Morning Report: Wages and confidence rising 10/31/17

Vital Statistics:

Last Change
S&P Futures 2573.0 4.8
Eurostoxx Index 394.7 0.8
Oil (WTI) 54.1 -0.1
US dollar index 87.6 0.1
10 Year Govt Bond Yield 2.37%
Current Coupon Fannie Mae TBA 102.875
Current Coupon Ginnie Mae TBA 103.938
30 Year Fixed Rate Mortgage 3.99

Stocks are up this morning as we start the November FOMC meeting. Bonds and MBS are down small.

No changes to FOMC policy are expected at this week’s meeting, however the Fed Funds market is predicting a 96% chance they raise rates in December.

Aside from the FOMC meeting, Congress is expected to unveil tax reform tomorrow, and Trump is slated to nominate the new Federal Reserve Chairman on Thursday. And on Friday, we get the all-important jobs report, so a lot going on this week.

Despite what the business press is saying, the markets are treating the Mueller / Manafort thing as a sideshow. As of now, nothing going on there is going to affect Washington enough to rile up markets. Earnings are the focus at the moment for stocks, and economic data (along with foreign central bank policy) is driving the bond market.

The Washington DC goat rodeo isn’t affecting consumer confidence either, which just hit a 17 year high. Most notably, the job market got positive marks for strength for the first time since 2001.

Are we starting to see stirrings of wage inflation? Perhaps. The Employment Cost Index rose 0.7% in the third quarter, faster than the 0.5% rate we saw in the second. Wages and salaries (which account for 70% of the ECI) rose 0.7%, while benefits rose 0.8%. On a year-over-year basis, they rose 2.5%. So far, bonds aren’t reacting to the number. An increase in wage inflation will force the Fed to move more aggressively. For those who worry about income inequality, the biggest growth was in blue collar jobs, where wages rose 0.8% and benefits rose 1.7%.

Home prices rose 0.5% in August and are up 5.9% for the year, according to Case-Shiller. Seattle has been on a tear, rising over 13% for the past year, followed by Las Vegas and San Diego. A strong economy along with low inventory and rates have been a support for home prices. The interest rate environment will be changing, however inventory doesn’t appear to be a temporary phenomenon, and the US economy seems to be accelerating, not declining. While the usual affordability questions are mentioned, the median mortgage payment for the median house as a percent of income is still very low by historical standards.

Note that the lack of building is simply creating pent-up demand for housing which will get satisfied eventually. That will push up growth for the next few years when it finally happens.

Manufacturing continues to hum along, with the Chicago PMI coming in well above expectations.

Bitcoin futures are coming… The contracts will be cash settled, not by delivery of the underlying.

19 Responses

  1. Observation – New regulations on retirement plan fiduciary responsibilities will reduce competition and promote consolidation. Our mid sized regional bank is getting out and we are having to move the 401k to another provider.

    Like

    • Falling fees, ETFs, and low commission rates for unsolicited trades are making the investment management business less interesting for many managers. Great for the investor, but not great for the investment manager.

      I think people are going to be in for a rude awakening the next time the market crashes..

      Liked by 1 person

  2. Just out of curiosity, why is Trump looking to replace Janet Yellen? From what little I’ve read, it sounds like Jerome Powell would just be more of the same.

    Like

    • Monetary policy wise, I think 95% of Fed governors would make exactly the same moves…There seems to be a pretty broad consensus of what central banks should be doing globally. The difference between a “hawk” and a “dove” is pretty minor these days, and the changes they would make are so marginal nobody would notice.

      The bigger difference is probably regulatory philosophy, but Fed Heads tend to be economists, not lawyers, so aside from broad statements about regulation they don’t get too in the weeds to begin with. Yellen is definitely on the pro-regulation side, which is probably why she is on the way out.

      Liked by 1 person

  3. This juggling aloud of part of otherwise secret tax changes without committee hearings or regular order is making CPAs and tax lawyers uneasy, but I assume it is causing dizziness for managers as well as lobbyists.

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    • They have to know that they are only going to get some sort of symbolic change through by brute force. This is about chalking up a W, not fixing the tax code.

      Like

  4. So General Kelly said:

    “But the lack of an ability to compromise led to the Civil War, and men and women of good faith on both sides made their stand where their conscience had them make their stand.”

    Well, the north was not forcing the south to give up slavery. The south was not forcing the north to become slave states.

    The compromises were about the status of new states in the west, carved from territories where slavery was not the norm. The fear of advancing the status of new western states as free led to southern insurrection to create a slaveholding nation.

    The federal response to insurrection was the wholly predictable attempt to hold the union together by force.

    So perhaps lack of ability to continue compromising the status of new states led to the politics of secession, but secession itself was not driven by conscience, but by power politics and expressly the preservation of slavery, and the federal response was driven by power politics and expressly the goal of preserving the union.

    Doesn’t everyone know this?

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  5. Handing out Halloween candy tonight, I noticed a significant drop in the size of the “fun size” chocolate bars. No inflation, my ass…

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  6. I generally don’t agree with much Yglesias says, but IMO he is correct…

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  7. Like

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