Morning Report: Conference Board sees strength ahead

Vital Statistics:


Last Change
S&P futures 2778.5 6.25
Eurostoxx index 360.61 -0.25
Oil (WTI) 69.1 0.5
10 year government bond yield 3.17%
30 year fixed rate mortgage 4.89%


Stocks are flattish on no real news. Bonds and MBS are flat.


Initial Jobless Claims fell to 210k last week, which means there is little (if any) evidence of the hurricanes affecting the employment numbers.


The index of leading economic indicators rose 0.5% in September, which is a strong reading. It points to economic strength through the end of the year and into 2019. The report noted capacity constraints, which is surprising given the capacity utilization numbers, which are still historically average at best. Note the high capacity utilization numbers in the 1970s – this was a big driver of inflation. Production generally goes from most efficient to least efficient (you use the best equipment first, and then go to more and more marginal equipment as you continue to expand). The less efficient equipment means higher costs and those get passed on to the consumer. The current capacity utilization levels are nowhere near what they were in the 70s.


capacity utilization


The Conference Board sees growth coming in at 3.5% for the second half of 2018, however we will need more help from housing to put up those types of numbers in 2019.


The CFPB is taking a closer look at the disparate impact theory of fair lending, presumably with an eye to limiting the more expansive use of the theory under the previous administration. The CFPB is looking to possibly codify this in a rule, which would be much more permanent than a more informal statement. The Obama Administration took an aggressive stance towards the use of disparate impact, which is a controversial idea – it basically means that intent is irrelevant. If your numbers don’t match the population, you are guilty of discrimination, no questions asked. Since discriminatory intent is notoriously hard to prove, this rule amounts to a waiver for the government from having to prove it. It is a plaintiff’s dream.


The MBA sees mortgage rates topping out soon. Their latest forecast has mortgage rates leveling out at 5.1% over the long term. In other word, regardless of what the Fed intends to do going forward, the Great Post Crisis Mortgage Rate Hike is largely done. Note the MBA sees even less volume in 2019 than 2018, although at a much shallower drop than 2017-2018.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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