Morning Report: new normal 8/16/16

Vital Statistics:

Last Change
S&P Futures 2182.0 -4.0
Eurostoxx Index 343.7 -2.0
Oil (WTI) 45.9 0.2
US dollar index 85.6 -0.6
10 Year Govt Bond Yield 1.54%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.45

Stocks are lower this morning on no real news. Bonds and MBS are mixed

Inflation at the consumer level continues to be well-contained. The consumer price index was flat month-over-month and is up 0.8% year-over year. Ex-food and energy it was up 0.1% MOM and 2.2% YOY. The biggest contributors to inflation were health care costs (up 4% YOY) and housing (up 2.4% YOY).

Housing starts were 1.211 million annualized in July, coming in higher than expected. The driver was multi-fam, which can be extremely volatile. Single fam continues to plug along. Building permits were more subdued, coming in at 1.15 million. Same situation in permits: multi-fam permits rose while single fam declined.

Industrial production increased 0.7% in July versus expectations of a 0.3% increase. Manufacturing production increased 0.5%. Capacity utilization increased to 75.9%. So some signs of life in the manufacturing sector after a dismal Spring and early summer.

An idea that is percolating at the Federal Reserve is the idea that this low productivity / low growth economy is a new normal, which implies a lower neutral interest rate. This in part explains why the Fed has been so reluctant to raise rates despite unemployment being at levels historically associated with full employment. One idea is that the Fed should either raise its inflation target or begin targeting nominal GDP. The big question is whether the PhD standard, which has pushed interest rates to the floor, is part of the reason why productivity and growth are so low. By creating a bubble in sovereign debt, you have a misallocation of resources (by definition – that is what bubbles are) and that could account for our disappointing growth and productivity. Certainly business capital expenditures remain low and focused on saving labor costs.

Meanwhile, William Dudley thinks the market may be too complacent about a September rate hike. The market has been calling the Fed’s bluff for over a year now.

Freddie Mac thinks 2016 could be the best year for mortgage origination since 2012, with total origination topping $2 trillion. The unexpected gift of lower rates is the reason why. For 2017, they are forecasting a drop back to $1.7 trillion as home price appreciation falters and interest rates rise, although rising rates shouldn’t be too bad given they are forecasting 2017 GDP growth to be below 2%. They anticipate the mortgage rate to increase 10 basis points to 3.7%.

13 Responses

    • you know this is the excuse the left is going to use to get to single payer…


      • Brent:

        you know this is the excuse the left is going to use to get to single payer…

        This has been clear for quite some time now.


        • Probably. Still, the wrong strategy for this country. If they wanted single payer, they should have gone for an expansion of Medicare. Incrementally, until it was, effectively, single-payer.

          Although I’m astonished that government micro-management of an already hugely distorted marketplace didn’t work out. Astonishing. Who could have predicted it?


  1. I don’t think many on the Right realize how little interest there is in using ground troops to fight anybody, anywhere

    This is a better strategy, frankly.


    • I am interested in using ground troops to fight any country that declares war against us and starts sending missiles or bombers in our direction.

      For terrorists, I prefer drones and Seal Team Six. I support Special Forces for combatting terrorists on foreign soil but I don’t see invading and controlling every country a terrorist group happens to walk through. Except possibly Canada.


  2. “which has pushed interest rates to the floor”

    Low interest rates don’t mean much if no one qualifies.


  3. I just heard a great quotation, attributed to Ian Tuttle at NR:

    The left has won the culture wars, and is now roaming the country shooting survivors.

    Sounds about right to me.


    • That’s the way you secure and preserve victory.

      Presumably, the right would do it differently, or at least did do it differently from 1900-1970 or so, and thus that is why the left has won the culture wars.

      Although I think the left was always going to win the culture wars in the West. Which is okay with me, ultimately. If only the left understood the cultural purists of Islam were much more their enemy now than your average angry Baptist.


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