Morning Report: Fed maintains rates as expected 9/21/17

Vital Statistics:

Last Change
S&P Futures 2504.0 -1.3
Eurostoxx Index 382.6 0.6
Oil (WTI) 50.3 0.8
US dollar index 85.8 0.2
10 Year Govt Bond Yield 2.27%
Current Coupon Fannie Mae TBA 103.24
Current Coupon Ginnie Mae TBA 104.21
30 Year Fixed Rate Mortgage 3.85

Stocks are flattish after the FOMC statement contained few surprises. Bonds and MBS are flat as well.

As expected, the Fed made no changes to interest rate policy and left the Fed Funds rate unchanged. They also announced their plan to implement their previously announced reduction in reinvestment in order to shrink their balance sheet. The projections were pretty much the same as they were in June, with the exception of June GDP, which was bumped up a tenth of a percent to 2.4%. Inflation was unchanged at 1.6% and unemployment was unch’d at 4.3%.

The dot plot reduced expected rates in 2018 by 3/16 or about 19 basis points. You can see a side by side comparison of the chart below:

Dot plot comparison jun vs sep

The market reaction to the announcement was a drop in stocks and bonds, with the 10 year yield increasing to 2.27%, up about 3 basis points. The Fed Funds futures took up the probability of a December hike from about 60% to 70%.

Initial Jobless Claims fell to 259k last week as Texas claims fell, more than offsetting the increase in Florida claims.

Home prices rose 0.2% MOM and are up 6.3% YOY according to the FHFA House Price Index. We are still seeing strength out West, however New England is beginning to show some strength after lagging for a long time. The farm belt as well as the NY-NJ-PA area are still bringing up the rear.

The OECD is forecasting that global economic growth will be the fastest since 2011 this year and that growth will accelerate into next year. Ultimately this is good for the US economy, although it won’t necessarily mean lower rates. Even if US growth isn’t enough to push up bond yields, relative value trading by overseas investors could do the job.

In other economic news, the Philly Fed index continued its string of strong numbers, while the Index of Leading Economic Indicators posted a strong 0.4% reading. Expect to see a hit to growth however due to hurricanes Irma and Harvey.

Hurricane Maria, which has just devastated Puerto Rico now moves North close to the Eastern Seaboard. There are still the remnants from Jose just off New England which makes predictions difficult. The East Coast from NC to Maine have at least some risk.

Home equity increased over 10% YOY, according to CoreLogic. Total home equity reached $8 trillion, which is double the level of 5 years ago. Negative equity decreased by 10%, to 2.8 million homes or 5.4% of all mortgages. 750,000 homes regained positive equity. Even if rates don’t go down from here, increasing home equity will create refinance opportunities, especially for cash-outs to refinance credit card debt and refis from FHA to conforming to remove MI requirements. A lot of FHA loans done 4 or 5 years ago now have enough equity to refi into a conforming.

25 Responses

  1. Frist.

    Zumwalt class destroyers cost $6B per because we are only building three.

    That’s not quite as wasteful as it sounds – the Navy had $10B of sunk cost before it pulled the plug, so at least it didn’t decide to pour more money into it to “fix” it.

    But not quite – the third and final Zumwalt class destroyer [the Lyndon B. Johnson] is being built anyway because Congress wants to make sure the Groton Boat Works survives as a strategic operation. therefore it must have something to do, whether the Navy wants it or not.

    One issue with the Zumwalts, which are really cool looking with stealth type semi-visibility on radar, is that it is vulnerable to certain types of attack that the Burke class can sustain and defend. Another issue was that the cannons on the first two Zumwalts had ammo that cost over $1M per round!

    Well, to save on that, the LBJ will likely be equipped, instead, with a rail gun. Yup, a rail gun.

    I love Navy tech and its why I enlisted for Navy OCS in ’68.

    In other Navy news, apparently this last incident in the 7th Fleet occurred with the Captain and the XO asleep and no one thought to wake them up. The foreign freighter [which was probably on autopilot] may have been at fault under rules of the road at sea, but considering that the USS John McCain, an Arleigh Burke class destroyer, is just about the most maneuverable thing afloat, everyone in the chain of command needed to be disciplined. Probably a CPO, too – the Chief should have sounded the alarm if no one else at the helm had any freaking sense.



    • An Arleigh Burke can go from flank speed to stopped in 2 ship lengths, assuming all engines are up an operating (which isn’t typically the case).

      I transited the Strait of Malacca several times and it is a nightmare of navigation hazards, crossing traffic and ships coming at you from all sides. We had to do it before the days of computerized tracking. Our “computer” was the junior officer of the deck with maneuvering boards and a sailor writing backwards in grease pencil on a big plexiglass board.

      Every time we transited that area the CO was on the bridge the whole time. Sometimes the XO was up there as well. It is too easy to get overwhelmed by all the info. Surprised the CO slept through it.

      Liked by 1 person

    • Repairs to the Fitzgerald will probably cost in excess of $500M, according to Sen. McCain. Repairs to the destroyer named after his grandfather and father should only cost ablut $100M, but that could be revised.

      Also, Fitzgerald was due for refitting with upgraded weapons systems that would allow it to simultaneously conduct offensive and defensive warfare. USN hasn’t decided whether to refit now or just repair.

      Apparently Fitzgerald has been or will be airliftedhauled to Pascagoula MS to be repaired because that shipyard has the most available capacity and expertise, right now.

      The Navy does not currently have the funds to repair these two ships. Any refitting would be extra. Negotiations with Congress are under way.

      These destroyers were 2 of the 7 assigned to carrier protection in the 7th Fleet, and the Navy Department considers them necessary components.


  2. This is a good piece. Judge Ed Emmitt runs disaster response in Harris County (Houston metro area) and would be in a position to know.

    Harris County Judge Ed Emmett was also uncomplimentary of the organization. Judge Emmett admitted that he asked a local nonprofit to manage the shelter at NRG Park, because he didn’t trust The Red Cross to do a good job.


    • I think Texas cities experienced that during Katrina. Red Cross was helpful, but not a management resource in any sense.

      Here in Austin, during Katrina, the City managed overall, but the big facilitators coordinating with the City Manager were the School district, the Head Start [there were 6000 kids in the Convention Center alone], HEB Foundation [food], hospital and clinic and pharmacy volunteers [that many people in close quarters – 17K in one location and 5K in another – and you have contagion possibilities that have to be dealt with up front], restaurants self organized deliveries and coordinated through City Manager, Red Cross brought lots of supplies on request, hell, the musicians’ union found gigs for displaced New Orleans band members, and TEC set up a 12 hour a day job bank that they actually computerized through multiple terminals on the floor of the convention center.

      Way beyond the capacity or expertise of the Red Cross. Just watching how the Schools and the HeadStart got those kids organized and bused to school and how the job bank got set up and you would have seen the minor role of Red Cross.

      Not to mention Police and Fire protection!


  3. How the fuck did she lose?


  4. David Axelrod explains how he couldn’t afford healthcare for his child until Obamacare passed. Or how he cried because finally other people would be paying for the medicine he could easily afford but didn’t like paying for?

    Anyhoo, coincidentally, I’ve been re-listening to You Are Not So Smart, which discusses the use of anecdotes and their utter worthless.

    This is, BTW, the same folks who tell us (correctly) that anecdotes are not the plural of data when the anecdotes don’t serve their narrative.


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