Morning Report: GDP disappoints 1/27/17

Vital Statistics:

Last Change
S&P Futures 2294.3 0.3
Eurostoxx Index 366.1 -1.4
Oil (WTI) 53.5 -0.3
US dollar index 91.5 0.1
10 Year Govt Bond Yield 2.51%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.16

Stocks are flattish after GDP comes in weaker than expected. Bonds and MBS are down small.

Fourth quarter GDP growth came in at 1.9%, lower than the 2.2% Street estimate. For the year, GDP came in at 1.6%. Trade was the big drag, along with Federal government spending. This is the advance estimate and will be subject to two more revisions. Disposable personal income rose 3,7% and the PCE deflator (the Fed’s preferred measure of inflation) increased 2%, right in line with the Fed’s inflation target. Ex-food and energy it increased only 1.3%. The savings rate also fell.

The Fed has been consistently high with its estimates for GDP growth. Check out the chart below. It shows the Fed’s forecast for 2016 GDP starting with the June 2014 FOMC meeting. They started out forecasting 2.75% growth, and it actually came in at 1.6%.

fed-2016-gdp-growth-forecast

Durable Goods orders disappointed in December, falling 0.4% versus expectations of a 2.6% increase. Capital Goods orders (a proxy for business capital expenditures) increased .8%, which was below expectations again.

Consumer sentiment improved in January, according to the University of Michigan survey.

I crunched some numbers looking at the last few tightening cycles, and compared the move in the 10 year bond yield to the move in the Fed Funds rate. During the last 3 tightening cycles (1994, 1999, and 2004) the yield curve flattened, meaning that long term rates went up less than short term rates. In fact, for every percentage point increase in the Fed Funds rate, the 10 year increased by about 34 basis points. The 10 year was at 2.2% when the Fed began its latest hike. With the Fed expecting an increase of 50-75 basis points in the Fed Funds rate this year, we should see an end of 2017 Fed Funds rate of about 2.6% or so. With the 10 year already at 2.5% plus, the market is treating these increases as if they have already been made. The 10 year has gotten ahead of itself a little bit, which means we could see the yield stay at these levels during the year while the Fed Funds rate catches up.

I talked about this and other stuff during the HousingWire 2017 Housing Outlook webinar: Trump’s Mortgage Nation. There is a link in the article for a playback if you missed it. We discussed interest rates, regulation and mortgage interest.

Mortgage backed securities got beat up a little yesterday after Brookings released an article by former Fed Chairman Ben Bernanke that discussed ending the practice of re-investing the cash from maturing bonds and MBS back into the market. The Fed’s balance sheet has been stuck at $4.5 trillion since QE ended, and they purchased about 360 billion worth of MBS last year to maintain their exposure. Given that total originations were probably around $2 trillion, that number is not insignificant. Does that mean spreads will widen once the Fed ends this practice of re-investing maturing proceeds? The short answer is “probably not” The spread between the 10 year and the mortgage rate is about 165 basis points or so. Prior to QE, it was around 166, and you didn’t really see any decrease in that spread when QE was active. The end of reinvestment should be a nonevent for the mortgage market.

Blue Horseshoe loves Annacott Steel

20 Responses

  1. Frist!

    For protestors and marchers and everybody speaking truth to power out there! Anthemic.

    Like

  2. I love Bird and The Bee. She’s got the most gorgeous voice.

    … and, natch, I love this song.

    Like

  3. And here’s a song that’s awesome to work out to, even if you don’t speak French (which I don’t):

    Like

  4. Okay, one more. I just thought of this song. Feels like a good tune for those unhappy with the Trump victory and hoping for a miracle.

    Like

    • The only miracle I can think of with regard to DJT would be for him to act like a rational adult in his daily dealings. I shouldn’t have to list all of the weird or fictional crap he has mouthed or tweeted in his first week in office.

      Noted this article on the emoluments suit that is likely to be dismissed because of standing issues:

      https://www.washingtonpost.com/posteverything/wp/2017/01/26/trump-is-getting-payments-from-foreign-governments-we-have-no-idea-what-they-are/?tid=pm_opinions_pop&utm_term=.cc9a530b0f0a

      The suit is more important than it seems because it lays out a groundwork for similar suits by parties with actual standing. This would include competing hotel chains, for instance, who lose foreign trade to a Trump named hotel, and have evidence to support the claim. The argument that the emoluments standard is prophylactic suddenly would be a tight fit, once standing were overcome.

      I assume that some competitors will hold off indefinitely, but some will jump fairly early, now that the legal research has been done for them.

      Under Jones, the POTUS can delay being personally tried until after he is out of office, so the results of litigation would be downstream.

      Depositions, as we know, are another matter entirely. After one suit with standing is filed we can expect that DJT’s financial dealings, worldwide, will be revealed, under pain of contempt. Would a USDCt hold a sitting POTUS in contempt? I assume a Plaintiff with standing would choose a forum friendly to the Plaintiff, and the question of whether the case would remain in that forum after the defense motion of forum non conveniens would be critical to that thorny matter.

      I speculate on this issue because I think it is a sure thing to occur within the first year of DJT’s presidency.

      Liked by 1 person

      • And while DJT’s counsel will be able to negotiate the timing of his depositions to some extent, his sons in charge of the business will have little room, and presumptively will have access to all of the global financial dealings because they “run the organization” now.

        Liked by 2 people

        • What is more worrisome, a president who rents his name to hotels, or a president who both refuses to enforce laws passed by congress and enforces laws that congress refuses to pass?

          Liked by 2 people

  5. More advice for the left:

    http://www.dailywire.com/news/12813/9-hints-how-democrats-can-learn-talk-real-people-john-nolte

    “Senator Elizabeth Warren is a walking pussyhat.

    In fact, I think her Indian name is “Shrieks with a Pussyhat.”

    Liked by 1 person

  6. The left is taking this temporary restriction on immigration from certain countries very badly.

    How is it that the ordinarily religion-phobic left decided to become BFFs with Islam? of all the religions…

    Like

  7. Yes! A thousand times yes!

    http://sanfrancisco.cbslocal.com/2017/01/27/california-could-cut-off-feds-in-response-to-trump-threats/

    Some day we’ll all thank Donald Trump for helping establish state nullification.

    Like

  8. This is gonna leave a mark.

    Like

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