Morning Report – Parsing the FOMC minutes 11/21/13

Vital Statistics:

Last Change Percent
S&P Futures 1783.8 4.1 0.23%
Eurostoxx Index 3050.5 3.2 0.10%
Oil (WTI) 94.25 0.4 0.43%
LIBOR 0.238 -0.001 -0.21%
US Dollar Index (DXY) 81.08 -0.035 -0.04%
10 Year Govt Bond Yield 2.81% 0.01%
Current Coupon Ginnie Mae TBA 105.3 -0.4
Current Coupon Fannie Mae TBA 104.3 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.38
Markets are higher this morning on no real news. Bonds and MBS continue their post-FOMC minutes sell-off.
Initial Jobless Claims came in at 323k, lower than the 335k street forecast. Inflation at the wholesale level remains muted.
The bond market sold off on the FOMC minutes, as people who had been holding out hope that the September non-move meant QE4EVA were disabused of that notion. The Fed largely dismissed the effects of the government shutdown as “temporary and limited.” Given the October jobs report and October retail sales, they are correct – we just didn’t see any effect from the shutdown except for a temporary spike in the 1 month T-bill. They again repeated the view that the economy is strengthening, and if things play out as we expect, we should be tapering QE in the next few months.
Sometimes you have to parse the Fed’s characterization of things. On the Fed’s scale:
Economic Growth – “moderate”
Inflation – “modest”
Corporate Credit – “robust”
CAPEX – “tepid”
In other words, growth is just ok, inflation is too low, business investment is way too low, and the Fed is beginning to worry about bond investors reaching for yield. This means that QE’ days are numbered as the risks of an overheated credit market are becoming larger than the risk of a credit crunch. However, low interest rates are probably here to stay until business investment, inflation, and employment are closer to where the Fed wants to see things.
One thing to keep in mind is that the Fed’s footprint has been increasing in the MBS market as issuance drops. The end of the refi boom meant lower overall MBS issuance but the Fed has been been maintaining a constant $40 billion a month. As a percentage of total volume, their footprint has been increasing. You can see it in MBS spreads, which have tightened to Treasuries. While the market has been of the view that the Fed would taper Treasury purchases first, lest it derail the nascent housing recovery, an adjustment in MBS is probably in order. This could mean a double-whammy for mortgage rates – The benchmark (Treasuries) increases in rate, and the spread to Treasuries increases as well. Float at your own peril..
I find it ironic that the Fed worries about people conflating a reduction in QE with a tightening of monetary policy, yet at the same time refers to “fiscal headwinds.” Reality Check: fiscal policy is about as loose as it gets, unless you compare it to a completely artificial benchmark of the past 5 years. Post WWII, government spending averaged around 19% of GDP. We have averaged 24% over the past 5 years. We are still at 22%. 5 of the 7 largest postwar deficits as a percent of GDP have been in the past 5 years. Calling a slight reduction in government spending as a “fiscal headwind” makes as much sense as characterizing a reduction in asset purchases from 85 billion a month to 65 billion a month as “tightening monetary policy.” It is the dieting equivalent of having a diet coke with your triple whopper value meal.
As home prices rise, negative equity has continued to fall, according to Zillow. The percentage of homes with negative equity dropped to 21% in the third quarter from 23.8% in the previous quarter. Negative equity has been a big reason why existing home sales have been so depressed. Yesterday we saw an annualized pace of 5.12 million, which is slightly below average. IMO, there is pent-up demand that is being held back by negative equity. As that condition rights itself, we should see existing home sales numbers well in excess of historical averages. The mortgage bankers who do purchase activity well will reap the benefit.

32 Responses

  1. Test

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  2. Senate Republicans decide not to shoot themselves in their foot:

    http://thehill.com/homenews/senate/191003-gop-on-obamacare-let-it-self-destruct

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    • jnc:

      Senate Republicans decide not to shoot themselves in their foot:

      I don’t profess to always understand the political consequences of a given action, but what does seem obvious to me is that, as a matter of policy, the R’s who were holding out for repeal ought to be given their due. They tried, and failed, to spare the nation from most people now recognize is a policy disaster.

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  3. Senate Republicans decide not to shoot themselves in their foot:

    It’s as if millions of voices suddenly cried out in terror and were suddenly silenced.

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  4. Speaking of traps, Harry Reid is thinking about going nuclear on nominations and the Republicans would potentially hold up the confirmation of Janet Yellen..

    Might be smart to let a token leftist on the court to prevent this little political skirmish from happening..

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  5. No. Republicans who shut down the government were idiots, pure and simple starting with Cruz. Had they taken the sit back attitude previously, they would be in a much stronger position now.

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    • jnc:

      Had they taken the sit back attitude previously, they would be in a much stronger position now.

