Morning Report – warning signs in the money markets 10/04/13

Vital Statistics:

Last Change Percent
S&P Futures 1673.5 3.8 0.23%
Eurostoxx Index 2915.7 13.6 0.47%
Oil (WTI) 103.6 0.3 0.32%
LIBOR 0.243 0.000 0.00%
US Dollar Index (DXY) 79.98 0.233 0.29%
10 Year Govt Bond Yield 2.63% 0.02%
Current Coupon Ginnie Mae TBA 105.6 0.1
Current Coupon Fannie Mae TBA 105.1 0.2
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.25
Markets are higher this morning on no major news. Since we have the government shutdown, the all-important jobs report that was scheduled for this morning will be delayed. Bonds and MBS are down small.
Even though we don’t have any economic data today, we have a lot of Fed-speak. Fisher will talk at 8:30, Dudley at 9:15, Stein at 9:30, Lacker at 12:30, and Kocherlakota at 1:45 (all times EST). With no data to chew on, the market will probably react more strongly to any new revelations than it otherwise would.
With no economic data to analyze, the Fed will almost certainly maintain its present course of asset purchases at the October FOMC meeting. While the Fed does have their own econometric models and independent sources of data, they do rely on inputs from the Federal government agencies. The bigger question is about December. Does Ben Bernanke want to start the tapering process on his watch or throw the whole thing to Janet Yellen? And does Janet Yellen want to taper at all? She may not. This whole shutdown has thrown a wrench in the conventional wisdom over tapering, which means QE may stick around a little while longer than we thought. Doing nothing at the December meeting is still a long-odds scenario, but it is getting less and less so.
The dynamic I would watch in the bond market is that anything that points to a deal would be bond bearish, and continued gridlock is bullish. Here is one area of concern though – the short term Treasury markets. I already discussed the issues with the repo market and here is another: the 1 month T-bill has increased in yield as the debt shutdown has gone on. It is now a higher yield than the 1 year. Heard on the Street has a piece on how a debt ceiling breach will impact the money markets. While no one anticipates another 2008, things could get dicey. If anything is going to push the S&P 500 over the edge and get everyone’s attention in Washington, this will.
Chart: 1 month T-bill yield

We are starting to see the Federal government move towards bringing back items piecemeal. Currently there is are bills that would commit to pay furloughed federal workers their back pay once government gets back up and running. Naturally Democrats don’t like these sort of bills because they want to use the leverage of mad constituents to force Republicans to drop their opposition to a clean continuing resolution. Republicans are taking a page out of the sequester strategy, where they fixed the air traffic controller problems with a simple bill. Behind the scenes, the Tea Party is wearing thin on most everybody and at some point the more senior Republicans are going to say enough is enough. Separately, John Boehner is telling people he will avoid a default on the federal debt. It is looking more and more likely that any sort of deal with be a two-fer, handling the budget and debt ceiling.
HUD has released its own rule on QM – any mortgage (aside from HECMs) that do not meet the points and fees requirements will not be eligible for insurance. This is a proposed rule, which will be open for comment. HUD will handle the points and fees a little differently: Under CFPB, the APR has to be below 150 bps over the average prime rate offer (APOR). Under the HUD proposal, it has to be less than 115 basis points over APOR plus the mortgage insurance premium. This intends to alleviate concerns that higher MIPs are causing loans to breach the threshold. HUD believes MIP will add about 135 bps to APR, so, the punch line is that a loan that is withing 250 bps of APOR would fall within safe harbor.
Banks are abandoning mortgage pre-approvals, according to CNBC and moving towards conditional approvals that usually last about 90 days.

40 Responses

  1. Meh, let it burn.

    On the upside, they’re making Ted II.

    Like

  2. Why should Juicer accept the Administration’s ” Overwhelming Demand” explanation? In what areas has this Administration been honest.

    http://m.washingtonpost.com/blogs/wonkblog/wp/2013/10/04/wonkbook-obamacares-web-site-is-really-bad/

    Like

  3. Which is “worse”? Obama’s actually “spooking” the market? Obama thinking he can/should “spook” the market to achieve a political victory? Or, Obama’s inability to “spook” the market?

