Morning Report: Janet Yellen heads to the Hill 2/14/17

Vital Statistics:

Last Change
S&P Futures 2327.0 0.8
Eurostoxx Index 369.9 -0.2
Oil (WTI) 53.2 0.3
US dollar index 91.0 -0.2
10 Year Govt Bond Yield 2.43%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.06

Stocks are flat this morning after the producer price index comes in a little hotter than expected. Bonds and MBS are flat.

As expected, Steve Mnuchin was confirmed by the Senate to be the new Treasury Secretary.

The Producer Price Index (which measures inflation at the wholesale level) came in at 0.6% in January, higher than the 0.3% consensus estimate. On a year-over-year basis, it is up 1.6%. The core rate, which strips out the volatile energy and food components, was up 0.2% and is up 1.6% YOY. Inflation remains under control, and won’t really accelerate until we see wage growth.

Despite the early missteps of the Trump administration, small business remains optimistic about the future, according to the NFIB. Small business added on average .15 workers in January, the highest reading in two years, and historically a very high number. 53% reported trying to hire workers and 47% were unable to find qualified candidates.

Janet Yellen begins her two-day Humphrey-Hawkins testimony to Congress. There probably won’t be much in the way of market-moving headlines, as I suspect the focus will be on deregulation and changes to Dodd-Frank. Any references to monetary policy should pretty much echo the Feb 1 FOMC statement.

PIMCO is warning investors to be prepared if the Fed makes a mistake by tightening too fast. Historically central banks have moved a little too quickly trying to bring back rates from the zero bound (or close to it). In fact, the Bank of Japan has tried twice since their 1989 crash to get off the zero bound and has had to reverse course each time. The markets are currently forecasting a 30% chance of a Fed hike at their March meeting. The risk isn’t so much that the current board of governors will move to fast – it is that Trump nominates hawks. That said, no politician likes a hawkish central bank except on the campaign trail, so that fear could be overblown.

Richmond Federal Reserve Bank President Jeffrey Lacker (nonvoting) said the markets are underestimating the pace of Fed rate hikes this year. “”Rates need to rise more briskly than markets now seem to expect. The elevated uncertainty now surrounding fiscal policy, particularly the potential for substantial fiscal stimulus, suggests that our next increase should come sooner rather than later in order to reduce the risks associated with having to raise rates more rapidly later on.” The way things are looking in DC, it seems pretty unlikely we are going to see any sort of cooperation on anything, least of all a tax cut.

It bears repeating that interest rate cycles are long. Coming out of the Great Depression, long term Treasury rates stayed below 3% from 1934 to 1956. Below is a chart going back almost 100 years. Long term rates are pretty much around the levels we saw in the 1940s. Note the uptick in interest rates around 1932. That was the Fed tightening that pushed the economy over the edge during the Great Depression. The Fed didn’t make the same mistake this time around, which is probably the biggest reason why the Great Recession didn’t become the Great Depression II. Ironically, it took Ben Bernanke to officially admit that the Fed screwed up in the 30s.


Completed foreclosures fell 40% year-over-year in December to 21,000. The foreclosure inventory is down 30%. The seriously delinquent rate is 2,6%, which is the lowest since June 2007. Foreclosures remain concentrated in the judicial states of NY and NJ. The rest of the country has pretty much worked through their foreclosure inventory.

Real estate agents are optimistic for 2017, according to NAR. Changes in the FHA rules for condos is helping.

Regulators put the kibosh on a strategy by JP Morgan and Redwood to help ease the path for private label securitizations. The idea was for JP Morgan to create a junior structure which contained the riskiest mortgages, sell off that piece to Redwood, and to retain the senior tranches. The hope was that this would reduce the amount of capital JPM would be required to keep against the mortgages. The OCC rejected the deal.

14 Responses

  1. Jimmy Rogers on the the move by governments to reduce the use of cash for transactions…

    I wonder what the effect will be on seigniorage.


  2. It is a strange time when the American Left is standing up for federalism, limited government, and is concerned about Russian influence on US politics…


  3. When the back end and the front end aren’t on the same page:

    Liked by 1 person

  4. Mich:

    Thought you would get a kick out of this. This is an exact comment today to me on another comments boards:

    You, sir, are the Most Reasonable Person On The Internet. Socrates is resting peacefully in his grave knowing that someone is still carrying the torch…

    We were disagreeing at the time. I thanked him but told him others were sure to disagree quite vociferously.


  5. This is the 2nd time this week that Bill Kristol has blown my mind.


    • Was Flynn THAT mental?


      • The scandal isn’t about Flynn being mental, but rather lying to cover up contacts with Russia, which may or may not have been undertaken at Trump’s behest.

        At a minimum, much like with Christie’s aides with Bridgegate, he could assume that Trump would have approved.

        Given the existing speculation about Trump’s ties with Russia vis-a-vis the election, this was a particularly stupid way to go about it. Trump should have just Tweeted that he was planning on doing a comprehensive review of US policy towards Russia after being inaugurated and left it at that. Instead, they poured gasoline on the fire.

        But if Trump had that kind of self discipline, he wouldn’t be where he is today.

        This is easily shaping up to be the most incompetent administration of my lifetime, beating Carter’s.

        But everyone on the left (and fellow travelers like Kristol) cheering this ought to think through very clearly the implications of the “Deep State”/Military industrial complex/national security establishment being able to potentially drive an elected president from office who they opposed via leaks, institutional opposition and leveraging criminal statutes.

        Charles Pierce alludes to it here:

        “It is also a problem for democracy to have the unelected bureaucrats of the intelligence community at war with an elected president, no matter what you think of the president* or how he got elected. Sooner or later, I fear, the military’s going to get dragged into this fiasco and that will make things immeasurably worse.”

        It’s also worth noting the precedent being set where any contact that discusses policy substance between people in an incoming administration and representatives of a foreign country is viewed as scandal worthy at best and a violation of the Logan Act at worst.

        But any tactic is justified in the “resistance” against Trump.

        This is pretty good too:

        “It can’t go on like this.

        We can’t have a White House this compromised and this oblivious to the water rising over its head. We can’t have an intelligence community permanently at war with the civilian government. We can’t have a Congress so set on its economic and social agenda that it abandons its oversight function. (Do you know what your House of Representatives was doing today? Among other things, it dealt with the issue of hunting bears in Alaska from the air. Sarah Palin was ahead of her time in so many ways.) And we can’t have an American public so numb and disengaged that this carnival of the bizarre and grotesque—and worse—sounds like the way self-government is supposed to work.”


    • It was either him or Kristol.

      As far as I know though, only Bill Kristol has advocated for dissolving the electorate and forming a new one.


  6. Like

  7. BTW: Whoever posted the Abraham Lincoln quotation is brilliant.



    Comrades, our own fleet doesn’t know our full potential. They will do everything possible to test us; but they will only test their own embarrassment. We will leave our fleet behind, we will pass through the American patrols, past their sonar nets, and lay off their largest city, and listen to their rock and roll… while we conduct missile drills. Then, and when we are finished, the only sound they will hear is our laughter, while we sail to Havana, where the sun is warm, and so is the comradeship. A great day, comrades. We sail into history.

    Liked by 1 person

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