Morning Report: Is the Trump Reflation Trade back? 12/20/17

Vital Statistics:

Last Change
S&P Futures 2693.3 -0.3
Eurostoxx Index 390.5 -0.5
Oil (WTI) 57.5 0.3
US dollar index 86.8 0.0
10 Year Govt Bond Yield 2.49%
Current Coupon Fannie Mae TBA 102.531
Current Coupon Ginnie Mae TBA 103.375
30 Year Fixed Rate Mortgage 3.88

Stocks are higher this morning as tax reform looks set to pass. Bonds and MBS are down.

The Senate passed tax reform, and it looks like we’ll need a second vote in the House because of the name. Stocks like it, and bonds are selling off. That said, bonds are selling off worldwide, so it isn’t just the US.

Hot on the heels of tax reform comes funding the government, as normal funding runs out on Friday.  Mitch McConnell has vowed there will be no government shutdown, and he is probably correct, as the continuing resolution will be larded up with all sorts of unrelated measures to garner the necessary votes. The big threat is if Democrats demand some sort of immigration deal or if conservatives balk at stabilizing Obamacare or re-authorizing CHIP. Politicians talk about “Christmas Tree” bills, where everyone gets an ornament (or a priority satisfied). Given the silence in the media and the absence of leaks, it appears that is exactly what is going on. Just in time for the season, I guess.

The 10 year broke through support yesterday, which caused a sell-off driven by stop-loss selling on the part of technical traders.  Don’t forget, one of the biggest trades on the Street right now is the yield curve flattening trade, where investors are long the 10 year and short the 2 year (or some variation of that). Yesterday, people got carried out on that trade as the losses on the 10 year side of the trade were not offset by gains on the 2 year. My point on this is that the movement in the 10 year over the past couple of days has a lot of noise in it, caused by temporary technical trading. It might just be a blip.

Does the passage of tax reform bring the Trump Reflation Trade back into play? The Trump Reflation Trade refers to the rally in stocks and the sell-off in bonds that we saw a year ago based on policy expectations in Washington. The markets were expecting a tax cut and an infrastructure spending plan which would goose the economy and drive investors out of safe assets like Treasuries into riskier assets like stocks and corporate bonds. That trade petered out, at least on the bond side of the ledger as getting anything passed in Washington looked almost impossible. We had a nice rally in bonds in Spring and have been stuck in a narrow range since. With tax reform now done, and talks of infrastructure spending next year, we could see a repeat, where bonds test the early 2017 levels around 2.6%. That said, I would be extremely surprised to see a deal on infrastructure, as 2018 will be all about midterm elections and posturing ahead of them.

The tax bill made some changes that are positive for housing and the mortgage industry. The biggest one for many smaller independent originators concerns mortgage servicing rights and the recognition of income for tax purposes. The original bill would have required originators to pay the tax up front for the MSR portion of the gain on sale. Since MSRs are not cash, it would have hurt the cash flows of many smaller originators and perhaps driven them out of servicing. The tax treatment for MSRs remains unchanged. Second, affordable housing advocates were worried about two provisions that would have possibly discouraged affordable housing construction – the removal of the Low Income Housing Tax Credit and Private Activity Bonds. Those provisions remain unchanged.

Mortgage Applications fell 4.9% last week as purchases fell 6% and refis fell 3% despite a drop in rates.

Existing Home Sales rose 5.6% to a seasonally adjusted annualized value of 5.81 million, which is the highest since 2006. The median home price rose 5.8% to $248,000. There are 1.67 million homes for sale, which represents about 3.4 month’s worth. The first time homebuyer was 29% of sales, and we saw cash-only sales (think investors) increase to 22%. The new tax bill will make it somewhat more attractive to be a landlord, so we could see some effect here, especially at the lower price points.

45 Responses

  1. Ben Shapiro and Rosie O’Donnell get into it on Twitter.

    Backstory, Rosie offered $2 million cash to either Flake or Collins to vote against tax reform. Of course bribing a Senator to vote for something is sort of illegal…

    Liked by 1 person

    • they’re going to Trump-Derange themselves into losses next year.

      Liked by 1 person

      • I think you might be right..The Far Left will screw the unscrewable pooch yet again…


      • See also:

        The Twitter comment that sums it up:

        “Is there anything more 2017 than a woke black American intellectual flouncing off Twitter because another woke black American intellectual accused him of not being woke enough and then Twitter blaming it on a white supremacist agreeing with the second woke black intellectual?”

        Liked by 1 person

      • From PL, this may well work:

        “AND TRUMP’S REELECTION MESSAGE, IN ONE TWEET: Here it is, from White House press secretary Sarah Sanders:

        “Sarah Sanders‏Verified account @PressSec

        Democrats wasted the year tearing the President down while the President built America back up:
        -Booming economy
        -Millions of new jobs
        -ISIS caliphate in ruins
        -Record number of judicial appointments
        -ObamaCare individual mandate repealed
        -Historic tax cuts
        America great again”

        Unremarked on is the value of having a message that can easily translate into a single Tweet.

        Liked by 1 person

      • if these online calculators are remotely accurate, i’m looking at a 15k+ tax cut. and tax advantage 529 plan for elementary/middle school (and probably high school) that’s Yuge

        uh, sure, i’ll wear a red MAGA hat.


      • There is no reason 2018 shouldn’t be a sweep for the Democrats. Except for the Democrats. If they even win a little bit, they’ll celebrate. But there’s no excuse for it not being a landslide, except they are truly deranged.


  2. Bitcoin crashed today.


  3. Gotta love the progressive strategy to build a political coalition:

    “A Generation of Sociopaths: How the Baby Boomers Betrayed America”

    Liked by 1 person

  4. 5 companies so far announced bonuses and wage increases based on the tax cut…

    If he cut a deal with corporate america to give raises in exchange for a corporate tax cut, and kept it quiet because the MSM is too busy chasing the Russian non-story, he has way more political acumen than I ever gave him credit for.

    The left has to be spitting mad right now…

    Liked by 1 person

  5. The government corruption surrounding the Bundy standoff is interesting, it reminds me of their tactics with Randy Weaver in Idaho and the Branch Davidians in Waco.

    Kinda surprised the Feds didn’t kill everybody, it’s their M.O.

    Liked by 1 person

  6. He is bent out of shape over raises, capital expenditures, and charitable donations

    Liked by 1 person

  7. I liked The Last Jedi.
    has some flaws, but overall enjoyed it.

    Liked by 1 person

    • I see it mostly as a wasted opportunity. Laura Dern’s arbitrary character should have been Ackbar, who dies offscreen. Hamill’s performance was aces, worth it for that, but again makes me think of what might have been. Heaven-handed messaging on casino planet. Snoke has to be the worst mysterious evil tyrant ever. Who was he? What was he about? What’s his dead with Luke? Ugh. On the whole … could have been better. But it was what it was.


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