Morning Report: Janet Yellen spooks the bond market 2/15/17

Vital Statistics:

Last Change
S&P Futures 2334.8 -2.3
Eurostoxx Index 371.3 1.1
Oil (WTI) 53.1 -0.1
US dollar index 91.4 0.1
10 Year Govt Bond Yield 2.50%
Current Coupon Fannie Mae TBA 102.1
Current Coupon Ginnie Mae TBA 103.2
30 Year Fixed Rate Mortgage 4.11

Markets are flat this morning as Janet Yellen continues to speak. Bonds and MBS are down.

Mortgage Applications fell 3.7% last week as purchases fell 5% and refis fell 3%. The average conforming rate fell 3 basis points, which makes this a surprise, but it could just be the vagaries of the slow season, which is pretty much over.

The consumer price index rose more than expected, increasing 0.6% month-over month and 2.5% year-over-year. The core rate, which excludes food and energy rose 0.3% MOM and is up 2.3% YOY. Both numbers are above the Fed’s 2% inflation target, which is why bonds are selling off further this morning. Higher motor vehicle prices drove the increase, which is the highest reading in 4 years. Note that yesterday’s PPI number (which typically leads CPI) showed very little inflation. While the Fed focuses on the Personal Consumption Expenditure index as its preferred method of measuring inflation, wage inflation is what matters. Until you see wage inflation, commodity push inflation will generally be self-correcting.

Retail sales came in better than expected, rising 0.4% month-over-month. Excluding autos and gas, they rose 0.7%.

In manufacturing data, the Empire State Manufacturing Survey increased to 18.7. Industrial production fell 0.3% however, while manufacturing production rose 0.2%. Capacity Utilization fell to 75.3%. Low capacity utilization rates are generally non-inflationary. Business inventories rose 0.4%, and the inventory to sales ratio fell from 1.38 to 1.35. A high inventory to sales ratio is generally bearish for the economy as it portends a slowdown in manufacturing while business works off excess inventory. The ratio is still elevated, but below last year’s levels.

The post-election bump in builder confidence was given back last month as higher rates discouraged traffic. The index dropped from 68 to 65, which is still a strong reading.

Janet Yellen testified in front of Congress yesterday, beginning her two-day Humphrey-Hawkins testimony. Here are her prepared remarks. Bonds sold off during the testimony, apparently because of this statement: “As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.” Seems to be a pretty benign (and obvious) statement, but there you go. The 10 year added 5 bps in yield but recovered some of those losses later in the day. There was also mention of ending the program of re-investing maturing MBS proceeds back into the market, but that is probably something we won’t see until next year. The effect of that on the MBS market is going to be a function of current rates and the average coupon of the portfolio.

25 Responses

  1. Like

  2. NY Times goes all in:

    “Trump Campaign Aides Had Repeated Contacts With Russian Intelligence

    FEB. 14, 2017

    WASHINGTON — Phone records and intercepted calls show that members of Donald J. Trump’s 2016 presidential campaign and other Trump associates had repeated contacts with senior Russian intelligence officials in the year before the election, according to four current and former American officials.

    American law enforcement and intelligence agencies intercepted the communications around the same time they were discovering evidence that Russia was trying to disrupt the presidential election by hacking into the Democratic National Committee, three of the officials said. The intelligence agencies then sought to learn whether the Trump campaign was colluding with the Russians on the hacking or other efforts to influence the election.

    The officials interviewed in recent weeks said that, so far, they had seen no evidence of such cooperation.”

    I don’t think anyone is going to care about the disclaimer in the last sentence.

    Taibbi is still right here:

    “We’re either learning the outlines of the most extraordinary compromise to date of an incoming American president by a foreign power, or we’re watching an unparalleled libel and media overreach.”

    I’d say that they need to do full televised hearings at this point.


    • jnc:

      We’re either learning the outlines of the most extraordinary compromise to date of an incoming American president by a foreign power, or we’re watching an unparalleled libel and media overreach.

      Odds on each are probably 50-50, but if I had to choose I’d guess its the latter.