      Again, you are talking about a stronger political position. As I said, I don’t profess to always understand what is or isn’t the best political tactics. But clearly from a policy point of view they were in the right.

      That said, I am curious about why you think they would be in a much stronger position right now had they not “shut down” the government. In what way is the “shut down” effecting their political position now that the very objections (to O-care) that led to the “shut down” have proven to be justified? Whether or not the “shut down” was good politics at the time, I don’t see how it is effecting the current political climate in the wake of the O-care debacle.

      edit: Corked by McWing, in fewer words.

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  6. “Might be smart to let a token leftist on the court to prevent this little political skirmish from happening..”

    The deal they should offer is one of Obama’s nominees for one that they preclear to preserve “balance”. That’s a lot easier to sell.

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  7. Stronger how? What tangible advantage would they have now that they do not currently have?

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  8. Meh, shoot the hostage. Get rid of the filibuster, it’s existence hasn’t saved us from bad legislation.

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  9. Reid has effectively turned the Senate into a House of Reps anyway. Might as well blow up the current structure that delivered us the shitty state we’re in now.

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  10. “Stronger how? What tangible advantage would they have now that they do not currently have?”

    Tying the one year mandate delay to a CR after the PPACA blew up would have been more likely to get enough votes to pass, given Democratic Congressional panic at the moment.

    You press when the opposition is divided, not when they are united. And independents hated the idea of the government shutdown. It was guaranteed to be 100% bad press for Republicans and it was.

    If you want to make believe that public image is irrelevant and polls don’t matter, feel free. Down that path lies defeat, but it sounds like you would prefer to be self righteous in defeat than to accept anything short of 100% victory, immediately.

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    • jnc (to McWing):

      If you want to make believe that public image is irrelevant and polls don’t matter, feel free. Down that path lies defeat, but it sounds like you would prefer to be self righteous in defeat than to accept anything short of 100% victory, immediately.

      I’ve heard similar laments lobbed at libertarians who insist on voting for unelectable third-party candidates rather than compromise their principles by voting for the least worst of the major party candidates.

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  11. “Whether or not the “shut down” was good politics at the time, I don’t see how it is effecting the current political climate in the wake of the O-care debacle.”

    Then you are indeed clueless on politics. Republicans ruined their standing in the shutdown fight. Democrats are now ruining theirs. The fact that the Republicans can say they are right is moot at this point. The swing voters are simply saying that they hate both parties, not giving the Republicans an advantage.

    Edit:

    “But clearly from a policy point of view they were in the right.”

    This is the argument that the administration is giving, that since the PPACA is good policy, it will fix the politics in the long run. They are wrong. The politics determine if there’s going to be a long run.

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    • jnc:

      Then you are indeed clueless on politics.

      Perhaps, but politics matters to me only in so far as it matters to getting the right policy implemented (or the wrong policy un-implemented.) I don’t care about the popularity of the R’s just for the sake of their popularity. I care about it only to the extent that it is needed to get preferred policies in place. So the question I have for you is this: What policy would, right now, have a higher probability of being implemented (or un-implemented) had the R’s agreed to the budget deal on Sep 30 instead of Oct 16?

      For example, you said to McWing, “Tying the one year mandate delay to a CR after the PPACA blew up would have been more likely to get enough votes to pass, given Democratic Congressional panic at the moment.” But in order to avoid the shut down, a CR had to be passed before O-care blew up. So we are right now in the same situation that we would have been in had the shut down not occurred, ie with a CR coming up in a few months post-blowup. So is it really the case that the D’s are now less likely to accept a delay in the mandate being tied to the next CR than they would have been simply because a month ago the R’s shut down the government? That doesn’t seem very intuitive to me at all. Dems seem to me to be panicking and seem increasingly likely themselves to want a delay, irrespective of last month’s shut down.

      But I admit, being outside the DC bubble, I could be clueless.

      This is the argument that the administration is giving, that since the PPACA is good policy, it will fix the politics in the long run. They are wrong. The politics determine if there’s going to be a long run.

      I agree there is a dependency issue. But it seems relevant to the D’s in this case in a way that it is not relevant to the R’s. The immediate unpopularity of O-care could in and of itself prevent the policy from becoming successful even if it eventually would be, if that unpopularity leads to its premature demise. But the immediate unpopularity of R tactics to repeal O-care will have no effect whatsoever on whether or not the policy will be successful, and indeed if it proves to be the debacle it appears to be, R’s previously unpopular (and unsuccessful) efforts to spare the nation of the debacle will most likely be widely forgotten, and to the extent they are remembered they may well come to be somewhat appreciated.

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    • jnc:

      I forgot this:

      The swing voters are simply saying that they hate both parties, not giving the Republicans an advantage.

      I understand, but the ever-cherished swing voters are, I think, notoriously and short-sightedly fickle. Also worth pointing out is that they don’t have a much of a choice. Republicans don’t need to be loved by swing voters. They just need to be less hated than the D’s.

