Morning Report: FOMC minutes show uncertainty over Trump

Vital Statistics:

	Last	Change
S&P Futures	2262.5	-2.0
Eurostoxx Index	365.1	-0.2
Oil (WTI)	5375.0	0.5
US dollar index	92.6	-0.4
10 Year Govt Bond Yield	2.42%
Current Coupon Fannie Mae TBA	103
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	4.18

Stocks are down small on no real news. Bonds are up on the FOMC minutes from yesterday. 

The private sector added 153,000 jobs in December, according to the ADP jobs report. This is below the 172,000 consensus figure. The Street is looking for 175,000 jobs in tomorrow's payroll report. As the labor market tightens, job growth should slow. 

Announced job cuts increased slightly in December, according to outplacement firm Challenger, Gray and Christmas. 

Initial Jobless Claims came in at 235k last week, which is the lowest level since 1973. People that have jobs are generally keeping them. 

Consumer comfort slipped last week, according to the Bloomberg Consumer Comfort Index.

The ISM Non-Manufacturing Index was flat in December, and came in above estimates. New Orders and pricing drove the increase, however employment fell. 

The FOMC minutes didn't reveal much from the December meeting, aside from the fact that the interest rate forecast was based on the assumption that we would see more fiscal stimulus out of Washington, either via an infrastructure build or a tax cut. If we don't get that, then the growth estimates, (and the assumed path of interest rate hikes) are probably too high. Note that Congress seems to be settling on repealing Obamacare as the first order of business. If so, that would probably poison the well for any sort of infrastructure spend and / or tax cuts. Which means interest rates should be heading downward, all things being equal. Bonds initially rallied on the minutes, gave back the gains, and then started rallying again this morning. Note that the Fed Funds futures are predicting two rate hikes next year, with a possibility of a third. 

Note that the Fed has been consistently high in its estimates for GDP growth. The chart below looks at the Fed's forecast for 2016 GDP growth at different points in time, starting with the June 2014 estimate. 

Part of the problem with the Fed's forecast has been that this recovery is different from the typical cyclical slowdown. In those, the issue is excess inventory, which causes companies to lay off employees. Once the excess inventory is liquidated and sufficient pent-up demand is created, the expansion begins. This time however the issue is bad debt from the bubble years, and that takes longer to work off. Instead of a V-shaped recession and recovery, we have more of a bathtub-shaped recovery. The effect of the bubble years also has a scarring effect on both consumers and business leaders (what Keynes called the animal spirits) which causes caution. That is why capital expenditures have been weak and why we are only building about 1.3 million new houses a year when we probably need 2 million a year. 

Holiday sales (at least for the bricks and mortar retailers) seem to be disappointing as same store sales come in. Kohl's and Macy's both warned this morning and are down double digit percentages. Macy's is cutting 10,000 jobs. Given that online is cannibalizing bricks and mortar, it is tough to draw too many conclusions from this, however it is probably helping bonds at the margin. We will get the government's estimate of retail sales next Friday. 

Mortgage Performance improved in the third quarter, according to the OCC. 94.8% of first lien mortgages were current and performing as of 9/30 compared to 93.9% last year. Foreclosure starts were down 25%.