Morning Report: Tariff Threats cause a bond market rally 3/2/18

Vital Statistics:

Last Change
S&P Futures 2658.0 -20.0
Eurostoxx Index 368.8 -6.1
Oil (WTI) 60.8 -0.2
US dollar index 83.8 -0.2
10 Year Govt Bond Yield 2.84%
Current Coupon Fannie Mae TBA 102.313
Current Coupon Ginnie Mae TBA 102.531
30 Year Fixed Rate Mortgage 4.4

Stocks are lower this morning on news of a possible trade war. Bonds and MBS are flattish.

Donald Trump has announced plans to impose 25% tariffs on steel imports and 10% tariffs on aluminum imports. The dollar has weakened in response, and we have seen bond yields fall as well. He characterized trade wars as “good” and “easy to win.” As a general rule, nobody wins trade wars – they depress economic growth – but the silver lining is that you are seeing a bit of a flight to quality, which means Treasuries have a bid for once. This is pushing rates down. Don’t know how long it will last (he may be bluffing, or someone will probably talk him out of it), but take advantage of it. I could see him re-thinking and abandoning this idea over the weekend, and we could be looking at a 2.9% 10 year on Monday.

Consumer sentiment was flat in February, according to the University of Michigan Consumer Sentiment Survey.

Jerome Powell’s testimony in front of the Senate wasn’t all that dramatic. The main subjects were wage growth (or the lack of it), fair lending, and regulation. Elizabeth Warren spent her time harping on Wells Fargo. These events are mainly for political posturing and not much else. One Senator asked him about climate change, which Powell took in stride. I was hoping he would ask the Senator to lay out the connection between the Fed Funds rate and atmospheric CO2, but alas he played it straight.

On the subject of the labor market and wage growth, he said that nobody really knows what full employment actually is. The unemployment rate suggests that we are, while wage growth and the labor force participation rate suggest we are not. His view is that if you take all of the data, we are probably at or very close to full employment. He did say that the Fed has been modeling something like a 25 basis point annual decline in the labor force participation rate due to demographics – i.e. the retiring Baby Boomers, and that it has now caught up with that demographic model.

Acting Director of the CFPB Mick Mulvaney said yesterday that the Bureau will rely more on state AGs when deciding on enforcement actions. He reiterated the plan to spend resources on cases that are on “solid legal ground” and less on “creative claims.” Regulation by enforcement is also on the way out, and the CFPB intends to be much more forthcoming in telling the industry what the rules of the road are.

Elmer Fudd says we are in a bond market bubble.

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