Morning Report: Tax reform to be unveiled today 9/27/17

Vital Statistics:

Last Change
S&P Futures 2500.8 5.3
Eurostoxx Index 385.4 1.4
Oil (WTI) 51.9 0.0
US dollar index 86.5 0.4
10 Year Govt Bond Yield 2.29%
Current Coupon Fannie Mae TBA 103.24
Current Coupon Ginnie Mae TBA 104.21
30 Year Fixed Rate Mortgage 3.87

Stocks are up this morning as Washington pivots to tax reform. Bonds and MBS are down.

Janet Yellen spoke yesterday and said that it would be “imprudent” to wait until inflation hits 2% to start hiking rates. Those comments were taken as support for a December hike and the Fed Funds futures took up the odds of a rate hike in December to 81%.

Bonds were also under pressure due to the possibility of some sort of tax deal. Here is a preview of the tax plan. Trump plans on releasing the details today. Apparently the big pieces involve cutting the corporate tax rate falls to 20%, while the top individual income tax bracket falls to 35%. There is an option for Congress to institute a higher bracket. Deductions will be limited while the standard deduction increases. The most contentious deduction will be the state and local tax deduction, which will hit taxpayers in high tax states like NY and CT the most. CT is already reeling from an exodus of high income earners and businesses, and this will only exacerbate that. This won’t be good for real estate prices there. While this is largely going to hit blue states, there are enough Republican House members in blue states to deep-six it unless Trump can get some Democrats on board. No word on eliminating or lowering the cap on the mortgage interest deduction.

Pending Home Sales fell by 2.6% in August, according to NAR.

Mortgage applications fell half a percent last week as purchases rose 3% and refis fell 4%. The hurricanes did depress activity in Florida and Texas, however increasing rates and a lack of home inventory were the biggest drivers.

Durable goods orders rose 1.7% in August, which beat consensus estimates. Ex-aircraft, they were up 0.2%. Capital Goods orders rose 0.9%, which is an indication that business expects to see further activity and is increasing their capacity. The bump in capital goods orders is being driven by the rebound in oil prices and drilling activity in the energy sector. Capacity Utilization rates are still low compared to historical standards.

The bond market has been in a tight range for this entire year. In fact, the 62 basis point range has been the tightest in over 50 years. Historically, that range has been closer to 175 basis points. The article is somewhat misleading, as the range is going to fall naturally when rates fall from 10% to 2%. Using volatility measured in sigma is better. That said, it isn’t just the US bond market: volatility in general is down. The VIX (the volatility measure for the stock market) has been in the single digits. Historically that has been a warning sign (When VIX is high, time to buy. When VIX is low, time to go).

25 Responses

  1. Worth noting:

    “Citi Is Bringing Back One of the Most Infamous Bets of the Credit Crisis
    By Sridhar Natarajan, Dakin Campbell, and Alastair Marsh
    September 26, 2017, 5:00 PM EDT”


    • They have a place, as there are people who naturally would want that exposure. Citi is still on the hook for all the counterparty risk, which is a problem in another crisis. My sense is that the leverage is a lot more limited than it used to be.


  2. Well, dad canceled his NFL Sunday ticket this morning. subscribed for 13+ years.


  3. The Wall Street Journal: Healthcare.Gov To Shut Down During Parts Of Enrollment Period For Maintenance
    The Trump administration plans to shut down, a website consumers use to sign up for the Affordable Care Act, for 12 hours on nearly every Sunday of the coming ACA enrollment season. The outages, which the administration says are for maintenance, will occur from midnight through noon on every Sunday other than Dec. 10. This year’s enrollment season, which the administration has shortened to half the length of previous years, will run from Nov. 1 through Dec. 15 for states that use the federal marketplace. (Hackman, 9/23)

    “Yeah, Central?”
    “This is Walt down at Nakatomi.”
    “Yeah, listen, uh, would it be possible for you to turn off grid 212?”
    “Hey, no shit it’s my ass. I got a big problem down here. Just shut it down. Shut it down now.”


  4. Great thread.


  5. I’m assuming this is a bargain chip to be traded away

    Hope they get something good for it.



  6. Worth noting:

    “Terrorists just tried to assassinate Defense Secretary Jim Mattis in Afghanistan
    It was supposed to be a surprise trip.
    Updated by Alex Ward
    Sep 27, 2017, 4:10pm EDT”


  7. Can’t decide who this story is worse for, the Obama admin or the continued inexplicable gullibility of WaPo.

    At this point it’s got to be willful on WaPo’s part, no?

    Serious question, what are the reasons to not confirm through non-MSM sources anything WaPo publishes?


  8. It’s not that they didn’t have a plan because they didn’t think they’d win, they didn’t have a plan because they have no desire to repeal it.

    There is no reason for the GOP to exist.


  9. Agreed.


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