Morning Report: Potential Dodd-Frank reform 11/14/16

Vital Statistics:

Last Change
S&P Futures 2164.5 3.0
Eurostoxx Index 338.2 0.7
Oil (WTI) 42.7 -0.7
US dollar index 90.2 0.5
10 Year Govt Bond Yield 2.20%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 3.89

Stocks are up modestly this morning on no real news. Bonds and MBS are up again.

No economic data this morning, but we will have some Fed-speak in the afternoon.

About $1.2 trillion in wealth was wiped out in the bond market last week as yields soared in response to the Trump victory. The yield on Treasuries increased by 37 basis points last week. Bonds are reacting to (a) the potential inflation from a big infrastructure spending program, and (b) the potential for reduced trade and increased protectionism. Yields are now at highs we haven’t seen since January.

Richmond Fed President Jeff Lacker said that if Trump enacts a large fiscal stimulus plan, it might cause the Fed to move faster than the markets anticipate. Lacker will be a voting member in 2018.

One of the first jobs the new administration will tackle is to reform Dodd-Frank. The biggest piece of that will be to reform the CFPB, by making it subject to the Congressional appropriation process and to replace a single director with a bipartisan board. Banking stocks have been rallying since the election. Other rules would center around capital requirements and stress tests, which would mainly affect the smaller banks that don’t have massive derivatives portfolios or international operations, in an attempt to ease the regulatory burden on them. Democrats might attempt to filibuster any reform if it goes too far, but there probably is enough common ground in the Senate to make some sort of reform possible.

Could Donald Trump end up facing the nemesis of Bill Clinton’s first administration – the bond vigilante? Certainly if you take his promises at face value: a big uptick in spending with a massive tax cut, then you might see the creature that has been in hibernation since the early 90s resurface.

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