Morning Report: The Fed maintains rates as expected 5/3/18

Vital Statistics:

Last Change
S&P futures 2622 -5.75
Eurostoxx index 385.94 -1.5
Oil (WTI) 67.7 -0.21
10 Year Government Bond Yield 2.94%
30 Year fixed rate mortgage 4.58%

Stocks are lower after the Fed maintained interest rates. Bonds and MBS are up.

As expected, the Fed maintained its current Fed Funds target yesterday. The money quote: Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced. The “symmetric” characterization of their inflation target (as opposed to treating the 2% target as a ceiling) gave markets some comfort that the Fed is going to continue its slow upward march in the Fed Funds rate as long as inflation remains around these levels. Bonds initially fell on the news and then rallied.

The Fed Funds futures are pricing in a 100% chance of a tightening at the June meeting, and the December futures are pricing in one more tightening this year, with a smaller chance of 2.

Job cuts fell in April after an unusually strong March, according to outplacement firm Challenger, Gray and Christmas. Retail has accounted for the largest share of job cuts this year, followed by health care. For the year, companies have announced around 175,000 job cuts, while announcing 210,000 job plans. C&G uses press releases to count job cuts and hirings, so it necessarily relate to the payroll numbers being put out tomorrow by BLS.

Productivity rose 0.7% while unit labor costs rose 2.7% in the first quarter, according to BLS. Weak productivity growth has been an issue for a while and is one of the reasons why wage growth has seemed muted. Increases in standards of living are driven by increases in productivity. The increase in unit labor costs may be related to many of the minimum wage hikes we saw at the beginning of the year. Theoretically, the lower the productivity, the less room the Fed has to maneuver.

Initial Jobless Claims rose slightly to 211,000 which is still close to 50 year lows.

The service sector continues to expand, albeit at a slower pace than March according to the ISM Non-Manufacturing Index. The respondents echoed the same trade fears as the manufacturers did. Some snippets:

  • “Economy is humming along. [Activity in] both residential and commercial construction [is] apparent. Agriculture sector seems to be moderating at these commodity price levels. The international trade situation appears to be shifting on a minute-by-minute basis, which has folks nervous.” (Finance & Insurance)
  • “National shortage of Class-A drivers and the increased demand for logistics is resulting in an increase in the cost of goods.” (Accommodation & Food Services)
  • Construction activity continues to remain strong in the region, resulting in capacity issues and shortages of labor, materials and subcontractors.” (Public Administration)

Bill Gross thinks the upward move in interest rates is pretty much done, and he doesn’t see much more of a move from here. “Supply from the Treasury is a factor in addition to what the Fed might do in terms of a mild, bearish tone for U.S. Treasury bonds,” Gross told Bloomberg TV. “I would expect the 10-year to basically meander around 2.80 to perhaps 3.10 or 3.15 for the balance of the year. It’s a hibernating bear market, which means the bear is awake but not really growling.”Of course Bill is talking his book a little, but he is probably right, with the caveat that inflation remains around the 2% level.

Beware of cult stocks once they lose favor with the Street. Tesla’s conference call was supposedly a disaster last night, and Elon Musk decided to take questions from You Tube people instead of analysts who were interested in things like cash burn. Comparisons are being drawn to Enron’s conference call in the early 00s when Jeff Skilling blew up at analysts which caused people to take a more critical look at the company. Don’t forget TSLA bonds have been getting slammed, and that is toxic for a stock with negative cash flow trading over 4x revenues.

Fannie Mae results are out. The company made $4.3 billion in the first quarter.

Big fixed income money managers have not had much of an appetite for MBS as QE pushed down returns. That may be changing, as BlackRock and BNP Paribas are allocating more funds to the sector. One big advantage of MBS is liquidity. What does this mean for mortgage originators? Lower rates, at least at the margin.

20 Responses

  1. um, hookers and blow in the breakroom?

    Like

    • Can’t find it but I wrote a comment not to long ago saying that tech company batchelors should be be given a Thai Hooker.

      Like

      • I can’t figure out what the left’s angle is here… Guy can’t get laid and might therefore be angry at women. So… fire him for it?

        The left is veering into thoughtcrime territory here…

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        • I find I’m sympathetic. If you’re so wrapped up in both your inability to get laid–and your unwillingness to live an interesting life despite that–that you create a group identity (or can be assimilated into one) where the identifying trait of the group identity–the thing your life revolves around–is not getting laid–then unless you are a Steve Jobs- or Mark Zuckerberg-level savant, which is relatively rare, I can’t imagine a situation where you prove to be a long term asset to the company.