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  12. Tying the one year mandate delay to a CR after the PPACA blew up would have been more likely to get enough votes to pass, given Democratic Congressional panic at the moment.

    I doubt that very much, their panicked now and won’t vote in numbers against the President. Why would they have done it then?

    You press when the opposition is divided, not when they are united. And independents hated the idea of the government shutdown. It was guaranteed to be 100% bad press for Republicans and it was.

    When does the Republcan party get good press? Nothing going on right now is pro R, it’s anti – D, a distinctly different proposition. Also , the party would have permanently lost my support had they not done it.

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  13. We’ll just take it. It’s democratic!

    she can’t be dumb enough to think this could actually work, can she?

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  14. You still have not demonstrated a tangible benefit that the R’s would have that they currently do not have now.

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  15. I give up Troll. You either believe polls are relevant in politics or you don’t.

    Go down in a blaze of glory.

    All they needed to do was wait 30 days.

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  16. The thing is you are asking me to believe that a 16 day shutdown would have a significant or even marginal effect on a voters decision 1 1/2 years later. In the 96 election, post shutdown, the Republicans gained two Senate seats. I never believed that Dole had a chance As D incumbents, going back over a 100 years have not lost.

    As I mentioned before, the D’s are not going to abandon Obama in enough numbers to override a Veto.

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  17. Interesting. Wonder if there Obana voters or victims of Obama.

    Clients wary of the health care law can be especially intolerant of the website’s problems, Mr. Trevorrow said. “They’re incensed over the fact that the law would, as they see it, intrude on them to this degree and then not even perform,” he said.

    Beatings will continue until morale improves I guess. But seriously it’s obviously because of Whitaker. Motherfucking. Chambers.

    Filing paper applications, which the Obama administration is encouraging people to do if they cannot access HealthCare.gov, has not necessarily been better. Laura Line of Resources for Human Development, a nonprofit group based in Philadelphia that has navigators working in 10 counties, said the group stopped using paper applications a few weeks ago because the federal government was so slow to process them.

    Slow? The Federal Government ? Knock me over with a feather.

    “We got concerned that people would not hear back in a timely fashion,” Ms. Line said. “When you do the paper, you eventually have to get online to finish the process anyway.”

    Well then, problem solved. Wait … What?

    http://www.nytimes.com/2013/11/21/us/politics/applicants-find-health-website-is-improving-but-not-fast-enough.html?pagewanted=all

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  18. Gingrich, Dole, and the rest who were there said it made a significant difference. You either believe them or you don’t. Given that they are describing their own psychology, I’d argue that they are qualified to make that judgement.

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  19. True, but history and events are on my side. R’s kept the house and gained 2 senate seats and Dole failed, like every other R since the 1870’s to defeat an incumbent Democratic President.

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  20. Correct, however for me Cooch vs McAuliffe really was a wash.

    Besides, I’m only arguing that if they had waited 30 days to try the tactic it would have had more of a chance at actually succeeding.

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    • jnc:

      Besides, I’m only arguing that if they had waited 30 days to try the tactic it would have had more of a chance at actually succeeding.

      I really want to understand your thinking here, so forgive me if I seem to be pressing the same issue over and over, but I still don’t know what exactly has less of a chance of success now than it would have had the shutdown not occurred.

      In order for the shutdown to have been avoided, the House R’s would have had to have passed a CR prior to Sep 30, ie prior to the rollout of O-care. So let’s assume the hypothetical CR pushed out the next deadline by the same amount of time as the actual CR that got passed, meaning that instead of Jan 15, the next CR date would be Jan 1.

      So, what exactly is it that you think the R’s would be more likely to have accomplished by Jan 1 than they now are likely to accomplish by Jan 15?

      As I mentioned earlier, your one comment to McWing suggests that you think delaying the mandate for a year would be more likely in the absence of the shut down. But that doesn’t strike me as particularly obvious, because such a delay would require D votes, and any “yes” D votes will come strictly from D’s who are panicked over the effects of O-care implementation. And those effects would (indeed do) exist, and are entirely independent of, whether or not there was a shut down. After all, we’ve seen (and even you referred to) the D panic despite the fact that the shut down did happen. So I just don’t see the logic behind the belief that the absence of the shutdown could have made a delay in the mandate more likely than it already is.

      If it is not a delay in the mandate, what exactly is the R policy that would have a higher chance of success if the shut down had not occurred?

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    • jnc:

      Correct, however for me Cooch vs McAuliffe really was a wash.

      How about Romney vs Obama?

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  21. Californians are racists.

    California’s exchange votes *not* to allow President Obama’s plan to reverse cancellation notices to go forward there.

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  22. That was from WaPo’s S. Kliff

    Like

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