Morning Report: Jerome Powell Addresses Congress 2/27/18

Vital Statistics:

Last Change
S&P Futures 2782.0 -2.5
Eurostoxx Index 381.8 -1.3
Oil (WTI) 63.6 -0.3
US dollar index 83.7 0.2
10 Year Govt Bond Yield 2.88%
Current Coupon Fannie Mae TBA 102.313
Current Coupon Ginnie Mae TBA 102.531
30 Year Fixed Rate Mortgage 4.4

Stocks are down small on no real news. Bonds and MBS are down as well.

Durable Goods Orders fell 3.7% in January MOM, but rose 6.8% YOY. Ex-transportation, they fell 0.3% MOM and rose 6.9% YOY. Core Capital Goods (a proxy for business capital expenditures and expansion) fell 0.2% MOM and is up 6.3% YOY.

In other economic news, the trade deficit widened to 74 billion, while retail inventories rose 0.8%. Wholesale Inventories rose 0.7%.

Home prices rose 6.3% YOY in December to close out 2017 up 6.3% overall. House price inflation will be subject to a bit of a push-pull effect: Strong demand and limited supply will provide support for home prices, while increasing interest rates will reduce affordability and should have a dampening effect on home price inflation. That said, by historical standards, these mortgage rates are still extremely low, and affordability is still extremely high, at least on a long-term basis when you use monthly payment as a percentage of income.

The FHFA House Price Index rose 0.3% and it is up 6.5% for the year.

Fed Chairman Jerome Powell testifies in front of Congress this morning at 10:00 am. Here are his prepared remarks. Nothing in the remarks jumps out at me as anything all that new, although Powell argues that the stability of the labor force participation rate over the past few years is a sign of strength, not weakness. Yes, baby boomers are retiring but their kids are entering the workforce so it should balance out. Below is a chart of the labor force participation rate going back to WWII. Note the steady rise beginning in the 1960s. That is the baby boom entering the workforce, and the secular change of more women entering the workforce. About half of those gains have been given back in the Great Recession. I think he is saying that the labor force participation rate should be trending even lower due to demographic factors, and that the stability of the past few years is evidence that the labor market is strong. Perhaps.

The Fed has always had a simple model of unemployment and inflation called the Phillips Curve. It basically says that unemployment will start driving inflation if it gets low enough. Historically economists have thought that unemployment levels in the low 4s would trigger it. So far we have seen some wage inflation in some skilled areas, but nothing widespread. Most of the inflation we have been seeing has been commodity push inflation driven by food and energy prices. These things often reverse, as higher prices invite new supply. Or in other words, the cure for high prices is high prices.

You are beginning to see a new theory in academia – that the slow growth in wages is not due to a supply / demand issue, but is evidence of an antitrust problem, or at least a market failure. Hard to see how heavyweights like Wal Mart and McDonalds are colluding for low wage labor, but that;s what they believe, and they think the cure is a higher minimum wage, more unions, and exerting more oversight over the bigger employers. Occam’s Razor says that labor-replacing technology is probably the driver, but that’s no fun.

Toll Brothers reported better-than expected earnings this morning, showing that there is still plenty of strength in the luxury sector of the market. Orders rose 19% in units, and ASPs rose 6.8% to $826k.  Margins are falling however, as increasing input and labor costs push against price hikes.

Surprising stat: 35% of homebuyers bid on a home before seeing it in person. The young buyer is more likely to do this: almost half of Millennial buyers bid before seeing.

18 Responses

  1. that 35% stat doesn’t surprise me. my parents did that once or twice.
    pretty sure i did back in 2004 when were flinging bids all over the place with escalation clauses.

    Liked by 1 person

  2. “Occam’s Razor says that labor-replacing technology is probably the driver, but that’s no fun.”

    Plus making labor more expensive via things like the ACA which aren’t reflected in the minimum wage itself.

    Liked by 1 person

    • That is heresy to the left…

      Liked by 1 person

      • A recent regression analysis I saw somewhere said “automation, and third, Asian competition” are second and third after aging out of the work force/aging population. Said those three factors were essentially the only factors.

        So its also heresy to the anti-NAFTA groups on the left and right, and the anti-ACA group on the right.

        Like

        • The antitrust angle seems like a reach, but I am not a lawyer, and I think many of those advocating it are not either.

          Like

        • It’s advocated by the people who don’t actually know what “monopsony” means.

          The one point that they do have is that prior to Robert Bork and the 1970’s, antitrust law used to be based on considerations other than just consumer welfare, as expressed by low prices.

          It’s pretty hard to make an antitrust case now unless you are actually colluding to limit competition and raise prices.