      • Maybe. I’m starting to come around to the position that regardless of Democratic hysteria and overreach, Trump could have been that egotistical and stupid as to have been a willing coordinator with the Russians vis-a-vis the WikiLeaks dump.

        On the other hand, the coordination between the leakers at the various security and intelligence agencies and the media is clearly designed to get Trump. It’s an agenda worthy of Felt vs Nixon.

        “The Watergate Scandal is the story of political corruption at the highest levels of the American government, and of the journalistic crusade that brought it to light. But it’s also a story of bureaucratic revenge, of what happens when the most powerful political leaders in the country antagonize officials in its premiere domestic intelligence agency. The latter part of the story is typically elided in retellings, precisely because of its disturbing implication that Nixon’s corrupt presidency might have survived had he read the politics of the FBI better.”


  3. Good Scott Adams piece:

    “How to Persuade the Other Party

    Posted February 15th, 2017 @ 10:35am in #WhenHub #Persuasion

    An interesting article in The Atlantic talks about studies showing that liberals think in terms of fairness while conservatives think in terms of morality. So if you want to persuade someone on the other team, you need to speak in their language. We almost never do that. That’s why you rarely see people change their opinions. ”

    Referenced piece:


    • jnc:

      From the Atlantic article:

      So if it’s so easy, why don’t more people—either in studies or in real life—try this strategy?

      “We tend to view our moral values as universal,” Feinberg told me. That “there are no other values but ours, and people who don’t share our values are simply immoral. Yet, in order to use moral reframing you need to recognize that the other side has different values, know what those values are, understand them well enough to be able to understand the moral perspective of the other side, and be willing to use those values as part of a political argument.”

      Some people just can’t bring themselves to take that last step, he said, even if they know it’s more effective. And perhaps the reason it’s so difficult is because politics is so deeply intertwined with our personal values. When something is important to us, it’s usually for a reason, and it’s hard to break free of those reasons, even for political expediency’s sake. To do so would take an abundance of empathy, and that’s in short supply all around these days.

      I don’t buy that last line about “empathy”. I suspect the reason that most people don’t make those kinds of arguments is because they don’t believe them themselves. For a conservative to try to convince a liberal to endorse more military spending on the grounds that it is poverty-reducing would require not “empathy” on the part of the conservative, but rather supreme disingenuousness.


      • Yes, it’s basically adopting an argument you don’t believe yourself to try and convince someone else.

        So at that level, it’s dishonest.


        • Or it’s the old business practice of rounding of the hard edges and glossing over disagreements to build emphasis on agreements before going back to address the disagreements.

          The reality is, most people can’t accurately state the argument of “the other side”. They don’t listen, and they don’t understand. “Empathy” is one way of expressing it, but you don’t necessarily have to be empathetic to accurately understand the other side’s perspective and issues.

          What I think gets in the way most is the emotional investment people have in various issues. I think it’s sometimes made worse by how little the issues they are emotionally invested in will ever actually effect them.

          In a lot of ways, the emotion and the drama is the point. Rationally discussing policies based on data and tweaking them (or supporting tweaks of them) that don’t revolutionize anything, but may improve them, is boring. And it bores everybody, even folks who think they embody the principles of science and are totally fact-based. Much better if the other side is full of idiots and evil people, and if every disagreement constitutes an existential crisis.


  4. Good points:

    Yes, I dislike Trump, but that doesn’t mean I find the left any better.


    • Maybe. It is currently giving the Democrats an activist energy that they otherwise would lack.

      If things continue as they are, Republicans will most likely blow the mid-term elections.


      • Probably. A lot of them deserve to blow it. So I’m not going to cry.

        That being said, I’ve been underwhelmed with Trump on the whole. Enough so that I might consider voting for a Democrat in the midterms or in 2020. I would have voted for HRC in 2016, if my vote would have made a difference.


        Except everything the Democrats and liberal activists are doing is suggesting that they don’t want my dirty vote. And they plan on coming to my town and setting things on fire at some point, if they don’t get their way. And that they hate me with a blind passion (mostly). Given that, I feel like I might just hold my nose and vote for Trump next time around . . . if I wasn’t likely to vote 3rd party, because the Republican always take Tennessee. But if I was a swing state, I’d almost certainly vote for Trump, and a like him less than ever.