    Like

  4. Interesting story about Chad, the first identified O’Care Fed Xchange enrollee.

    http://reason.com/archives/2013/10/04/obamacare-chad-henderson-father

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  5. Ezra didn’t accept the explanation. In fact, he debunked it:

    “But the Obama administration doesn’t have a basically working product that would be improved by a software update. They have a Web site that almost nobody has been able to successfully use. If Apple launched a major new product that functioned as badly as Obamacare’s online insurance marketplace, the tech world would be calling for Tim Cook’s head.

    Yes, the overwhelming crush of traffic is behind many of the Web site’s failures. But the Web site was clearly far, far from prepared for traffic at anywhere near these levels. That’s a planning flaw: The Obama administration badly underestimated the level of interest. The fact that the traffic is good news for the law doesn’t obviate the fact that the site’s inability to absorb that traffic is bad news for the law.

    Part of the problem, according to a number of designers, is that the site is badly coded, which makes the traffic problems more acute. There’s a darkly amusing thread on Reddit where web designers are picking through the site’s code and mocking it mercilessly.

    But the Obama administration did itself — and the millions of people who wanted to explore signing up — a terrible disservice by building a Web site that, four days into launch, is still unusable for most Americans. They knew that the only way to quiet the law’s critics was to implement it effectively. And building a working e-commerce Web site is not an impossible task, even with the added challenges of getting various government data services to talk to each other. Instead, the Obama administration gave critics arguing that the law isn’t ready for primetime more ammunition for their case.”

    It’s actually one of the better critiques of the site’s shortcomings that I’ve read and certainly the most pointed one from a progressive thus far.

    Like

  6. J, he is uncritically accepting the Admin’s numbers about traffic. I do not.

    I wonder, given Reason’s piece, if anybody has successfully signed up on a Federal exchange.

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    • Park Ranger told to “make life as difficult as possible” for people.

      Like

      • Scott, seems like a good time to bet on stocks that will plummet if we go much past October 18 without resolution. Any ideas?

        Less intutive to me would be stocks that might be boosted from a continuing crisis. Anything there?

        Like

        • Mark:

          I can’t think of any stock that ought to perform well because of the government shutdown. I would assume that companies with big defense and other government contracts will react particularly bad. Plus any companies (eg health related?) that require routine regulatory approval for aspects of their business will suffer.

          Like

  7. Why does any rational investor think the Feds won’t pay on debts?

    Also,

    @baseballcrank: de Blasio, with a 45 point poll lead in a 8-to-1 Democratic city, feels the need to call himself “a fiscal conservative.” Let that sink in.

    Why is this?

    Like

  8. As a trade, I could see the agency REITs outperform as they are interest rate sensitive and an extended shutdown will be interest rate bullish. But the overall trend is not your friend with these stocks..

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    • McWing:

      I read that article yesterday. That is exactly what I have been saying all week now. It’s been driving me crazy that virtually every economic analysis that I have gotten from various dealers in the market talks about the probability of default, and while they all determine that the probability is low, they all take it as a given that a failure to raise the debt ceiling actually could cause a default. The worst is Vincent Reinhart at Morgan Stanley who is peddling the notion that if the debt ceiling isn’t raised, one of 3 laws will have to be broken. (The laws are 1) the debt ceiling law, 2) the Federal Reserve Act which disallows the Fed from lending to the treasury, or 3) the 14th amendment.) When my MS contact sent me Reinhart’s analysis, I called him up and told him Reinhart was full of shit and he should stop winding people up. I made exactly the same points your link makes. In fact yesterday morning when I read that link I sent it to my MS guy and told him to forward it to Reinhart.

      As i said the other day, the only reason we will default is if Obama chooses to default.

      Like

  9. It’s almost as if entity’s that are heavily regulated are parroting the regulators message.

    If Obama refuses to use the revenue coming in to pay off debts as they come due, and is not successfully impeached, then we no longer have even a semblance of a Constitution.

    Like

    • McWing:

      If Obama refuses to use the revenue coming in to pay off debts as they come due, and is not successfully impeached, then we no longer have even a semblance of a Constitution.

      I think it is clear already that we don’t. If it wasn’t already clear before the ACA decision, that removed any remaining doubt. Constitutional restraints on government are now mostly optional.

