Morning Report: Hawkish Fed-Speak yesterday 3/30/17

Vital Statistics:

Last Change
S&P Futures 2355.0 -2.0
Eurostoxx Index 378.7 0.2
Oil (WTI) 49.8 0.3
US dollar index 90.2  
10 Year Govt Bond Yield 2.39%
Current Coupon Fannie Mae TBA 102.06
Current Coupon Ginnie Mae TBA 103.36
30 Year Fixed Rate Mortgage 4.11

Stocks are lower this morning on no real news. Bonds and MBS are down small.

We will have Fed-speak all day, with 4 speakers. The bond market is still digesting hawkish statements from yesterday.

The final revision to fourth quarter GDP came in at 2.1%, an uptick from the previous 2.0% estimate, based on higher consumption. The PCE price index came in at 2%, bang in line with the Fed’s inflation target.

Initial Jobless Claims came in at 258k, a slight downtick from the week before. Consumer comfort slipped.

Corporate profits rose 22% in the fourth quarter compared to a year ago to just over $1.7 trillion. While the stock market may have overreacted to the Trump reflation trade, the backdrop of increasing corporate profits provides basis for increasing stock prices.

Federal Reserve Bank of Boston Head Eric Rosengren suggested the Fed should hike rates 3 more times this year and warned about pushing unemployment too low. “The perception seems to be that the outcome of each FOMC meeting depends on nuances of incoming data, with the base case being no change in rates,” Rosengren said in a speech in Boston Wednesday. “My own view is that an increase at every other FOMC meeting over the course of this year could and should be the committee’s default.” Rosengren used to be a dove, and now has turned hawkish. Again, the big question is whether the unemployment rate of 4.7% is a true reflection of the labor market given the low labor force participation rate. The true “tell” is going to be wage growth, and that is improving after a long slumber, but is nowhere near igniting inflation. Remember, the Fed has two goals here: 1) to prevent inflation from getting out of control, and 2) to get off the zero bound. The Fed is soft-pedaling goal #2, but that is what is really going on here.

A bipartisan group of senators has warned FHFA Chairman Mel Watt to not suspend Fannie Mae’s dividends to Treasury, as it would affect efforts to revamp the housing finance system. Note that the dividends from Fannie Mae have been used to prop up Obamacare, and the constant draining of capital means that Fannie is becoming less safe and more likely to need a bailout should home prices fall or we have a recession.

Repeal and Replace might not be dead after all. Trump is hinting that he might deal with Democrats if the Freedom Caucus doesn’t come onboard. That may be an empty threat as the bridge across the aisle is pretty much a smoking hulk at this point, but you never know. Trump does have leverage with the Democrats however, if he chooses to use it. Lawsuits against Obamacare still exist, and if the Administration chooses not to defend against them anymore, they could end the subsidies to the insurance companies which would probably end the exchanges in many parts of the country. The Freedom Caucus however is about to learn the first lesson of coalition politics – nobody gets everything they want. Additional progress on this front will generally be bond bearish (in other words sending interest rates higher).

One-of-a-kind waterfront property in VA for under $250k? Yes! Though it is a bit of a fixer-upper.

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