        I feel like I might not be the only voter who feels that way. And then there are all sorts of voters out there who like Trump just fine, and the Democrats and the left are just confirming the wisdom of their vote for Trump daily. I think they’ve got a great opening, and it may be great enough that their lack of tactics and awful strategy (generally; obviously, Robert Reich is different from the DNC who is different from the antifa which is different from Black Lives Matter) doesn’t matter in 2018 or 2020.

        But I’m dubious they can rely on the awfulness of Trump to cover their myriad of sins.

        Wasn’t that what they did in 2016?


  5. This should be interesting to litigate:

    “The attorneys argue that he was “subject to arrest and deportation solely as a result of his immigration status,” violating his constitutional rights.”

    It does clearly show it was never about enforcement priorities. It was about giving them de facto amnesty.

    Liked by 1 person

    • it was always about creating D voters. Period.

      They can wrap themselves in virtue all they want.. if these people voted R, obama would have been deporting them as fast as he could.

      Liked by 1 person

    • jnc:

      The opening line from the WaPo article:

      Federal immigration authorities have arrested and threatened to deport a 23-year-old Mexican immigrant who was living in the United States legally under the Obama administration’s Deferred Action for Childhood Arrivals program, according to a lawsuit.

      A good example of a media propaganda tactic. Why does the WaPo need to add “according to a lawsuit” at the end of that sentence? Surely the fact that the authorities really have arrested and threatened to deport a 23-year-old Mexican immigrant is something that the WaPo can – and should – confirm independently of any lawsuit. The only indeterminate “fact” is whether or not the person in question was here “legally”. So the WaPo is able to implant the suggestion that his legal status is a fact, while maintaining plausible deniability by adding the “according to a lawsuit” qualification at the end.

      But was the immigrant actually here legally?

      …Created in 2012 through an executive order by President Barack Obama, the program has given temporary protection to more than 700,000 people — often called “dreamers” — who were brought to the country illegally as children.

      The President is in charge of enforcement, not law making. I can see how an executive order on enforcement can “protect” an illegal immigrant from being arrested and deported. But I do not see how an executive order can transform someone who is here illegally into someone who is here legally. Again, the president does not make laws, he enforces them.


      • Give up, Scott. Your point requires some understanding of American civics. An actual understanding of American civics (from any side) can be plotted as a stark downward curve, approaching “zero” somewhere just past the Millenial generation.


  6. Worth remembering:

    “It’s hard to put into words how strange it is to watch the very same people — from both parties, across the ideological spectrum — who called for the heads of Edward Snowden, Chelsea Manning, Tom Drake, and so many other Obama-era leakers today heap praise on those who leaked the highly sensitive, classified SIGINT information that brought down Gen. Flynn.”

    Liked by 1 person

    • Though the typical strategy (especially on the left) is to make the hypocrisy go away with the magic words “false equivalency”, the reality the only significant difference is which side is doing the leaking or which side benefits the most from said leaking. If it benefits the ideologues of my tribe, then the leaking is noble and necessary. If it benefits the ideologues of that Other tribe, then the leaks are immoral and treasonous and appalling.

      The same way messing with the election is awful if it’s Trump or the Russians, but messing with elections is great and awesome if it’s Clinton and the DNC screwing Sanders. Unless you’re a diehard BernieBro then they are both bad.


  7. Good read that makes the case for Trump’s foreign policy far better than he ever has. It’s interesting for the clarity.

    Liked by 1 person

  8. Vox is so naive:

    “But the really hard question — the stuff of sci-fi — is whether we’ll someday use genome-editing tools on people to wipe out heritable diseases or to enhance human capabilities. It’s no longer a question of whether we’ll be able to create “designer babies”: The technology is improving at a stunning pace. Instead, it’s a question of whether we should. It’s a complex policy question, involving ethics and regulations.”

    No it’s not. If the means exist and people have the money then it’s going to happen.

    “Policy” won’t matter a damn.

    Liked by 1 person

  9. Liked by 1 person

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