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  10. Thank God.

    http://m.nationalreview.com/corner/360423/national-park-service-attempts-barricade-mt-vernon-sterling-beard

    In all seriousness, doesn’t this nonsense make you want to hand over ALL Federal parks to private companies?

    Like

  11. Does someone who believes in a neutral press do this?

    http://www.buzzfeed.com/leeboreport/9-completely-unnecessary-government-shutdown-event-fimt?s=mobile

    Hmmmmm

    @ByronYork: Does the punishing way the Obama administration has run aspects of the shutdown reveal anything about how it will run national health care?

    Like

    • McWing:

      Does someone who believes in a neutral press do this?

      At this point it is hard to believe there is anyone who actually does believe a neutral press ever existed, much less that it does now. R’s simply need to factor into their own political strategy the knowledge that the media will, for the most part, aid and abet whatever strategy the D’s, and especially the anointed One, employ.

      Like

  12. Scott,

    True, sometimes I let my naïveté get the better of me. I keep forgetting that the ends justify the means.

    Like

  13. That’s why I say risk the House on this. The job of the opposition is to oppose. If your not interested in doing that, why have the House Majority?

    Like

    • McWing:

      That’s why I say risk the House on this. The job of the opposition is to oppose. If your not interested in doing that, why have the House Majority?

      As I said the other day, it all depends upon your perspective on just how immediately disastrous implementation of ACA is and what the longer term prospects of blunting/eliminating it are. The job of an army is to fight, but that doesn’t mean it should always and necessarily fight and never engage in a tactical retreat.

      O will never defund Obamacare, and the R’s just don’t have the numbers to defund it unilaterally. That is just an unfortunate fact. So the question for those of us who can see the train wreck that lies ahead is what will be the most effective way of opposing it in the long term. I understand the desire for a grand last stand on principle, and I am not even arguing that it is definitely the wrong strategy. But I don’t think it is fair to say that anyone who believes a different strategy will ultimately be more effective isn’t really interested in opposition.

      Like

  14. I agree Scott. There are many effective ways to oppose this. I just don’t see the Republ cans capable of effectively doing so. For instance, why hasn’t the Vitter Amendment been used? Why not pass funding bills that are below sequester caps? If Obama let the Fd shutdown, then any future CR should contain a 10% across the board cut. Or he could have sequester level budget with a year long delay in individual mandate. The point is to hold out until he capitulates even if, in the end, you lose the House.

    Ultimately, a lot of R’s see Obamacare for the power of life and death that it is and a perfectly happy with that.

    Like

    • McWing:

      Ultimately, a lot of R’s see Obamacare for the power of life and death that it is and a perfectly happy with that.

      I’m sure that is true. That is one reason I am fairly resigned about all of this. Ultimately I think there is very little that can be done about the ever-expanding reach of government. I truly believe that we have passed a tipping point (probably quite some time ago) beyond which it is simply impossible to restore limited, constitutional government short of a catastrophic collapse of the nation (which will happen eventually). We have become Europe. The left has won.

      Like

  15. I truly believe that we have passed a tipping point (probably quite some time ago) beyond which it is simply impossible to restore limited, constitutional government short of a catastrophic collapse of the nation (which will happen eventually). We have become Europe. The left has won.

    That’s why I say we force a collapse now, while we’re still physically and mentally capable of dealing with it. In 20 or 30 years we won’t be.

    Like

  16. Really interesting look at the NHS. What fascinates me is that even the critics think that what it needs is more centralized control.

    “One of the more recent scandals has its roots in the 1990s, when the NHS established a set of best practices for providing care to patients at the end of their lives. Known as the Liverpool Care Pathway, it has since been applied to hundreds of thousands of people. Last November, the Mail reported, an independent review found that 60,000 people were put on the pathway without their consent and a third of the time families weren’t even informed. Thus, they had no idea that their close relatives were removed from life support equipment and were being denied nourishment. In extreme cases, nurses shouted at relatives who attempted to give their dying loved ones sips of water. According to the Mail, hospitals were given incentive payments for putting more people on the pathway – effectively, the government was providing bonuses for ending people’s lives earlier.”

    It always helps to have a Emanuel Goldstein.

