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.

18 Responses

  1. Just curious – how does Japan mechanically manipulate interest rates and stock prices? Fiat?* Limiting sales volume? Government purchases?

    Does the govt own a high % of publicly traded stock?

    *I am assuming that the Central Bank is not as independent of the government as it is here.


    • The government basically has all the supply of government bonds, so it doesn’t take much buying or selling to move them. QE was basically the same concept: by buying up a lot of the available supply of Treasuries, the Fed was ensuring that investors who were buying them would move them in the direction they wanted.

      Re the stock market, Japan is weird. One of my first jobs was trading Japanese warrants on the graveyard shift. The Japanese stock market has always been somewhat manipulated, but it went into overdrive in the 90s. The Ministry of Finance would conduct price keeping operations, where they would tell institutional investors they are forbidden from selling for a certain period of time. Now, the Bank of Japan buys stocks directly. While the Japanese stock market is large in terms of market cap, the old keiretsu system still exists, so there are huge cross-holdings of Japanese companies. In other words, the float of these stocks is usually pretty small, so it doesn’t take much to move it around. Second, the Nikkei 225 index is a price weighted stock market index, which makes it much easier to manipulate than a market cap weighted index like the S&P 500.

      The Japanese experience is a classic example of what happens when you try and prevent markets from clearing. Now they have a generation of people who know nothing but deflation.


      • Thanks – I got all of that except how a price weighted index is easier to manipulate.

        George, did you know about Theranos and the phony blood testing machines? I don’t mean in a guilty knowledge sort of way, just in terms of having heard that something “too good to be true” might be going on.


  2. Quit saying we want to take your guns


    • “The legal scholars I talked to suggested that an Australia-style program would probably pass muster.”

      This is just bullshit. I don’t know what “legal scholars” he talked to, but it’s garbage. There’s no way gun confiscation is going to pass constitutional muster. Not unless they get an unambiguously progressive majority on SCOTUS.


    • That being said, Vox is even less “news” than CNN. The Democrats would never get something like Australian gun laws enacted here.

      Dude also says:

      Large-scale confiscation is not going to happen. That’s no reason to stop advocating it. (I also want to repeal all immigration laws and give everyone a monthly check from the government with no strings attached, and will argue for those ideas even though they’re not politically viable.

      He thinks the problem with repealing all immigration laws and then giving away free money to everybody here is that they aren’t politically viable. Christ, do they pay him money to write for that thing?

      Liked by 1 person

      • When Ds say this kind of stuff or when HRC doubles down on her “intolerables” message as she did the other day they absolutely shoot themselves in their tone deaf ears.

        HRC remains fully capable of losing any election all on her own.

        Liked by 1 person

    • “We have partially compensated for the short record by computing daily rather than season correlations.”

      I am not a climate expert, but this sounds like the data is therefore worthless. There simply is not enough to make the claim their study makes.

      Given that presumable it was cooler in, say, the 1920s, with less man-made global warming, what causes the cold snaps and severe winter weather then? This seems like a pertinent question.

      I am consistently amazed by what a a bunch of religion and showbiz the climate change alarmism is. They know nothing, Jon Snow.


    • Also, I’ll beat this drum until the evidence disproves me: warmer in the arctic, getting colder in the mid-latitudes . . . what else does that sound like? It sounds like seasons. Macroseasons explain observations better than anthropogenic climate change, IMO.


  3. Wait, I was told that Fusion GPS were a bunch a stand-up mofo’s?

    Liked by 1 person

  4. Our society is in trouble from every direction.

    Everything has to be a “thing”. Christ.


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