Morning Report: Handicapping the next Fed Chair 10/5/17

Posted on October 5, 2017 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2538.5 2.3
Eurostoxx Index 390.1 -0.3
Oil (WTI) 50.1 0.1
US dollar index 86.7 0.0
10 Year Govt Bond Yield 2.32%
Current Coupon Fannie Mae TBA 103.05
Current Coupon Ginnie Mae TBA 103.98
30 Year Fixed Rate Mortgage 3.88

Stocks are higher this morning on no real news. Bonds and MBS are flat.

I was at the IMN conference earlier this week, which was very informative. Haven’t heard this much about convexity in a long, long time.

We have a lot of Fed-speak today, with 4 speakers. Powell, Williams, and Harker speak this morning and Esther George speaks after the close. Bonds should be quiet as we await the jobs report tomorrow.

Announced job cuts continue to be low, according to outplacement firm Challenger, Gray and Christmas. Job cuts fell 4.4% in September to 32,346. This number is down 26% from last year. The most movement (in terms of cuts and hiring) remains the retail sector. For the quarter, companies announced job cuts of just over 94,000. Sub-100k quarters are rare: the last one was Q4 last year and then you would have to go back to 2000 to find another. Remember, this stat includes announced job cuts (it counts all the press releases companies do) so these job cuts won’t necessarily materialize.

While online shopping has led to job cuts in bricks-and-mortar stores, those losses are being offset by new jobs in e-commerce. Of course the jobs are very different and require different skill sets, but it kind of looks like a wash

Initial Jobless Claims fell to 260k last week as hurricane-related effects continue to mess with the numbers. Note the ADP Survey (which foreshadows the BLS numbers tomorrow) was weak at 135,000 however hurricane-related effects are probably included in that number as well.

Janet Yellen’s term expires early next year. Here are the most likely candidates to run the Fed going forward. Trump could re-nominate Janet Yellen, however she is a liberal and supports stronger banking regulation. Gary Cohn is another possibility, as Trump prefers business people over academics. Jerome Powell is another possibility, and he would be somewhat more hawkish than Yellen. He is supposedly the choice of Treasury Secretary Steve Mnuchin. Kevin Warsh is more hawksh than either Yellen or Powell and supports financial deregulation. Warsh would probably get some opposition from the left. Finally, John Taylor would be the most hawkish. While politicians might rail against too easy money out of the Fed while on the campaign trail, most prefer dovish types once they are in office. Nobody wants a Fed-induced recession on their watch. The last one we had was 81-82, when Paul Volcker tightened to break the back of 1970s inflation. President Ronald Reagan supported his move, which caused the worst recession (at the time) since the Great Depression.

Online betting site Predict It shows the market’s assessment. Kevin Warsh is in the lead at a 40% chance, while Jerome Powell is at 31% and Yellen is at 10%. Gary Cohn is at 9%.

Philly Fed President Patrick Harker says that the US economy will continue to grow at a subdued 2% rate until we get some sort of pro-growth tax reform out of Washington. He still supports hiking rates in December. The Fed Funds futures have more or less doubled their probability of a rate hike over the past month from around 40% to over 80%.

Donald Trump roiled distressed hedge funds yesterday when he suggested that Puerto Rico might need some debt relief to recover. The Commonwealth’s general obligation bonds fell into the low 30s. At least Trump was nice enough to wait until everyone marked their books for Q3.

Filed under: Economy, Morning Report | 31 Comments »

The Anti-Inversion Rule is Invalidated

Posted on October 3, 2017 by markinaustin

Remember that one of the BHO Admin’s “70 day temporary regulations” was the “Anti-Inversion Rule?”

It was designed to keep American entities from merging with foreign companies to avoid American taxation, and from manipulating fungible items so that the American portion of the merged entity would show minimized income, or even losses.

As a temporary rule it stymied one drug company’s merger. The Admin believed that while it engaged in full APA review it could indefinitely extend its temporary regs pending same.

My friend of 50 years, Lee Yeakel, just said “No”. As the USDCt for the Western District of Texas, Austin Division, he ruled that the Anti-Inversion Rule was invalid because the APA had not been followed.

This business of avoiding the lengthy procedures required to vet a far reaching regulation got out of hand with BHO – remember the immigration regulations that the USDCt for the Southern District of Texas invalidated? As with that decision, In this case, the Judge agreed that the proposed rule was not inherently arbitrary or capricious, but that it just could not be a valid exercise by the Executive branch without the benefit of publication in the Federal Register, comment, and plenty of the back and forth that the APA requires.

Remember that Congress also gets the benefit of notice and prep time when the APA is followed, and can stop a proposed reg cold if it determines the proposal violates rather than applies the statute. Perhaps as important, the public, the interest groups, and those whom the reg is going to affect get their lawyers in gear.

The DJT Admin is also abusing the temporary reg loophole to try to avoid the cumbersome APA, as with its own “temporary” immigration regs.

But the cumbersome APA is in fact the legal mechanism that we have in place to tame executive bureaucratic overreach.

Here is an article on the Austin case:

Click to access 2017-10-02_court_invalidates_anti-inversion_regulation.pdf

Filed under: law, regulations | 12 Comments »

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