Morning Report – Big Week Ahead 9/15/14

Markets are flat this morning ahead of a big week for data and events. Bonds and MBS are down.

Industrial Production fell .1% in August, while capacity utilization dropped by 30 basis points to 78.8%. It looks like the notoriously volatile motor vehicle sector accounted for the decline. The previous month had a big increase in motor vehicles, which it looks like we gave back in August.

The Empire Manufacturing Survey came in at 27.5, a multi-year high.

This week we will have the FOMC meeting, with the decision on Wed afternoon. This meeting will include new projections and also should include a press conference. The Street will be focusing on any changes in the rate projections from the voting members (note that the mix of voting members will turn much more dovish at the beginning of 2015).

One of the interesting features of mortgage rates this summer has been the decoupling from long-term bonds. As rates fell during the summer, mortgage rates stayed stuck at the 4.25% range. Now that bonds are selling off, mortgage rates are still relatively constant. Look at the graph below. The top line is the 30 year fixed rate mortgage according to Bankrate, and the lower line is the 10 year bond yield. The correlation has completely broken down.

I Blame NoVA

http://www.washingtonpost.com/blogs/federal-eye/wp/2014/09/15/how-states-have-gamed-medicaid-for-hundreds-of-millions/?wpisrc=nl_fed&wpmm=1

 

You healthcare lobbyists should have written a law without loopholes to begin with.

 

I am curious as to what is the net effect of revenue matching laws.  It seems to me that revenue match for a particular program that bypasses the state’s general coffers might achieve the supposed result of more program funding, but considering how it is normally done, I think it is simply a transfer of deficit raised federal dollars to state general revenues.

 

We have so many revenue matching programs.  I assume that Highway funding is the largest one, followed by Medicaid.  Or perhaps vice versa.  I believe that in TX all fed revenues into both are used however the Lege desires.

 

Should a federal/state joint venture like highway construction even have a feature like “revenue matching”?  What purpose does it actually serve?  Assume with me that interstate highways are basically federal responsibilities.  Nevertheless, the R.O.W. impacts are all local, and state and local input are critical to managing the minimum damage to a community.  So cooperation is a legitimate goal, but does revenue matching have anything to do with that?  Is it possible states or localities were blackmailed into supporting the interstate system financially, or else the feds would have drawn the roadway to kill commerce in a town?

 

The article calls the gaming of Medicaid by the states “waste”.  But it seems to me the structure was established as a “game”.  If you see revenue matching as other than an invitation to increase the federal deficit in order to permit states to have the pleasure of spending money they did not have the pain of raising, explain it to me.

 

 

 

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