Morning Report: Bonds rally on Jerome Powell’s prepared remarks

Vital Statistics:

 

Last Change
S&P futures 2975 -6.5
Oil (WTI) 59.12 1.26
10 year government bond yield 2.05%
30 year fixed rate mortgage 4.06%

 

Stocks are lower as we await Jerome Powell’s Humphrey-Hawkins testimony. Bonds and MBS are flat.

 

Bonds were initially lower this morning, with the 10-year touching 2.10%. They rallied back after Powell’s prepared remarks were released. Here is the paragraph that probably caused it:

 

In our June meeting statement, we indicated that, in light of increased uncertainties about the economic outlook and muted inflation pressures, we would closely monitor the implications of incoming information for the economic outlook and would act as appropriate to sustain the expansion. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened. Since then, based on incoming data and other developments, it appears that uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook. Inflation pressures remain muted.

 

Powell is scheduled to testify at 10:00 am. Note that we will also get the minutes from the June meeting at 2:00 pm today. Given how jittery the bond market is, we could see some volatility.

 

The Fed Funds futures turned slightly more dovish with the July futures predicting roughly a 80% of a 25 basis point cut and a 20% chance of a 50 basis point cut. The most likely outcome by the end of the year is a 75 basis point cut. December Fed Funds futures probabilities:

 

fed funds futures

 

Mortgage applications fell 2.4% last week as purchases rose 2.3% and refis fell 6.5%. The average contract rate on a 30 year fixed rate mortgage fell 3 basis points to 4.04%. There is some seasonal noise from the July 4 holiday baked into the numbers. Separately, the MBA’s Mortgage Credit Availability Index rose by 0.2% in June. Conventional credit expanded, while government credit contracted slightly. Jumbo credit is the easiest it has ever been, at least since the series started in 2011.

 

The House passed legislation yesterday which clarifies which VA loans are eligible to be included in Ginnie Mae Securitizations. They also passed a bill which would lower the mortgage insurance premiums for first-time homebuyers who complete a housing counseling course.

 

 

 

 

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Morning Report: Consumer inflation remains muted

Vital Statistics:

 

Last Change
S&P futures 2787 2
Eurostoxx index 372.85 -1
Oil (WTI) 57.27 0.47
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.32%

 

Stocks are higher with a general “risk-on” feel to the tape. Bonds and MBS are down.

 

Lael Brainard speaks this morning and then the Fed enters its quiet period ahead of next week’s FOMC meeting.

 

Consumer inflation rose 0.4% MOM in February. Ex-food and energy, the index rose 0.4% and is up 2.1% YOY. Inflation remains under control, which should give the Fed the leeway to hold the line on rates next week. Falling energy prices at the end of 2018 helped keep the index under control, and we are seeing evidence that medical costs are finally stabilizing. Medical goods fell 1% MOM and services were flat. Stabilizing medical costs should translate into stable health insurance costs, which leaves more room for wage increases.

 

medical cpi

 

Retail Sales in January rose 0.2%, a touch higher than expectations. Those looking for a big rebound after December’s anemic numbers were disappointed. Given the strong consumption numbers in Q4 GDP, the holiday shopping season remains a bit of a mystery. The government shutdown is a possible explanation, and while it certainly hit the shops at Tyson’s Corner, the rest of the nation was unaffected. Note that the Fed’s consumer credit report showed that revolving credit increased only 1.1% in December and 2.9% in January, both well below run rates we have seen in the months leading up to it

 

Nancy Pelosi doesn’t support impeaching Trump. This is probably a tacit admission that the Mueller report isn’t going to contain anything we don’t already know.

 

Small business optimism rebounded in February. Earnings trends fell as many contractors were temporarily sidelined due to the government shutdown. Employment trends also slipped, probably for the same reason. Plans for expansion rose, however they are still below levels we saw in 2017-2018, which were extremely strong. Actual hires were the highest in years, and small business still finds a shortage of qualified workers. I am curious as to whether the “shortage of qualified workers” means (a) nobody around knows how to do the job, (b) nobody around knows how to do the job and can pass a drug test, or (c) nobody around that knows how to do the job will accept what I am willing to pay.