Morning Report: Risk on feel as the US and China strike a trade deal

Vital Statistics:

 

Last Change
S&P futures 3088 12.25
Oil (WTI) 57.27 0.94
10 year government bond yield 1.88%
30 year fixed rate mortgage 3.97%

 

Stocks are higher this morning after the US and China agree to remove tariffs. China also made some high profile arrests to stem the tide of fentanyl coming into the US. The fentanyl issue was a key part of the US’s issues with China. Bonds and MBS are down on the “risk-on” trade.

 

After a dismal start to the year, the luxury end of the market (homes over $1.5 million) rebounded in the third quarter as rates fell. Prices rose 0.3% on average, but they had been falling since 2018. Manhattan was hit particularly hard on the new mansion tax. Florida was the beneficiary as prices rose over 100% in West Palm and some of the other nearby areas. Previously hot markets like San Diego also remained in the losing category. “Because recession fears peaked over the summer, I expected luxury home prices and sales to dip. But it appears that nerves alone weren’t enough to scare off wealthy homebuyers,” said Redfin chief economist Daryl Fairweather. “The U.S. economy grew faster than expected in the third quarter, partly as a result of healthy consumer spending. Those results, along with flat luxury home prices and rising sales, go to show that Americans are basing their spending habits on their own personal financial situation rather than concerns about global economic tensions. For many, that means strong incomes and good employment prospects.”

 

Fannie Mae is out with their housing forecasts for 2020. They anticipate the 30 year fixed rate mortgage will continue to fall, hitting 3.5% by the end of 2020, and home prices will rise about 4%. Interestingly, they do not anticipate any sort of pickup in housing starts – in fact they anticipate they will be flat with 2019. Despite the drop in rates, they anticipate origination volumes will fall to 1.86 trillion from 2.04 trillion as the refinance share of the market falls from 37% to 31%.

 

New York Fed President John Williams said that the FOMC sees no reason to cut interest rates further: “The three rate cuts we did were very effective at managing the risks” slowing global growth and trade uncertainty present to the U.S. economy, New York Fed President John Williams said at a Wall Street Journal event in New York. Chicago Fed President Charles Evans echoed the same sentiment.

 

Finally, we know that gathering strength in the US economy is helping push rates higher. It is important to note that rising rates is not simply a US phenomenon. US Treasuries don’t trade in a vacuum – they are always going to be subject to moves in overseas rates. For now, the key overseas interest rate to watch is the yield on the German Bund, which has increased by 45 basis points since early September. The Bund still has a negative yield, but it is now -27 basis points after bottoming at -72 basis points 2 months ago.

 

bund

20 Responses

  1. Stocks are higher this morning after the US and China agree to remove tariffs.

    I feel like to the casual non-partisan, this would appear to be a win from Trump. Such that either his China policy worked, or was at least nowhere near as bad as critics claimed.

    I also feel that the Al Baghdadi kill (whether or not it’s actually a thing that really happened factually) comes across as a win for Trump–and possibly an indicator his Syria policy was either good or not nearly as bad as critics say, at least to a casual, non-partisan observer.

    Feels to me like the environment outside the Democrat/NeverTrump bubble is likely to be fairly positively disposed towards Trump, and taking the critics ever less seriously. Which of course doesn’t mean he’s going to win, but I don’t feel like it’s great for the Democrats.

    Like

    • it is funny, when i mention the strength of the economy, etc on Plum Line, they always tell me I need to get out more and the economy is really terrible. As I like to point out, the labor market is so tight right now that builders are hiring ex-cons. And then they tell me that people are working 80 hours a week holding down 3 minimum wage jobs.

      But, if you are a progressive, your view of the economy is basically a univariate function of inequality, with perhaps a dummy variable for the party of the WH…

      I think the only ones really struggling are people with liberal arts degrees who can’t find a job in their major and are not interested in a sales role. Who are probably overrepresented on PL…

      Liked by 1 person

      • “they always tell me I need to get out more and the economy is really terrible.”

        The economy is pretty much always terrible to extreme partisans/ideologues with the other party/group is in Power. And is always great–or at least rapidly improving–when their folks are in power.

        So their description of the economy is really a description of their emotional state about the “wrong” people being in charge. You can write those folks off on the right or the left in terms of being influenced by anything other than in terms of political affiliation.

        Which is why I say “casual non-partisan”–people whose self-identity isn’t about politics, or who pride themselves on being swing-voters, or are about other things that political tribalism would likely see Trump as being successful, generally. I would say they would also feel the Democrats have gotten nothing done but thus far failed efforts to impeach Trump since having gotten power, but I don’t think those folks pay that close attention, most of them.

        While, yes, inequality is bad, I think that’s more abstract. Things can get more unequal and they will fret over that, but they will say that the economy is still super-great because a Democrat is in the Whitehouse. Or superbad because it’s a Republican.

