Morning Report: Strong economic data 3/17/17

Vital Statistics:

Last Change
S&P Futures 2379.3 0.3
Eurostoxx Index 378.1 0.4
Oil (WTI) 49.0 0.2
US dollar index 90.6  
10 Year Govt Bond Yield 2.52%
Current Coupon Fannie Mae TBA 101.53
Current Coupon Ginnie Mae TBA 102.87
30 Year Fixed Rate Mortgage 4.27

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

Industrial production was flat in February, while manufacturing production increased 0.5%. Capacity Utilization fell to 75.4%. The low industrial production number was largely driven by weather and lower-than-expected utility expenditures. The manufacturing production number was actually strong and the Jan-Feb numbers were the strongest back-to-back reading in 3 years. Capacity Utilization is still relatively low compared to historical numbers, and is one reason why inflation remains under control.

Consumer sentiment increased to 97.6 from 97.2 in February, while the Index of Leading Economic Indicators ticked up to 0.6%.

Trump’s new budget involves cuts to HUD. Here is a list of the specific cuts. Initially it appears that rental support and mortgage origination are untouched, and other areas like community development block grants will take the hit. Community Development Block Grants are known primarily for Meals on Wheels, but that is not really what they do. CDBGs are mainly Federal grants to local governments to build parks or other nice-to-haves. Unsurprisingly, the biggest beneficiaries are the counties surrounding DC.

Refinances dropped to 43% of all originations in February, according to Ellie Mae. Refis have been falling due to the change in VA IRRL securitization treatment and rising rates. The refis that still make sense however, are refinancing old ARMs into 30 year fixed rate mortgages, as LIBOR (which is what the interest rates is pegged to) is definitely going up, while longer term rates may or may not increase. The other trade is refinancing out of FHA loans from a few years ago, where the borrower has enough equity to qualify for a conforming loan with no MI. Time to close dropped to 46 days, which was down 5 days from January, but flat YOY.

UBS is out with a call saying the bond market sell-off is almost over. They are making the argument that the yield curve typically flattens in a tightening cycle, and the the long end adjusts first then stagnates. I made a similar argument here.

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