All Things in Moderation

Markets are higher this morning after better-than-expected growth out of China. Bonds and MBS are up.

We will have some important housing related data this week with the NAHB Homebuilder Sentiment Index today, housing starts & building permits tomorrow, the FHFA Home Price Index on Thursday, and existing home sales on Friday.

The ECB will announce further QE measures this week, so be aware we could see some volatility in the bond market. Investors have been repricing aggressively, so let borrowers know that bond markets are volatile and rate quotes can change in a hurry.

The NAHB Housing Market Index fell to 57 from an upward-revised 58 in December. Traffic was a drag on the index. We are seeing increases in traffic in the Midwest, and declines in the Northeast, South, and West. The index is still close to post-recession highs.

The big takeaway from homebuilder earnings so far has been that price increases are going to be hard to come by and builders are going to become more promotional. They are also going to start shifting production to lower price points – starter homes may be lower margin projects, but you can build a lot of them. Note that in the December Industrial Production indices, construction materials were a big standout. This could portend a stronger building year.

Tonight we will have the State of the Union. Basically, Obama is going to announce a laundry list of liberal priorities that have no chance of being enacted with Republicans in control of Congress. In other words, don’t worry too much about what he has to say. He is going to agitate for higher capital gains taxes , however his centerpiece will be to provide free community college (to help the middle class), and his way to pay for it is to eliminate the 529 College Savings Plan. Of course middle class families have to save for college – they can’t just write a check like the rich, and they don’t qualify for need-based financial aid – so it is kind of ironic that Obama wants to torpedo the way the middle class saves for college in the name of helping the middle class. Of course the cognitive dissonance is irrelevant since this is strictly for show and has absolutely no chance of ever seeing a vote in either chamber. Markets should not react to what he has to say (in fact I suspect only the obama faithful will watch in the first place).

Another proposal slated to come out tonight is some sort of bank tax. SIFMA has already weighed in on it. Again, relax. It is red meat for the base and has zero chance of becoming law.

Note that obamacare is going to complicate people’s taxes this year.