Morning Report: Jerome Powell stresses flexibility

Vital Statistics:

 

Last Change
S&P futures 2587.75 -6.75
Eurostoxx index 348.54 -0.31
Oil (WTI) 52.94 0.34
10 year government bond yield 2.72%
30 year fixed rate mortgage 4.48%

 

Stocks are lower this morning on no real news. Bonds and MBS are down small.

 

Initial Jobless Claims fell to 216,000 last week.

 

Jerome Powell stressed that the Fed has the flexibility to be patient in raising rates and will react to new data as appropriate. “Especially with inflation low and under control, we have the ability to be patient and watch patiently and carefully as we … figure out which of these two narratives [slowdown or inflation] is going to be the story of 2019,” Powell said at the Economic Club of Washington. Separately, St. Louis Fed President James Bullard said that the Fed had “reached the end of the road” in this tightening cycle.

 

The Fed Funds futures have retraced some of their December move and are now forecasting that the Fed will do nothing in 2019. In November, they were forecasting another hike in 2019, and then swung to forecasting a cut in December. They are now more or less agreeing with James Bullard that this tightening cycle is in the books.

 

fed funds futures

 

Bonds largely ignored the Fed Speak and stocks were more focused on punishing the mall based retailers and department stores, many of which had a difficult holiday shopping season.

 

Fannie Mae reported another drop in delinquencies, as the SDQ percent fell to .76% of their portfolio from .79% a month ago and 1.12% a year ago. The DQ rate for loans originated during the bubble years is 4.5%. The DQ rate for loans originated since is .33%.

 

It is looking more and more likely that Trump will declare a national emergency to allocate funds to the wall and to re-open the government. It will then be up to the courts to decide if such a move is legal, which opens up a new can of worms as the executive branch continues its decades-long path of power consolidation.

Morning Report: James Bullard says no further rate hikes are warranted

Vital Statistics:

Last Change
S&P futures 2722 3.75
Eurostoxx index 392.17 0.2
Oil (WTI) 71.3 -0.06
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.56%

Stocks are higher this morning on no real news. Bonds and MBS are flat.

Import prices rose 0.3% MOM and 3.3% YOY, driven by oil. Ex-energy import prices were flat.

St. Louis Federal Reserve Head James Bullard said that interest rates may already be at the level where they are no longer stimulating the economy. There are “reasons for caution in raising the policy rate further given current macroeconomic conditions” he said in his prepared remarks. Bullard has generally been considered a dove, so this is not much of a surprise. He is also a non-voter. He believes that there is little in the inflationary pressures being signaled in the market.

With respect to inflation signalling, he has a point. The spread between the 30 year bond and the 5 year bond is now the narrowest since 2007. Note that the yield curve generally flattens during tightening phases and is probably not signifying the type of deflationary period that 2007 did. Given all of the QE over the past decade, the signals from the bond markets are heavily distorted and should be taken with a grain of salt. Note short Treasuries is one of the biggest hedge fund trades on the Street.

flat yield curve

Are the homebuilders set to outperform going forward? They have suffered more than the market during the recent declines, but the environment should be favorable for the sector going forward. With a shortage of housing, high demand and rising prices, the sector should be in good shape. The problem for investors? The sector is highly cyclical, and the stock behavior reflects that. In other words, earnings will rise and fall, and the multiple will expand and contract, dampening the effect. So, if the average multiple is typically mid-teens, don’t be surprised if P/E ratios fall to the high single digits during boom times.

Q2 GDP is currently tracking at 3.7%.

Sen Pat Toomey says that the Trump Administration doesn’t have the authority to pull out of NAFTA, since it was passed by Congress. On the other hand, the Admin does have the authority to pull out of the Iran Deal, as well as the Paris Accords because they were only deals with the Obama Administration and not the US – never ratified by Congress.