    “Robert Francis reads a statement to the media following the publication of his report on the Mid-Staffordshire NHS Foundation Trust earlier this year. (Photo: Dominic Lipinski/PA Wire)The level of detail in the Francis inquiry and the succession of news stories about the horrific state of care at Mid Staffs was a shocking blow to those who like to think of the NHS as supremely humane, especially compared to the U.S. health system. It was followed by another report detailing similar failings in ignoring patient needs at 14 other trusts, or hospital systems, within the NHS.”

    Isn’t this just leftism in a nutshell re charity?

    “other source of NHS strength is the sense of social responsibility on which wealthier Britons pride themselves. “People, by what they believe, think they’re being virtuous,” said James Bartholomew, author of the book “The Welfare State We’re In,” which detailed the failings of the NHS. “I don’t have to do anything virtuous, I just have to believe in the NHS.”

    Back to Goldstein.

    “I’m always wary of shibboleths,” Lawson said, contrasting the reflexive adoration Britons have for the NHS with their abhorrence of the U.S. system.

    Just needs more cowbell!

    Carnall agreed that people’s religious attachment to the NHS is “undoubtedly” a barrier to helpful reforms. She has been pushing for centralizing treatment for emergencies such as heart attacks and strokes in larger, better-equipped hospitals. But, she said, a lot of people are sentimentally wedded to their local hospitals.

    http://m.washingtonexaminer.com/health-emergency-on-eve-of-obamacare-britains-nhs-needs-political-therapy/article/2536520

    Like

    • McWing:

      What fascinates me is that even the critics think that what it needs is more centralized control.

      I couldn’t agree more. They seem to be preternaturally incapable of thinking outside the box of centralized, government control of health care. I think I have mentioned before how struck I was while I lived over there at the incongruence between the universal love of the NHS as an idea coupled with the universal criticism for it in practice.

      Like

  17. The BS on the debt ceiling is slowly starting to fade:

    “Well, Goldman Sachs has a short paper (not online) arguing that the government probably could prioritize payments on Treasury bills, avoiding the breakdown of markets that would come from putting the world’s key safe asset into default.”

    http://krugman.blogs.nytimes.com/2013/10/06/hitting-the-ceiling-disastrous-or-utterly-disastrous/

    Also, the American Thinker piece is wrong on the idea that SS, Medicare and other entitlements constitute debt under the 14th Amendment.

    Like

    • jnc:

      Also, the American Thinker piece is wrong on the idea that SS, Medicare and other entitlements constitute debt under the 14th Amendment.

      On medicare it said only that it could be “plausibly argued”, presumably in an effort to make the definition as broad as possible and still show that payments could be met. But it also said that “Section 4 specifically includes pensions in its definition of public debt” which would inclulde both Social Security and Veterans retirement benefits. Is it wrong about the definition, or that they are considered pensions? I guess SS is probably not strictly a pension, but Veterans benefits would be, I would think.

      Like

    • BTW, when the Treasury “borrows” from the Social Security fund, does that count against the debt ceiling?

      Like

  18. Russian jails suck. Go figure.

    http://www.foxnews.com/world/2013/10/01/greenpeace-crew-in-shock-in-russian-jails/?intcmp=obnetwork

    In other news, Greenpeace activists have A LOT of first world problems.

    Like

  19. “But it also said that “Section 4 specifically includes pensions in its definition of public debt” which would inclulde both Social Security and Veterans retirement benefits. Is it wrong about the definition, or that they are considered pensions? I guess SS is probably not strictly a pension, but Veterans benefits would be, I would think.”

    It’s referring to debt issued to fund civil war pensions. I.e. not the pension itself.

    Like

    • jnc:

      It’s referring to debt issued to fund civil war pensions. I.e. not the pension itself.

      Ah, thanks.

      Like

    • BTW, I e-mailed Vincent Reinhart about his debt ceiling claims that I mentioned yesterday, asking him specifically what law would have to be violated in order to avoid default by prioritizing interest payments. He said that failing to make other payments owed would be akin to issuing an IOU, which would be a violation of at least the spirit, if not the letter, of the debt ceiling law. I didn’t go back to him to say so, but I think that strains credulity.

      Like

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