Morning Report: Housing starts miss 4/18/17

Vital Statistics:

Last Change
S&P Futures 2339.5 -5.5
Eurostoxx Index 377.0 -3.6
Oil (WTI) 52.3 0.4
US dollar index 89.8  
10 Year Govt Bond Yield 2.22%
Current Coupon Fannie Mae TBA 103.09
Current Coupon Ginnie Mae TBA 104.31
30 Year Fixed Rate Mortgage 3.97

Stocks are lower this morning after housing starts disappoint. Bonds and MBS are higher.

Housing starts fell 9% MOM to 1.215 million in March. This was below the 1.26 million estimate. Building Permits rose 1.26 million, which exceeded the 1.25 million estimate. A big drop in single family starts in the Midwest drove the decrease, which may have been weather-related. Multi-fam continues to be volatile, while SFR is slowly creeping upward.

Industrial Production rose 0.1% in March, however manufacturing production fell 0.4%, which was a big miss from the 0.3% increase that was expected. Capacity Utilization bumped up to 76%. This is another example of the disconnect between the soft data (sentiment surveys) and hard data (actual spending patterns etc) that has been a hallmark of the post-election landscape.

We had a nice rally in the 10 year bond last week, with the yield falling about 15 basis points to 2.23%. The mortgage rate has lagged the move, falling about 10 basis points. Generally speaking this is typical, as the mortgage rate is less volatile than the 10 year. If the 10 year stabilizes here, we could see a move lower in mortgage rates.

Part of the post-election rally was due to the Trump reflation trade, which assumed tax cuts and infrastructure spending. Tax cuts really mean tax reform, as the plan is to increase the size of the standard deduction and reduce itemized deductions. While the mortgage interest deduction is too popular to eliminate, the state and local tax deduction is being targeted. This will hit taxpayers in high tax areas like CA and the Northeast the hardest. Democrats are opposing this however, even though the people most likely to be affected are the very rich (90% of the increase will fall on the wealthy), and will raise something like $1.3 trillion over 10 years.  Guess Chuck Schumer has found a loophole that benefits wealthy New York hedge fund managers that he isn’t willing to close.

The Trump Administration has said that health care reform will take precedence over tax reform this year. Note that we are coming up on the period where health insurers will announce whether they are staying on the Obamacare exchanges or not for 2018. That will most likely color the debate. As hard as it is to get anything through Congress right now, it will only get harder in 2018 as midterms loom on the horizon.

The punch line is that bonds and stocks are telling you different things, and when that happens the bond market is usually correct. If the Trump reflation trade is indeed dead, and we don’t see a big increase in growth, we should start thinking about the possibility of the 10 year trading below 2%. The pre-election yield on the 10 year was 1.78%.

Note that the IMF may be catching on as well. They are taking up their global GDP growth numbers, probably on the bet that protectionist policies in the US aren’t going to happen.

Both the Atlanta Fed and the NY Fed took down their Q1 GDP estimates after the lousy retail sales numbers last week. A CNBC survey of economists is pegging Q1 GDP at about 90 basis points. The Fed Funds futures are now pricing in an under-50% probability of a rate hike in June. You can see that the Fed Funds futures have been cheating down their estimates for hikes over the past month or so:

Treasury Secretary Steve Mnuchin said that the Administration prefers a strong dollar “over time.” There had been some confusion in the markets over the Administration’s exact policy on the dollar, since Trump had said early on it was too strong, in reference to China. Note that there is some horsetrading going on between the US and China over currencies, trade, and North Korea. Trump is willing to tone down his comments on Chinese currency manipulation in exchange for action from China in reining in NK. A strong dollar policy out of the Admin will generally make for lower interest rates.

The CFPB is soliciting input for possible changes the Home Mortgage Disclosure Act.

10 Responses

  1. A group headed by Ballmer is supposed to publish a detailed analysis of government revenue and expenditure this week. Have you heard about it Brent? What do you know?

    I don’t know about the NYT, but NPR is constantly referring to the French Communist candidate as “Far Left” and The Economist fears that he and the Far Right woman will make the run-off. Either one of them spells the end of the EU, apparently, and both are trading heavily on nationalism and closed doors on both immigration and trade. Meanwhile, many suggest both the extremist candidates are benefiting from Russian manufactured fake news, etc.

    Liked by 1 person

    • Did you see the pieces I linked to yesterday about Mélenchon?

      This isn’t precisely true:

      “Either one of them spells the end of the EU, apparently”

      Le Pen is going to put it to a referendum, and Mélenchon has stated that his preference is to renegotiate the treaties (after first ignoring them) to allow more deficit spending and certain other concessions. If that fails, then he will push to leave the EU as a Plan B.


    • Brent, this is a story about the Ballmer Report I mentioned yesterday.


  2. Good analogy on why Brexit won:

    “Imagine if NAFTA mandated that every Mexican and Canadian citizen had a right to live and work in the U.S. — and the Congress had no ability to say no! But that was what Brits have now dealt with for decades.”


  3. All that eliminationist rhetoric from Democrats is having an effect on the weak-minded.

    Hard to argue.

    This had to of sting like a bitch.

    She had to apologize to the man who kept her out of the White House in 2008 for losing the White House in 2016.


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