Morning Report: What is the shape of the yield curve telling us? 7/20/17

Vital Statistics:

Last Change
S&P Futures 2475.8 4.3
Eurostoxx Index 387.3 1.8
Oil (WTI) 47.4 0.3
US dollar index 87.2 0.2
10 Year Govt Bond Yield 2.26%
Current Coupon Fannie Mae TBA 103.31
Current Coupon Ginnie Mae TBA 104.375
30 Year Fixed Rate Mortgage 3.96

Stocks are up this morning as global central banks remain easy. Bonds and MBS are up small.

The Index of Leading Economic Indicators jumped 0.6% in June, which is forecasting an acceleration in the economy going forward.

Initial Jobless claims fell to 233k, which is a 9 week low. The last time we were at similar levels was the early 1970s, when the Vietnam War was still raging. I have plotted initial jobless claims (left axis) versus wage inflation (right axis). You can see the inverse correlation, and it also suggests that with claims this low, we should be seeing wage inflation. Of course inflation has an influence as well, and the late 60s / 70s were characterized by inflation. However, pressures seem to be building, and we are seeing wage inflation at the lowest end of the spectrum – low wage workers.

initial jobless claims vs wage inflation

Bill Gross looks at the shape of the yield curve and warns investors not to read too much into it, since the curve is being manipulated by central bankers worldwide. The chart below shows the difference in yield between the 10 year bond and the 3 month T-bill. That difference has historically been somewhat predictive of recessions, especially when it has inverted. While the current spread is nowhere near zero, the trend is certainly heading that way. Does that mean a recession is imminent? His point is that we are really in an apples-to-oranges comparison with QE. Global central bank buying of sovereign debt is pushing that spread downward, and the relevant question is where would the yield curve be without the Fed’s (and other global central banks’) buying?

yield curve

He does make the point that Corporate America is more leveraged than before, however with rates so low, the debt service (actual interest paid) is much less than it was historically. You see that in households too. Total debt has risen past the old highs, however the debt service (interest paid as a percent of disposable income) is close to the lows.

The NYC luxury real estate market is soft, and many luxury sellers in Greenwich, CT are pulling the plug on sales. Of the homes in this market ($4.5 million+) days on market was 319, up by over 100 days. Some sellers have had to cut their price by 60% to entice a buyer. FWIW, I see very little building in this area of the country – only a handful of spec homes have been built, and they haven’t sold yet.

46 Responses

  1. Good article on the ultimate meaning of the Charlie Gard situation…single payer means state ownership of people.

    BTW, late in the article the author says:

    Right now, I have been forced into Medicare. I don’t like it, and I would happily take an alternative, but legally, I cannot. Further, if Medicare declares that I can’t have a particular treatment, I can’t even buy it for myself.

    Can this be true? Can someone explain to me the mechanism by which people are compelled to use Medicare and prohibited from getting any health care outside of it?

    Liked by 1 person

    • so, it’s not a prohibition on the patient, it’s a restriction on the providers from accepting a cash payment from a medicare patient.

      it get complicated really fast, but essentially, the provider could get in trouble for billing a Medicare patient outside of the program.

      basically, to pay for a service out of pocket and not have Medicare be involved in any way, shape, or form, you need to find an “opt-out” provider who does not have a participation agreement with Medicare. and those are very rare.

      and, of course, these restrictions are all done in the name of patient protection.

      Liked by 1 person

    • Experts know what’s best for you. Just lay back and take it.


    • And while (certain avian opinions aside 😜) I don’t think we have much in the way of hard partisan, my-party-right-or-wrong types here, the Republican party faithful should always keep in mind that this doesn’t happen without GOP cooperation and tacit approval, generally. The Republicans have had some varying degree of serious clout in DC since 1994. And could certainly be clear about what’s a problem, and how things that are supposed to help the voters are hurting them.

      But they have other priorities, and prefer to speak in slogans and platitudes and do, ultimately, very little to advance an agenda that resembles their rhetoric.



    Dwayne Johnson is not technically qualified to become President.

    Why not? Why are journalists and pundits so certain that a life in politics somehow “technically” qualifies you to be president?


    • i think he’s misusing the word. he’s technically qualified, meaning meets the constitutional requirements.


      • I think he is, too. But what he means is “lacking the technical skills”, meaning: not a lifelong politician of some kind. Or former military general. I still don’t see why being a lifelong politician makes one so qualified. How qualified was Carter? Did the left see Dubya as qualified, technically? They argued out of the gate that Reagan was senile, his experience as the governor of California counting for nothing, apparently.

        I think there’s this romantic notion that being in politics gives you some greater expertise in governing than being generally super successful in life, which I think is only barely true. Maybe. I’d rather have The Rock as president that most politicians I can think of. I don’t like Trump, but it’s not because he was never governor of New York or a senator before running for the Whitehouse.


    • It depends on the party in question. Oprah would be eminently qualified to the commentariat…


  3. Good read:

    “John McCain Walks on Water

    Is the Arizona senator a virtuous man or a man who uses virtue for his own ends? And in Washington these days, can anyone tell the difference?
    By Charles P. Pierce
    Jul 20, 2017”


  4. So glad I lived in NYC under the Guiliani admin and not the current fuckstick running things…


    • Jeebus! I fucked that joke up! I fixed it.

      When New Yorkers elected De Blaiso, were they thinking like Jerry Jones was thinking when he hired Switzer, that even a monkey could coach the team?


    • The great thing about Uber, AirBnB and now this app is that in addition to their utility value, the confrontations that they set up with the government are perfect for showcasing libertarian ideology.

      Great example:

      ““The laws are antiquated,” said Chad Bacon, 29, a dog sitter in Greenpoint, Brooklyn, with the app Rover. “If you’re qualified and able to provide a service, I don’t think you should be penalized.””


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