          Like

        • Mark:

          So its also heresy to the anti-NAFTA groups on the left and right, and the anti-ACA group on the right.

          I don’t understand the connection between this and ACA.

          Like

        • “that the slow growth in wages is not due to a supply / demand issue”

          Slow growth in cash wages is also caused by having to pay higher per worker benefits that increase the cost for each employee without actually being reflected in take home pay.

          Like

  3. Occam’s Razor says that labor-replacing technology is probably the driver, but that’s no fun.

    Also immigration.

    Liked by 1 person

  4. Uh oh:

    “As GOP tax cuts take hold, Democrats struggle for line of attack

    By Erica Werner February 26 at 6:00 PM

    Americans have just started to see the tax cut show up in their paychecks this month, and along with those boosts in pay have come a spate of recent polls that show public opinion turning in favor of the tax legislation — leaving Democrats the unenviable task of trying to convince voters that a law increasing their paychecks now will be bad for the country later.”

    This is a perfect example of the dangers of believing your own bullshit:

    “Activist groups on the left are clamoring for the law’s full repeal, putting pressure on liberal lawmakers who for the most part are stopping short of pushing to undo it entirely. Meanwhile, red-state Democrats such as Donnelly must craft an even more nuanced response. It is a communications challenge many Democrats appeared to have not foreseen when the tax bill passed late last year over their unanimous objection. It had polled abysmally amid forecasts that some voters would pay higher taxes in years to come.”

    https://www.washingtonpost.com/business/economy/as-gop-tax-cuts-take-hold-democrats-struggle-for-line-of-attack/2018/02/26/5fa86f6a-17db-11e8-b681-2d4d462a1921_story.html

    Like

    • ” It is a communications challenge many Democrats appeared to have not foreseen when the tax bill passed late last year over their unanimous objection”

      do’h

      Liked by 1 person

    • “It had polled abysmally amid forecasts that some voters would pay higher taxes in years to come.”

      I never understood the rationale that suggested taxes would be going up for some people. Or why the Democrats who generally don’t think taxes going up is a bad thing, thought that would be a bad thing? Unless it wasn’t really going to happen and they were lying.

      Like

  5. The NRA should replace Wayne LaPierre with David French.

    https://www.theatlantic.com/politics/archive/2018/02/gun-culture/554351/

    Like

  6. First – a case I must read because of the lineups of opinions.

    Patchak v. Zinke
    6-3 Thomas
    Holding: David Patchak filed suit challenging the authority of the secretary of the Interior Department to take into trust a property (Bradley Property) on which Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians wished to build a casino. In an earlier appeal in the case, the Supreme Court held that the secretary lacked sovereign immunity and that Patchak had standing, and it remanded the case for further proceedings. Congress subsequently enacted the Gun Lake Act, which “reaffirmed as trust land” the Bradley Property, Section 2(a), and provided that “an action . . . relating to [that] land shall not be filed or maintained in a Federal court and shall be promptly dismissed,” Section 2(b). The court of appeals properly affirmed the district court’s dismissal of Patchak’s lawsuit pursuant to that statute.

    Judgment: Affirmed, 6-3, in an opinion by Justice Thomas on February 27, 2018. Justice Thomas, joined by Justices Breyer, Alito and Kagan, concluded that Section 2(b) of the Gun Lake Act does not violate Article III of the Constitution. Justice Breyer filed a concurring opinion. Justice Ginsburg filed an opinion concurring in the judgment, in which Justice Sotomayor joined, concluding that Congress acted effectively to displace the Administrative Procedure Act’s waiver of immunity for suits against the United States — which enabled Patchak to launch this litigation — with a contrary command applicable to the Bradley Property. Justice Sotomayor filed an opinion concurring in the judgment, concluding that that Section 2(b) of the Gun Lake Act is most naturally read as having restored the Federal Government’s sovereign immunity from Patchak’s suit challenging the trust status of the Bradley Property.

    Chief Justice Roberts filed a dissenting opinion, in which Justices Kennedy and Gorsuch joined.

    Second, Scott and Joe, the study I read indicated that the only determinants of wage stagnation were 1] the aging population and the fact newbies get paid less than the experienced folks they ostensibly replaced; 2] automation drives down labor value of manually intensive work; and 3] Asian competition drives down labor cost for manually intensive work. These 3 factors were so overwhelming that all other possible factors could effectively be discounted.

    It was like finding that the market was a more powerful driver than government policies. Surprise.

    Liked by 1 person

  7. This article is profoundly stupid, on so many levels…

    http://evonomics.com/want-to-kill-your-economy-have-mba-programs/

    Liked by 1 person

  8. Truer words my friends, we are bad ass.

    Like

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