        And to them the killing of Al Baghdadi doesn’t mean anything, the real story is we abandoned the Kurds and now no one in the rest of the world will trust us (because they are too stupid to understand, apparently, that in American politics, policy changes with elections). That there’s a deal with China now will be awful–when, previously, Trump was a madman for imposing tarriffs that were obviously going to tank the global economy–because of a sudden awareness that China is not exactly great on human rights, and Trump is sullying themselves by making deals with them.

        The goal posts always move.

        I just don’t see how Trump doesn’t, as a practical matter, have a more favorable impression to the non-partisan and casual voter now than in 2016.

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        • I think Joe Biden wipes the floor with Trump, but Trump beats EW or Bernie.

          I also suspect that Joe will try the triangulation angle, which will drive the progressive left absolutely batty…

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        • Not sure. I think Joe Biden probably wins. Wipes the floor is excessive. Biden has his own issues. And frankly, when even Bernie Sanders seems sharper than you, you got problems.

          And I’m wondering if “getting rid of Trump” is enough motivation for Sandernistas and Warren folks to show up and vote if Biden gets the nod as a safe choice. The Democrats have their own intraparty schism that could screw up the results.

          In any case, if Trump wins, he’ll still lose the popular vote (primarily because of Florida). So if that happens, I’m expecting a lot more talk about the “unconstitutionality” of the electoral college and how it should be outlawed. Also perhaps some argument–since the margin of popular vote victory will come from California–that California deserves more electoral votes, if we can’t scrap the system all together.

          Like

        • And I’m wondering if “getting rid of Trump” is enough motivation for Sandernistas and Warren folks to show up and vote if Biden gets the nod as a safe choice. The Democrats have their own intraparty schism that could screw up the results

          They are spitting mad. I think they will crawl through miles of broken glass to cast a vote against trump. the question is where they are located. My sense is that they are located primarily in the safe blue states.

          Liked by 1 person

        • “I think Joe Biden wipes the floor with Trump, but Trump beats EW or Bernie.”

          If it’s Biden, the quality of the Green candidate could matter.

          Like

      • “I think the only ones really struggling are people with liberal arts degrees who can’t find a job in their major and are not interested in a sales role. Who are probably overrepresented on PL…”

        And the media in general. It’s the whole Vox crowd who think they should be making what their peers who went into finance are.

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        • they will never understand that the world doesn’t reward book smarts as much as it rewards sales skills..

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        • Brent:

          they will never understand that the world doesn’t reward book smarts as much as it rewards sales skills..

          Interestingly, one could say that the media is, in a sense, all about sales skills!

          Like

        • “they will never understand that the world doesn’t reward book smarts”

          These folks aren’t that book smart. They can string together coherent sentences (perhaps with the help of Grammarly and autocorrect) and perhaps leverage their knowledge of pop-culture to craft decent metaphors, and know enough in a few categories to perhaps sound like they know what they are talking about in a given area to people who are even more ignorant about the topic than them, but they aren’t, generally speaking, even that book smart.

          But you make a good point in that they don’t understand how the market works. It doesn’t matter how awesome and well-read you are (or think you are). That you have been to Europe, can play bass guitar, have developed an impressive knowledge of French wine and have Very Important Opinions about politics and are obviously smarter than the president of the United States doesn’t entitle you to jack shit. And if that’s your basic type of skillset, there are literally tens-of-millions of you in any Western democracies. Plumbers and car mechanics and carpenters and sanitation workers are more in demand.

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        • Interestingly, one could say that the media is, in a sense, all about sales skills!

          Media, like entertainment, is about making a product that people want to consume. Ideally, you want to make Avengers: End Game or Star Wars or some sort of thing that captures the cultural zeitgeist. Failing that, you want to make something that makes more in revenue than it costs to produce, like reality television.

          In general, the media feels entitled to an audience, and consider their role in the world to be that of feudal lords. We should be busy consuming their product and thinking what they tell us to, and are offended–or blame Russian bots–when we don’t.

          Sales skills are great but its hard to sell a turd. Much better to try to make an appealing product that people want to consume, rather than putting yourself in the position of selling something unappealing to the vast majority of the market in order to target the small niche of consumers than think exactly like you.

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  2. And then they tell me that people are working 80 hours a week holding down 3 minimum wage jobs.

    I don’t think that happens a lot and if it does happen, they are probably doing something wrong. You can find above minimum wage jobs hiring where you literally don’t need to have any skill level. Also, my daughter has managed to move from a minimum wage job to a basic management position, making several dollars over minimum wage, while working part time and going to college. And being kind of lazy.

    Not every description of people in bad economic circumstances are completely due to external factors. And the economy is never going to be so good that is saves everybody from making bad life decisions.

    I’m working 60+ hours a week and my job kind of sucks. But I work for county government so . . . not sure that’s an indictment of the economy.

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    • its bullshit. anyone with that sort of work ethic is going to be making much more than minimum wage.

      Liked by 1 person

      • Concur. There are always outliers, but in general, if you’re willing to work 80 hours a week–and actually work during that time–then you’ll be making a lot more than minimum wage. And would quickly develop skills that qualify you for above minimum wage work, at any rate.

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  3. Anyone think DIsney could have some legal liability for sitting on the Epstein story?

    Liked by 1 person

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