Morning Report: Janet Yellen’s remarks spark a rally 7/12/17

Vital Statistics:

Last Change
S&P Futures 2435.3 11.0
Eurostoxx Index 382.2 3.0
Oil (WTI) 45.7 0.7
US dollar index 88.1 -0.1
10 Year Govt Bond Yield 2.31%
Current Coupon Fannie Mae TBA 103.31
Current Coupon Ginnie Mae TBA 104.375
30 Year Fixed Rate Mortgage 4.03

Stocks and bonds are sporting their rally caps on Janet Yellen’s prepared testimony in front of Congress.

The big event of the day will be Janet Yellen’s semiannual testimony in front of the House Financial Services Committee. Expect the focus to be on the tightness of the labor market and why we have yet to see any real wage inflation. Both sides will also try and get her to agree with their viewpoints on banking regulation. Here are her prepared remarks.

The statement that jumped out to me was this: “That expectation is based on our view that the federal funds rate remains somewhat below its neutral level–that is, the level of the federal funds rate that is neither expansionary nor contractionary and keeps the economy operating on an even keel. Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.” That is a dovish statement, and bonds took off, especially the long end of the yield curve. This sentiment was echoed by Lael Brainard as well.

The Fed Funds futures reacted to the remarks by assigning a 91% probability of no move in September and assigning a 53% chance of no move in Decsember. These are about 9-10 basis points higher than they were last week.

Minneapolis Fed President Neel Kashkari is skeptical that the economy is close to overheating, and he believes that wage growth will happen once labor is scarce. The fact that wages aren’t really increasing leads him to believe there is still plenty of slack in the labor market, despite some shortages in certain skills.

Donald Trump Jr. met with a Russian lawyer last year who supposedly had dirt on Hillary Clinton. Turns out the info mainly concerned the Ziffs and was tangentially related to the Clinton Foundation. Interpretation of the gravity of this is predictably falling along partisan lines. PIMCO is warning that this could affect markets since it makes bipartisan consensus less likely in DC, but that ship has sailed. Note stocks went out on their highs yesterday, which indicates the stock market assigns zero import to the latest “bombshell.”

Mortgage Applications fell 7.4% last week as purchases fell 3% and refis fell 13%. The index does include an adjustment for the 4th of July holiday, however many people took off on the Monday prior. Interest rates did rise on the back of a European bond sell-off, which hurt production.

RBS reached a settlement with the FHFA for $5.5 billion related to toxic MBS securities from the go-go days.

The federal government is King George 7/12/17

In the Declaration of Independence, the Founding Fathers explained their departure from secession from the British Commonwealth by listing the King’s transgressions against them, among which were:

He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance.


He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

How ironic that our government has become exactly that which the Founders rebelled against in the first place.

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