Morning Report – Terrible GDP revision, but look at the technical notes 6/25/14

Vital Statistics:

Last Change Percent
S&P Futures 1939.1 -4.1 -0.21%
Eurostoxx Index 3250.8 -34.0 -1.04%
Oil (WTI) 106.1 0.0 0.05%
LIBOR 0.234 0.000 0.11%
US Dollar Index (DXY) 80.16 -0.170 -0.21%
10 Year Govt Bond Yield 2.54% -0.04%
Current Coupon Ginnie Mae TBA 106.6 0.1
Current Coupon Fannie Mae TBA 105.9 0.1
BankRate 30 Year Fixed Rate Mortgage 4.19
Markets are lower this morning after a dismal revision to first quarter GDP. Bonds and MBS are flying on the number
First quarter GDP fell at a downward revised rate of 2.9% in the first quarter. The initial estimate was a .1% increase, which was revised downward to -1%, which was finally revised down to 2.9%. There were some obamacare-related revisions in personal consumption expenditures which drove the decrease in the number.
Personal consumption rose 1% in Q1, versus an expected increase of 2.4%.Finally, durable goods orders fell 1% although if you strip out defense, air and transportation the number isn’t that bad.
Was first quarter GDP as bad as all that? I think you have to take the number with a huge grain of salt. Weather did have an effect, but it looks like there was some obamacare bean-counting issues happening that made the number so low. Simply put, the last time we had a similar GDP report was 2008 / 2009 and no one is going to argue that Q1 was as bad as then. The rest of the data is reasonably strong. Chalk this one up to technical revisions. The bond market is taking that view as well.
Case in point: The Markit PMI and Services PMI numbers came in above 61, which is a good number. If the ISM reported a PMI number above 61, we would be talking a manufacturing pace that would correspond to 4% GDP growth. Of course manufacturing doesn’t have the impact on the economy it used to, but still…
Insurers are beginning to tally up the effects of Obamacare and what it will mean for premiums next year. People enrolled in the new plans under Obamacare are showing higher rates of serious health conditions than other insurance customers, who tend to hang on to their old plans. This means prices are going way up next year for these new plans. So, either premiums are going to have to rise a lot, or government subsidies will have to rise a lot. Remember, the only reason why the insurance companies went along with Obamacare in the first place is because the government is going to backstop any losses they take. If Obama demands that they hold down prices to keep voters happy, then government will have to pick up the tab. Maybe Elmendorf’s CBO can figure out a way to obfuscate the issue so the Administration can claim it is bending the cost curve down, or at least claim we cannot say Obamacare is increasing costs.
The upshot: Higher healthcare costs = less disposable income. Which means less spending and a weaker economy. If there is a multiplier on health care spend, it cannot be that big.
Mortgage Applications fell 1% last week as well. Both purchases and refis fell.
Foreclosure starts fell to 78.8k in April, according to Black Knight Financial Services. We are starting to see more progress in the judicial states, however Massachusetts instituted a new foreclosure prevention (home price appreciation prevention) program, which is keeping its pipeline high.
%d bloggers like this: