Morning Report: Banks fail the living will test 4/13/16

Markets are higher this morning after equities rallied overnight. Bonds and MBS are down on the “risk-on” trade.

Mortgage applications increased 10% last week as purchases rose 8.4% and refis rose 11.3%. The average 30 year fixed rate mortgage rate fell from 3.86% to 3.82%. Refis dipped to 54.9% of all loans.

Retail Sales fell 0.3% in March which was lower than expected. The control group, which excludes autos, gas and building products rose 0.1%, which again was lower than expected. January and February were revised higher, however.

Inflation remains muted at the wholesale level, with the Producer Price Index falling 0.1% in March, again below estimates. On a year over year basis, the core rate is up 0.9%, well below the Fed’s inflation target of 2%.

Business inventories fell 0.1% in February, in line with expectations. January was revised downward as well.

JP Morgan reported better than expected earnings this morning. Mortgage Banking revenues increased 7.3% YOY, and charge-offs fell. It appears that units fell while average loan sizes increased.

Regulators have rejected the living wills submitted by 5 of the largest banks, which could ultimately force them to raise more capital and could subject them to being broken up. In spite of all of these TBTF banks, we do have the least concentrated banking system in the world. Most countries are dominated by 3 or 4 massive banks.

Confirming everyone’s suspicions, the government knew that Fannie and Fred were about to become profitable when they changed the rules and began to take everything the GSEs made. The government’s cover story was that the two GSEs were too weak and therefore all profits needed to be swept to protect taxpayers. Fannie stock rallied from 1.33 to 2.05 on the news.

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