPI is the lowest in almost 2 years. 

Retail sales came in lower than expected at 0.4% for April. The control group, which strips out volatile elements like autos, gasoline and building products rose 0.2%. Note that retail sales only captures a part of consumer spending - services are largely ignored. Overall it points to steady consumer demand - nothing great. The mall based retailers have been getting crushed however as Q1 numbers were pretty much abysmal. 

Wells Fargo is contemplating doing a private label MBS deal this year. Private label MBS are backed by mortgages without government insurance, and have been mainly limited to the jumbo market since the crisis. 

Rising wages helped ease affordability concerns in the first quarter. A total of 60.3% of all homes were affordable to someone earning the median income of 68,000, up from 59.9% in the fourth quarter, according to NAHB / Wells Fargo Housing Opportunity Index. 

Good news for the first time homebuyer: entry level salaries for college grads are the highest in a decade.