Morning Report: Dec fed funds futures still forecasting 3 hikes this year 6/8/18

Vital Statistics:

Last Change
S&P futures 2767 -8.25
Eurostoxx index 385.56 -0.38
Oil (WTI) 65.78 -0.17
10 Year Government Bond Yield 2.93%
30 Year fixed rate mortgage 4.59%

Markets are lower this morning on negative news out of Apple. Bonds and MBS are down small.

Something to watch: We are seeing bigger bets against emerging markets currencies and some European bonds. These trades will bump up against Treasury shorts, which were increased last week in the wake of the Italian election results. One of the biggest trades in the hedge fund community is short Treasuries – which means hedge funds are betting on rising rates. A sell-off in Euro bonds and emerging markets will add buying pressure to Treasuries on the flight to quality trade. So, expect some volatility in Treasuries as fast money enters and exits the market.

Rising interest rates are creating another phenomenon – increased flows into money market funds. Money market funds had been a moribund asset class after the crisis, with interest rates at 0% and the memories of breaking the buck still fresh in many investors minds. Money market funds are seeing the biggest inflows since 2013. Expect to see more of this as bond investors also look for ways to shorten duration. This is yet another reason why hedge funds are short Treasuries.

After the Italian led drop in rates, the market adjusted its prediction for the Fed Funds rate. Still sitting at a 60-40 bet for 3 or less hikes this year / 4 or more.

Warren Buffett and Jamie Dimon are exceedingly bullish on the US economy. “Right now, there’s no question: It’s feeling strong. I mean, if we’re in the sixth inning, we have our sluggers coming to bat right now” is how Warren Buffet characterized it. Jamie Dimon’s view: “The way I look at it, there is nothing that is a real pothole,” he said. “Business sentiment is almost at the highest level it’s ever been, consumer sentiment is at its highest levels, markets are wide open, housing’s in short supply and my guess is mortgage credit will expand a little bit.”

Buffett and Dimon are also arguing for companies to stop providing earnings guidance. They claim that focusing on short term quarterly earnings causes companies to de-emphasize long-term growth. Berkshire Hathaway does not provide any sort of guidance to the Street. It is an interesting idea, however companies provide guidance to the Street because investors as a general rule prefer predictable companies to unpredictable ones.

How not to “teach your servicer a lesson.” Yikes. If you think your lender is making a mistake, or you are unhappy with the service, don’t stop paying as a means of retaliation.

The OCC is taking a more constructive approach with the banks. At the top of the agenda: re-writing community reinvestment rules to be less onerous for the industry. Obama’s head of the OCC was a career regulator who made a point of challenging the perception that the OCC was too close to the banks it regulated. The Obama administration pushed hard for banks to take less credit risk, and I wonder how much of the issue with a lack of housing construction is due to that. While this wouldn’t affect the Lennars of the world, most construction is with smaller builders who would have to go to their local community bank for financing.

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