Morning Report – Party at the Fed 09/19/13

Vital Statistics:

Last Change Percent
S&P Futures 1721.8 4.0 0.23%
Eurostoxx Index 2940.7 31.7 1.09%
Oil (WTI) 108.2 0.1 0.07%
LIBOR 0.25 -0.002 -0.89%
US Dollar Index (DXY) 80.2 -0.042 -0.05%
10 Year Govt Bond Yield 2.70% 0.01%
Current Coupon Ginnie Mae TBA 105 1.3
Current Coupon Fannie Mae TBA 104.2 0.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.42
Markets are higher this morning after yesterday’s furious rally on the Fed’s decision to keep asset purchases in place. The 10 year had a trading range of over 30 basis points in yield yesterday. Initial Jobless Claims increased to 309,000. Bonds and MBS are up small.
The FOMC statement was obviously a surprise, and it is clear from the reaction in the markets that a LOT of people were leaning short heading into the announcement. What does that mean for rates going forward? The markets will now begin to fret about the December meeting, which isn’t going to be bond bullish. I think if you are considering locking right now, you do it. 2.7% seems to be resistance on the 10 year, and we could be looking at a 2.7% – 3.0% trading range. At these levels, take the money and run.
The Fed’s decision certainly provides support for the theory that the Fed was really targeting leverage with its announcement last Spring. The economic data has never supported a reduction of stimulus, and the Fed has been consistently too high with its economic forecasts. The thing is, they can’t un-ring the bell – so people are not going to be piling into levered curve flattening trades. REITs have significantly de-leveraged. Mission Accomplished.
The Fed took down its forecasts again, with the 2013 GDP range now 2.0% – 2.3% from 2.3% – 2.6% in June. Unemployment’s forecast ticked down as well, from a range of 7.2% – 7.3% to 7.1% to 7.3%. Ben Bernanke was asked in the press conference about the labor force participation rate and how it seemed to be driving unemployment. Bernanke acknowledged that there is more to the labor picture than simply the headline unemployment number, and also stressed that these are guideposts, not thresholds. In other words, if unemployment gets to their 7% target, but it is due to the wrong reasons (a drop in the participation rate), then the Fed may decide to remain accomodative.
The beatdown goes on… Wells Fargo is cutting 1,800 jobs in its mortgage unit, in addition to the 3,000 announced earlier this year.

9 Responses

  1. Brent, wasn’t it you or jnc who speculated that floating Larry Summers was just to give cover to an eventual Yellen nomination? This was one of Ezra’s points in Wonkbook this morning:

    Yes, it will be Yellen. “Federal Reserve Vice Chairman Janet Yellen is the leading candidate to be President Obama’s nominee to lead the Fed as chairman, a White House official said Wednesday. Barring any unexpected development, that likely means that Yellen will get the nomination, perhaps as soon as next week…While some speculated in light of Summers’s withdrawal the president may consider other candidates, it appears he is focusing on Yellen.” Zachary A. Goldfarb in The Washington Post.

    Oh, and McWing: First!

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  2. From an interesting (to me, anyway) article by DeLong in The Financial Times:

    . . . When I first saw Ms Yellen up close and in action, it was late-1988. She was a professor at Berkeley and taught me something important, something that I had not previously known and would not have thought of on my own. In a conference room at the Brookings Institution, she explained just how the welfare benefits of lowering unemployment were of much greater value than the mere boost in production it brings. For example, it also means fewer people in the wrong type of job.

    When I next saw Ms Yellen up close and in action, it was the mid-1990s, and she had been appointed a governor of the Fed by Bill Clinton, then president. She was not in the business of showing she was the smartest person in the room. But she was in the business of making sure that the person in the room who had the most constructive thing to say got the floor. And she did know how to keep in check those who were trying to show they were the smartest person in the room whenever they grew attached to ideas because they were clever rather than because they were true.

    Those of us on the Treasury and the Council of Economic Advisers staff who had recommended that Mr Clinton recruit her to the Fed were very pleased. We had been worried that the culture of the central bank – where staff deferred to division directors, division directors sought to please the chair and governors largely stayed out of the loop – was not the healthiest of environments for encouraging sound debate. Ms Yellen (along with some others selected by Mr Clinton) helped to open the place up.

    Ideally, I would ask for more. I am in the faction of economists who think that what the Fed needs now is a regime change like the one that Paul Volcker imposed in 1979 as he launched the very painful breaking of the stagflation of the 1970s. It needs some of the bold leadership that President Franklin Roosevelt launched in the US in the 1930s and that Prime Minister Shinzo Abe is pushing in Japan right now. Ms Yellen is, to my taste, a little overinvested in the proposition that the Fed’s current policy consensus is the appropriate policy.

    When the two leading candidates were Ms Yellen and Mr Summers, everyone who was not crazy knew that the policy stakes were small: the two have very similar views of the economy and were likely to follow very similar policies. Now the policy stakes are actually significant – and a substantial chunk of America’s future prosperity may well ride on the outcome.

    DeLong mentioned earlier in the article that his first choice would have been Larry Summers, so I found his comment about her keeping in check “the smartest person in the room” somewhat intriguing.

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  3. Well, at first I thought that was the case, but later on there were reports that Summers was the pick because he was willing to be more political and help the administration push Congress for further fiscal stimulus.

    Yellen is steeped in a Fed culture of political independence and would probably not go there.

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  4. Team Anarchy, Fuck Yeah!

    http://www.nytimes.com/2013/09/19/opinion/the-march-to-anarchy.html?_r=0

    I literally think children will starve in the streets with this miserly funding. Whatta buncha haters.

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  5. You bear ’em, we scare ’em. Full service evil with a smile!

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  6. We’ve probably talked this out to end of it’s usefulness but here’s one more bit on Yellen and why liberals think she’s a better choice.

    http://www.alternet.org/economy/janet-yellen-and-federal-reserve?page=0%2C0

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  7. This sounds like the legislative process at work to me, not anarchy.

    “After the House takes its vote this week to approve a temporary resolution that pays for the government to keep running through mid-December — but defunds the health law — the measure will go to the Senate. Assuming 60 votes can be found to beat back the inevitable filibuster from Republicans like Mike Lee or Ted Cruz, the Senate will almost certainly approve the resolution minus the defunding language, sending the bill right back to the House.”

    There’s a value in recorded votes. Boehner and Reid need to agree that for the CR, whatever each body sends over gets a vote on the floor.

    And I have no idea why the NY Times believes that Cruz or Lee would filibuster a bill that defunds the PPACA.

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  8. And I have no idea why the NY Times believes that Cruz or Lee would filibuster a bill that defunds the PPACA.

    I think, to scare their readers, the NYT is required to mention Ted Cruz. He’s the left’s new boogeyman.

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