Morning Report: Markets now heavily discounting 4 hikes this year 5/30/18

Vital Statistics:

Last Change
S&P futures 2705 4
Eurostoxx index 384.58 0.1
Oil (WTI) 67.12 0.39
10 Year Government Bond Yield 2.84%
30 Year fixed rate mortgage 4.45%

Stocks are slightly higher this morning as Italian bonds bounce. Bonds and MBS are down.

US Treasuries touched 2.76% yesterday on the flight to quality trade. The Fed Funds futures are now predicting a 81% chance of a hike in June. The biggest effect of the Italy situation can be seen in the December Fed Funds futures. A couple of weeks ago, we were looking at a coin toss for 4 hikes this year. Now it is closer to 20%. The dot plot consensus is 3, so the markets are aligning a little closer to what the Fed thinks it is going to do.

Why is Italy worrying the markets so much? Italy has a huge amount of debt – 1.9 trillion euros worth. Its debt to GDP ratio is 130%. The fear is that the uncertainty over this issue over the summer will depress Euro growth, while the banking sector (which already has some issues) will take further hits. As of now, this is a political, not an economic issue – Italian yields are around 3%, nowhere near the 8% level they hit in 2012. Note that Spanish yields are beginning to creep up as well.

Mortgage Applications fell 3% last week as purchases fell 2% and refis fell 5%. This is the 8th consecutive decline. The refi index is down to the lowest level since December 2000. “Rates slipped slightly over the week as concerns over U.S. trade policy and global growth sent some investors back to safer U.S. Treasuries,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Minutes from the most recent Federal Open Market Committee meeting also yielded a more dovish tone, which added to the downward pressure in rates. Our 30-year fixed mortgage rate decreased two basis points over the week to 4.84 percent as a result. Both purchase and refinance activity decreased despite the drop in rates, part of which was due to slowing activity before the Memorial Day holiday.”

The second estimate for GDP came in at 2.2%, right in line with the first estimate. Inflation was revised downward a touch from 2% to 1.9% and consumption was revised downward from 1.2% to 1%. Inventories were revised downward, while business investment was revised up to 9.2% – a big number.

Whether the increase in business investment was a direct result of the tax cuts remains to be seen, but so far tax cut effects aren’t showing up in corporate profits which were more or less flat in the first quarter with last year.

The economy created 178,000 jobs in May, according to the ADP Employment Report. The Street is looking for 190,000 jobs in Friday’s report, although the ADP and BLS reports have been pretty far away the last few times around. The key number will be wage growth, not payroll growth in any case.

Interesting data points in the ABA survey of the nation’s banks. QM has actually caused banks to decrease non-QM lending (which was the opposite of the intended effect). About half retained servicing. Almost nobody lends to FICOs below 620.

The Fed is set to announce proposed changes to the Volcker Rule, which severely limits proprietary trading activities for commercial banks. The current rules are so vague that JP Morgan Jamie Dimon once quipped that traders would need a lawyer and a psychiatrist by their side to determine whether they were in compliance with the law. The Fed will probably tweak the rules only modestly, and will not usher in a return to pre-2008 rules. That would require legislation, which isn’t happening.

10 Responses

    • Marcie Bianco is a writer and the Editorial and Communications Manager of the Clayman Institute for Gender Research at Stanford University

      Which is why you should send your children to community college or trade school!

      Like

      • You’re absolutely right, plenty of CC’s offering Bachelor degrees. That’s the best bang for the buck to get that ticket punched.

        Liked by 1 person

        • Indeed. Most of the Ivy League seems to produce people in (a) massive debt and (b) only employable at universities or left-wing think tanks. And only so many of those jobs to go around.

          Like

        • KW:

          Most of the Ivy League seems to produce people in (a) massive debt

          I wonder how true that is. Most of the top tier schools give out tons of so-called “needs based” financial aid, only a small portion of which is debt. The one I know off the top of my head is Duke, which guarantees that no more than $5k per year of aid will be debt, the rest being grants that do not need to be paid back. That’s not an Ivy but I imagine they all have pretty similar packages. And the percentage of students that are paying full sticker price is pretty small. The calcs I did on the schools that provided all the relevant info generally showed that more than half the students were paying something between 30% and 40% of the advertised sticker price.

          Like

  1. Speaking of lit af

    Liked by 1 person

  2. Horrors!

    Like

    • “This court is not free to substitute its preferred economic policies for those chosen by the people’s representatives,” he said”

      not that!

      Like

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

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

WordPress.com Logo

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

Google+ photo

You are commenting using your Google+ 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: