Morning Report: Trade war tensions pushing rates lower 3/5/18

Vital Statistics:

Last Change
S&P Futures 2681.3 -9.0
Eurostoxx Index 369.2 2.2
Oil (WTI) 61.4 0.1
US dollar index 83.8 0.1
10 Year Govt Bond Yield 2.84%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.4

Stocks are lower this morning the trade cold war between the US and the world escalated. Bonds and MBS are up.

Those hoping that Donald Trump would re-think his position on trade over the weekend were disappointed. He is now threatening EU automakers and demanding a re-negotiation of NAFTA to ease steel and aluminum restrictions with Mexico and Canada. Exiting and / or renegotiating NAFTA will probably not be as easy as he thinks it will be. The US has always had the leadership position globally in encouraging free trade. There is no doubt it that has accepted some protectionism from other countries as a cost of doing business, and in the spirit of moving the ball on free trade in general. In other words, the US has accepted a disadvantaged position, and these “free trade” agreements were in reality a negotiation over how many points the US would spot other countries.

Rates this week will be primarily determined by the fluid state of trade announcements. We will get  some important market-moving data this week with the jobs report on Friday, and productivity on Wednesday. There will also be Fed-Speak all week.

Big picture, trade tensions are causing a flight to quality, which is pushing down interest rates. This is probably going to be only a temporary phenomenon so I would encourage LOs to push their customers to lock. Despite rising rates, we are not seeing an influx of foreign money into Treasuries, and we are seeing European investors and Japanese investors investing in Bunds and JGBs despite the lower yields. Why would investors accept 62 basis points in Germany or 5 basis points in Japan when they could get 2.8% in the US? Currency hedging costs wipe out the differential.

Trade battles are generally bad for everyone involved, except for domestic producers in the industries being protected. Note that Secretary of Commerce Wilbur Ross is an ex-steel guy himself and is not an idealistic free-trader. I suspect that is where Trump is getting his advice, although the media claims it was a petulant decision out of the blue as a result of negative headlines.

Tariffs on steel and aluminum will be bad for the construction industry, especially multi-fam. Don’t forget, the housing business is already dealing with a 20% tariff on Canadian soft lumber. Building Material prices are already at record highs.

The services economy continues to expand, with the ISM Non-Manufacturing index hitting 59.5 in February. This was lower than the exceptionally strong January reading of 59.9. The internals of the report were good, with the New Orders and Employment indices coming in over 60. Some of the comments from business below:

  • “Lumber-related costs continue to increase as supply is also starting to become a problem. The market volatility of construction materials and the short supply of construction labor have added difficulty to long-term planning.” (Construction)
  • “Slight increase in activity; beginning to see some higher cost for goods and services.” (Finance & Insurance)

Strong growth and inflation is the takeaway.

Amazon is in talks with JP Morgan to start providing checking account services. Amazon mortgages can’t be far behind. Has Bezos ever looked at banking P/E ratios? They aren’t triple digit.

25 Responses

  1. Excellent review.

    Liked by 1 person

  2. Found this interesting, not necessarily the fact that she has been targeted, but that the ones calling for her to be disinvited are law students..

    If the future lawyers of America are indifferent to free speech we’re in trouble…

    Liked by 1 person

    • Agreed.

      Although I suspect that the sum total of the membership of the named groups is fewer than ten per cent of the law school student body it is no less remarkable that they could fall into the trap of selective free speech for me and not for thee.

      Liked by 1 person

  3. Link for Scott and Joe – Incorporation Doctrine and the Excessive Fines Clause – a new case which would be of first impression.

    Of course you are all welcome to obsess over the law as well!


    • Mark:

      Thanks for the link.

      This will probably come as no surprise, but I confess that I find Volokh’s pretense that he is presenting some kind of legal/Constitutional analysis irritating. The arguments are entirely political, and pretty much exactly the kind of arguments that one would expect to be presented if the issue was being debated in a legislature, not a courtroom.

      The headline is indicative of the pretense: Does the Excessive Fines Clause Apply to the States? But literally every argument presented is instead an attempt to answer the question: Should the excessive fines clause apply to the states? It is a policy analysis, not a legal analysis.

      The argument that the 14th amendment was intended to incorporated either the whole of the BoR or none at all is at least debateable as a legal matter, in theory anyway. But the idea of “selective incorporation” as practiced by SCOTUS is such a blatantly transparent political act, it pains me to see otherwise reasonable analysts treat it as a legitimate Constitutional doctrine, and to accept the Court’s self-appointed position as a super-legislature whose judgement of right and wrong is so superior to all others that it should take on the role of “correcting” all the mistakes made by actually elected representatives.


      • I agree that the arguments seem legislative for the most part.

        But I knew you would enjoy it and am glad you read it.


        • Mark:

          But I knew you would enjoy it and am glad you read it.

          The weirdness of my interests is apparently well known.


  4. Boss, imma need to bang, er, interview a bunch a Thai bar girls to really nail this Trump thing down.


  5. “I suspect that is where Trump is getting his advice, although the media claims it was a petulant decision out of the blue as a result of negative headlines.”

    I blame Chuck Schumer.

    The meltdown at PL today makes me think that regardless of the economic merits, Trump may be on to something politically.

    The Hill agrees:

    Liked by 1 person

    • election night 2020 is going to be a hoot. I don’t think I could take the schadenfreude of his re-election when he loses the popular vote even more bigly and still wins.

      Liked by 1 person

    • She got railroaded. They both did. She was making sure she was mentally fit to execute her duties, and the dude was just doing his job. Justice for Megan!


  6. This is a fun piece by the MILFY Mollie Hemingway.

    I especially like the Susan Rice lying part.


  7. Left unsaid, disabled cost-share to States is 50% whereas able-bodies cost-sharing tostates is over 90%. Guess who gets priority in treatment? Obamacare is literally killing the disabled.


Be kind, show respect, and all will be right with the world.

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: