Morning Report: Housing starts fall 10/18/17

Vital Statistics:

Last Change
S&P Futures 2561.0 4.0
Eurostoxx Index 392.0 1.5
Oil (WTI) 52.1 0.2
US dollar index 86.8 0.2
10 Year Govt Bond Yield 2.33%
Current Coupon Fannie Mae TBA 102.96
Current Coupon Ginnie Mae TBA 104.188
30 Year Fixed Rate Mortgage 3.86

Stocks are lower on no major news. Bonds and MBS are down small.

Housing starts fell in September, as hurricane effects probably had an effect. Starts fell 4.7% from August, but are up 6.1% on an annual basis. Weather probably doesn’t explain all of it, however as building permits were also down on month-over-month basis. Permits were also down on year-over-year basis. Housing starts fell in the North, South, and Midwest, but rose in the West. Permits rose in the Northeast and Midwest and fell in the South and West. We should probably see some improvement in these numbers as the flood waters recede and people rebuild.

Mortgage applications rose 3.6% on an adjusted basis for the holiday-shortened week. Purchases rose 4% while refis rose 3%. The MBA said that mortgage rates decreased by 2 basis points overall last week. This was the first increase in the applications index in over a month.

Treasury Secretary Steve Mnuchin predicts the stock market will slump if tax reform isn’t passed this year. Since Democrats are uniformly against tax reform, it will have to be modest in order to pass it under a straight majority in the Senate. “There is no question that the rally in the stock market has baked into it reasonably high expectations of us getting tax cuts and tax reform done,” Mnuchin said in the “Politico Money” podcast interview. “To the extent we get the tax deal done, the stock market will go up higher. But there’s no question in my mind that if we don’t get it done you’re going to see a reversal of a significant amount of these gains.” Note that there are some procedural hurdles to get this done. It all comes down to earnings. If there are no changes in taxes at the corporate level, then the forward earnings estimates are too high, which means the multiple is higher than people think.

The Senate has a tentative deal to save Obamacare and the cost reduction subsidies, however the White House is lukewarm on it, and many in the House are outright hostile to anything that props up Obamacare.

Trump is expected to name his nominee to be the next Fed Chairman by early November. The expected nominees are John Taylor, Kevin Warsh, Gary Cohn, Jerome Powell, or Janet Yellen. Trump meets with Yellen this week. Note a Reuters poll of economists think Powell will get the nod.

One puzzling aspect of the current economy is the labor market and the lack of wage growth. Theory says that if the unemployment rate is as low as it is now, we should be seeing bidding wars for workers and general wage hikes across the board. The leading indicator for wage growth – the JOLTS quit rate – has been flat for 2 years. What is going on? The first (and biggest) is that the unemployment rate is sending a false signal about how tight the labor market is. While there is some tightness in the labor force, particularly in skilled labor, most people are not in the hot sector, and are reluctant to leave. Second, many could still be trapped in homes with negative equity, unable to move to where the jobs are. And finally, many are just not willing to move, for whatever reason. I think the answer is the first one: Our unemployment rate stops counting the unemployed at 6 months, which may have been a reasonable thing to do 30 years ago, but not today. The employment to population ratio is probably a better indicator. And according to that, we still have a ways to go. Note that demographic trends will play a part here as well. The low ratios in the 50s and 60s are explained by a lack of women in the labor force. And some of the drop in recent years is due to the retirement of the baby boomers, however their kids (the Millennials) should be replacing them.

employment to population ratio

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