Morning Report: Market Reassessing post Trump risk-on trade 1/12/17

Vital Statistics:

Last Change
S&P Futures 2264.8 -6.0
Eurostoxx Index 364.0 -0.9
Oil (WTI) 53.3 1.1
US dollar index 91.8 -0.6
10 Year Govt Bond Yield 2.33%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 4.1

Markets are lower after Trump’s press conference yesterday. Bonds and MBS are up

We saw stocks sell off (and bond rally) after Donald Trump’s press conference yesterday. He did not address any sort of fiscal stimulus, which the markets were hoping to see. IMO the market may be realizing the huge stock market rally (and bond sell-off) post election was overdone. Trump also fired a shot across the bow of the pharmaceutical industry (which sent the S&P 500 downward), and got into it with a CNN reporter. He also will not divest his business operations. The pivot to a more presidential demeanor doesn’t look like it is going to happen. He is also introducing the dreaded “U” word – uncertainty – into the conversation with his tweets directed at specific companies. The markets are in a risk-off mood.

The first act of Congress was to set the stage to repeal Obamacare on a simple majority basis. The Senate passed it yesterday 51-48 and the measure goes to the House today. IMO, if the first legislative act is to repeal Obamacare on a party-line basis without any sort of replacement plan, any sort of bipartisan cooperation of tax reform and infrastructure spending is going to be almost impossible. Given the Fed’s forecast of 3 Fed Funds hikes this year was based on the assumption that we will have more fiscal stimulus, we could see a March hike taken off the table rather quickly, and I wouldn’t be surprised to see a further decline in overall interest rates. As Morgan Stanley said: Buy the election, sell the inauguration.”

St. Louis Fed Head James Bullard said that any of Trump’s proposed fiscal stimulus would be a 2018 and 2019 story, not a 2018 story. Infrastructure spending has a long lead time – the idea of “shovel ready” jobs is more or less a myth. Tax cuts would affect things sooner, but even then will be a 2018 story. The best chance for immediate results will be in regulatory reform.

We have a lot of Fed-speak today, with 3 speakers, so expect some volatility in rates during the day.

Import prices rose 0.4% last month, however if you strip out energy, they fell 0.2% and the YOY rate was flat. The strong dollar is helping keep inflation in check.

Initial Jobless Claims rose to 247,000 last week. We are still at exceptionally low numbers: employers are hanging on to their employees.

Ben Carson travels to Capitol Hill today to answer questions about his plans for HUD. Expect Republicans to focus on GSE reform and Democrats to focus on fair lending and affordable housing. There will undoubtedly be questions on his lack of experience in housing.

KB Home reported fourth quarter numbers yesterday. Revenues increased 21%, while average selling prices increased only 2%. We have been seeing a decline in ASP inflation from most of the builders. Backlog was the highest in 10 years. Deliveries were up 19%, while gross margins decreased to 16.5%. The stock is down about 4% on the open.

The fall in gross margins is a reflection of (a) increasing inflation and (b) an inability to pass on higher costs through price increases. Inflation is most prominent in increasing raw land costs, higher regulation, and also a tight market for skilled labor.

Foreclosures are at a 10 year low, and we are seeing better performance in many states. 379k people lost their homes to the bank last year. At the height of the crisis over a million people did. Home price appreciation helps as it takes the strategic defaulters off the table. The worst state for foreclosures? New Jersey.

The night of the election, Carl Icahn left the party early to buy S&P 500 futures down 100 points. He ended up taking a $1 billion position overnight and profited handsomely in the subsequent rally. Know who was short the whole time? Soros. Trading and politics are a dangerous mix. Politics is almost pure emotion.

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