Morning Report: Inflation still tame 3/14/18

Vital Statistics:

Last Change
S&P Futures 2779.5 6.8
Eurostoxx Index 376.9 1.4
Oil (WTI) 61.1 0.4
US dollar index 83.4 -0.1
10 Year Govt Bond Yield 2.84%
Current Coupon Fannie Mae TBA 102.375
Current Coupon Ginnie Mae TBA 102.75
30 Year Fixed Rate Mortgage 4.43

Stocks are higher this morning on no real news. Bonds and MBS are flat as well.

Inflation at the wholesale level rose 0.2% MOM / 2.8% YOY. Ex-food and energy, they rose 0.2% MOM / 2.7% YOY. The core index (ex food, energy and trade services) rose 0.4% MOM / 2.7% YOY. Overall, the report came in a touch hotter than expectations, but nothing major. In terms of services, hotel demand drove the increase, while goods were impacted by lower energy prices. This report shouldn’t have any effect on the Fed’s decision next week.

Retail Sales came in weaker than expected, and this is providing some support for bonds. The headline number was down 0.1%, while the control group was up 0.1%. Census has made some technical changes to the way it measures and calculates the index, so these numbers are going to contain a bit of noise. That said, people who were hoping that tax cuts would propel spending are disappointed this morning, however it might take a month or two to show up in the data.

Not much of a reaction in the Fed Funds futures, with March futures handicapping a 89% chance of a 25 basis point hike, and the December futures coalescing around a total of 75 basis points this year.

Mortgage Applications increased 0.9% last week as purchases rose 3% and refis fell 2%. The average contract rate rose 4 basis points to 4.69%, the highest level since January 2014. Refis comprised 40% of all mortgages, the lowest level in almost 10 years. The government share of mortgages increased.

The leading candidate to replace Gary Cohn is Larry Kudlow, a free-trade, supply-side economist. A veteran of Wall Street and Washington, he recognizes that some saber rattling in trade issues can be a useful negotiating tactic. He also is a regular on TV, which is crucial for selling the Administration’s policies to the public. Finally, he is well-liked in Washington, and while Democrats might not agree with him on policy, he doesn’t strike a nerve with them. This will be helpful in navigating budgetary decisions.

10 years ago, Bear Stearns collapsed, pretty much setting the stage for the financial crisis. The public didn’t pay attention until Lehman went under. At the end of the day, Bear and Lehman were symptoms, not the disease. The disease was a burst residential real estate bubble. Keep that in mind as the business press will undoubtedly publish a bunch of “Are we at risk for another financial crisis?” articles this week. Residential real estate bubbles are the Hurricane Katrinas of banking, and when they burst, they take down the system with it. We do not have one at the present, and while there is evidence of excessive risk taking in some corners of the market (subprime auto, etc) it simply isn’t big enough to dent the economy in a material way.

Hard to believe, but true. Last night not a single Japanese government bond traded. Between the central bank vacuuming up the supply as a part of QE and Japanese pension funds buying and holding, there is almost no liquidity in the market. Makes the yield curve pretty easy to manipulate, though. Japan has always had a different attitude about markets – it thinks interest rates and stock prices are too important to be determined by a mere market – but it will be interesting to see how the economy gets out from under such determined government support. Ultimately, accurate, unmanipulated interest rates and asset prices are a necessary part of the plumbing for a functioning economy.

%d bloggers like this: