Morning Report: Tax and Fed Head day 11/2/17

Vital Statistics:

Last Change
S&P Futures 2573.8 -1.0
Eurostoxx Index 395.3 -1.4
Oil (WTI) 54.3 0.0
US dollar index 87.7 0.0
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 3.95

Stocks are flat after the Fed maintained rates and the Bank of England hiked them. Bonds and MBS are flat as well.

As expected, the Fed maintained the current level of the Fed Funds rate and said its plan of tapering QE remained on track. Since there was no press conference or updated projections, there really wasn’t much for the bond market to work with. The part that caught my eye was that the Fed saw risks to the economy as evenly balanced. Given the growth and the low unemployment rate the risks to the economy are probably to the high side. What is more likely? An uptick in inflation to 2 – 3% or a recession?

Separately, the Atlanta Fed bumped up their estimate for Q4 GDP to 4.5%. That would work out to 3.1% growth for 2017. That said, hurricane effects didn’t drag down Q3 all that much so we may not see that big of a rebound in Q4. This estimate is going to hinge on the holiday shopping season.

Job cuts fell to 29,831 in October, the lowest in 20 years, according to outplacement firm Challenger, Gray, and Christmas. The health care sector had the biggest number of cuts. Separately, initial jobless claims fell to 229,000 last week.

Perhaps an explanation of why we are starting to see wage growth: productivity rose to 3% in the third quarter. Lousy start / stop productivity growth has bedeviled the economy since 2008. Increases in productivity drive increases in real (non-inflationary) wages. Unit labor costs rose 0.5%.

Donald Trump is expected to nominate Jerome Powell to run the Fed today. There are many that are disappointed that Yellen didn’t get a second term, however Trump wants someone with private sector experience to run the Fed, after a string of academics. We probably won’t see much difference between Powell and Yellen in terms of monetary policy (any differences would be so minor no one will notice) but there will be differences in regulatory approach. Janet Yellen was very much in the Obama mold of aggressive regulation. Powell is expected to be more balanced in his approach to the banks.

The GOP is slated to release their tax reform bill today. There have been trial balloons galore floated, so nobody really knows what it will entail. The most likely change is a drop in the corporate tax rate (which may or may not be phased in and / or temporary), an increase in the standard deduction, and limitations on deductions for those that itemize. Some sacred cows are going to take a hit in this bill, and with zero expected Democratic votes, it will have a narrow path to approval. Here is what the latest handicapping has..

Donald Trump signed the Congressional Review Act override to the CFPB’s arbitration rule. Eliminating the mandatory arbitration rule was always more about benefiting lawyers than consumers, and even the CFPB’s own research showed that consumers get better compensation from arbitration than they do from class action suits (ever get an unexpected check in the mail for $1.37 after a class action suit you never heard of? The rest went to the legal fees). Small and medium sized financial firms will be the biggest beneficiaries of this rule.

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