Morning Report: Will the late teens resemble the early 80s? 11/10/16

Vital Statistics:

Last Change
S&P Futures 2167.5 7.0
Eurostoxx Index 340.7 0.9
Oil (WTI) 44.9 -0.3
US dollar index 89.3 0.4
10 Year Govt Bond Yield 2.09%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 3.75

Stocks are higher this morning as the markets come to grips with a Trump presidency. Bonds and MBS are down.

Strangely, the 2 year bond is trading at 90 basis points, while the consensus is that we should be getting 2 more rate hikes by late 2018. This is even more surprising given the action in the 10 year. A poll of economists and strategists indicates that the Fed will still raise rates in December. Given the market action since Trump won, the Fed has every excuse to do so.

Trump will not ask for Janet Yellen’s resignation. That said, she probably won’t get re-nominated when her term expires in 2018. Donald Trump has been critical of Fed policy, insisting that rates should be higher than where they are now.

After an appeals court ruling, President Trump could fire CFPB Director Richard Cordray.

Mortgage Applications fell 1.2% last week as purchases rose 1% and refis fell 3%. The average interest rate for a 30 year fixed conforming mortgage rose 2 basis points to 3.77%.

Initial Jobless Claims fell to 254k last week as employers continue to hang onto their workers.

The conventional wisdom that a Trump victory would be stock bearish, bond bullish, and dollar bearish turned out to be dead wrong, at least initially. Stocks were destroyed in the wee hours of Wednesday morning, and then had a massive turnaround during the day. Legendary investor Carl Icahn probably singlehandedly cleaned up the sellers overnight, pouring $1 billion into S&P 500 futures. He was probably up about 6% on that trade by noon.

The overall feel to the tape is “risk on” and investors are definitely selling bonds to buy stocks. Financials, Pharma, and construction stocks led the charge. Surprisingly the homebuilder ETF (XHB) underperformed. Ultimately a Trump presidency should be bullish for housing, so I am surprised at the stock action.

The more I think about it, the more I believe the Trump presidency will most closely resemble the early Reagan Administration economically. Reagan took over after a long period of economic underperformance and shocks to the economy. Early in his administration, the Fed was tightening while fiscal policy loosened. I think that dynamic is going to play out here, as the government cuts taxes, deregulates, and spends on infrastructure while the Fed methodically raises interest rates off the zero bound. Ultimately the Fed has an easier job here, as they don’t have the raging inflation problem and any recession will probably be more mild since we are already at full employment. I don’t see a deep recession like 81-82 in the cards, however we are certainly in uncharted territory with monetary policy worldwide. The biggest difference is that that the early 80s ended a secular bear market in bonds that began in the 50s. This time around, we are ending a secular bull market in bonds that started in the early 80s. Note that we are also probably at the beginning of a secular bull market in stocks, just like the early 80s.

10 year long term.PNG

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