Morning Report: Manufacturing strong 1/3/18

Vital Statistics:

Last Change
S&P Futures 2697.8 3.8
Eurostoxx Index 389.3 0.9
Oil (WTI) 60.8 0.4
US dollar index 85.7 -0.2
10 Year Govt Bond Yield 2.46%
Current Coupon Fannie Mae TBA 102.375
Current Coupon Ginnie Mae TBA 103.25
30 Year Fixed Rate Mortgage 3.91

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

We will get the FOMC minutes this afternoon at 2:00 pm. We might see some volatility if they contain any surprises, so just be aware if you are locking around then.

Mortgage applications fell 3% last week as purchases rose 1% and refis fell 7%.

Manufacturing improved in December, according to the ISM Manufacturing Report. New Orders and Production drove the increase, while employment fell. This was the second highest reading for 2017. Manufacturing firms reported difficulties finding qualified workers, and 44% reported increasing starting pay to attract workers. The 2017 average of 57.6 in the index historically corresponds with a 4.5% increase in GDP. The December reading would be associated with over 5% growth. That said, manufacturing doesn’t have the impact on the economy it used to have, but that is still impressive growth.

Despite Twitter tensions with North Korea (which rattled the chattering classes), North Korea and South Korea improved communications. While the tiff between Kim Jong Un and Trump make for bit of a sideshow, the markets (stocks, bonds, currencies) do not take it as any sort of serious threat or possibility.

Construction spending increased in November by 0.8% MOM and 2.4% YOY. Private residential construction rose 1.1% MOM and over 7% YOY.

Framing lumber prices are up 43% YOY, in the CME futures. Traders are looking for prices to eclipse their bubble highs this Spring. This should bump up prices for new construction in 2018. For all of the handwringing over tax reform’s effect on house prices, simple supply and demand will keep them supported, at least for 90% of the market. If the growth in the economy ever translates into faster wage growth, expect that supply and demand imbalance to increase even further.

Economic confidence was positive in 2017, according to Gallup’s economic confidence index. Note the index began in 2008, so the only track record we have is of the crisis / post-crisis days.

Congress is working to come up with some sort of long-term spending solution to keep the lights on. Republicans want increased defense spending, while Democrats want non-defense spending to have the same increases that defense does. Surprisingly, both parties seem to want to increase defense spending. Republicans are going to need Democrats to reach a deal, as some on the right will balk at the higher spending levels. While there has been talk that Democrats might demand some sort of immigration measure in exchange for a vote, so far they haven’t drawn that line in the sand. At least as of now, nobody is talking about a government shutdown. Remember the last time government shut down, originators couldn’t get tax transcripts out of the IRS which delayed some closings. It is something to stay ahead of.

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