          But I hate a lot of the modern “creativity” that’s poisoning the language and identity politics. Combine them both and I’m sure to despise both it and the practitioners thereof. So I am not objective.

          I put “incel” into the same basket I do words like “cuck” and “cisgender”. I automatically don’t trust you (royal you, not you specifically, Brent) and don’t like you if you use them seriously. Include with scare-quotes around the word, at minimum, if you must use it. And even then, please don’t. 😉

          Like

        • Also, despite the fact I hate the very concept of “incel”–at every level–I think the left’s angle is the angle of most elitist: ostracizing and making fun of the nerds both for the nasty gratification and self-flattering person elevation by comparison.

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    • If they refer to themselves as “incels”, fire them. Immediately. Same if they ever use the word “cisgender”.

      I hate to be an advocate of such draconian speech codes, but sometimes it’s necessary. The choice to seriously use such words reveals the person.

      Like

  2. A true favorite beef against government overreach – asset forfeiture –

    now we read this:

    https://www.texastribune.org/2018/05/04/customs-and-border-protection-took-41000-texas-woman-six-months-ago-th/

    Like

    • It’s a horrible story about a horrible law which simply encourages corrupt behavior among officious government employees who are already too prone to corrupt behavior.

      That being said….am I the only one who thinks travelling to Nigeria with $40,000 in cash is a bit screwy?

      Liked by 1 person

      • am I the only one who thinks travelling to Nigeria with $40,000 in cash is a bit screwy?

        Nope.

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      • That requires a different type of nanny-state law, like “we’re putting your cash in a trust for you” or some sort of escrow account that puts a hold on the money–it’s still yours, you just can’t access it at the moment–until it’s established you’re of sound mind and honest about your intentions.

        What customs did in this case is just theft, pure and simple.

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  3. Speaking of “incels”, I’m not entirely sure if I completely disagree with everything in this Guardian piece on this, and that’s rare.

    https://www.theguardian.com/commentisfree/2018/may/04/what-do-incels-fascists-and-terrorists-have-in-common-violent-misogyny

    I mean, that’s only about 75% off the mark. That’s pretty good for The Guardian.

    Like

  4. Beware of cult stocks once they lose favor with the Street. Tesla’s conference call was supposedly a disaster last night, and Elon Musk decided to take questions from You Tube people instead of analysts who were interested in things like cash burn. Comparisons are being drawn to Enron’s conference call in the early 00s when Jeff Skilling blew up at analysts which caused people to take a more critical look at the company. Don’t forget TSLA bonds have been getting slammed, and that is toxic for a stock with negative cash flow trading over 4x revenues.

    This is sad to me. I really hope Tesla pulls it out of the fire, and that Musk reinvents himself and his company. And the company in general gets its shit together. It can happen. But it may not.

    One advantage, potentially, is that Tesla is actually selling a tangible product. Enron was primarily selling its stock ticker. And, arguably, energy, but still. Grasping at straw. I don’t want to see Tesla collapse.

    Like

  5. I laughed.

    Like

  6. The irony in this comment boggles the mind.


    WBinDE Bronxist
    May 04 · 01:25:06 PM
    Ah, but the “other side” is in fact picking and choosing judges. They, under the effective if unethical guidance of the Senate Majority Leader, have denied progressives a Supreme Court seat and are see their main task this year not as legislating but as filling all the open slots in the Federal judiciary with youngsters approved by the  Federalist Society. This is the opportunity they’ve been salivating over and working toward since January of 2011.
    50 years from now, this judicial packing will be seen as the most consequential outcome of the entire 2016 election. Even if Democrats take over for the next 20 years and attempt to reverse all the damage done within the Executive Branch, libertarians (short for “what’s mine is mine and what’s yours is mine too”) will tie up as much as they can in lawsuits that will be brought in front of judges friendly to the cause. An effective “permanent Republican majority”, independent of who holds elective office, may be closer than it appears because the structure of society will have become incapable of supporting progressive ideals.

    https://www.dailykos.com/stories/2018/5/4/1762016/-Judge-in-the-bank-fraud-case-against-Manafort-goes-rogue-accuses-Mueller-of-aiming-for-impeachment

    Like

  7. Ross Douthat is perceptive:

    “A core fact of our era is that the national Republican Party is politically effective only as a vehicle for anti-liberalism, a rallying point for all the disparate groups who feel threatened by having our cultural elite in full control of government. Which means the G.O.P. is often more popular the less it attempts to legislate at all.”

    Like

    • “Which means the G.O.P. is often more popular the less it attempts to legislate at all”

      Well, yes. If you believe in limited government, you are happy if they do nothing…

      Like

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