Morning Report: Risk on feeling after speech

Vital Statistics:

	Last	Change
S&P Futures	2379.5	16.8
Eurostoxx Index	374.6	4.4
Oil (WTI)	54.1	0.1
US dollar index	91.7
10 Year Govt Bond Yield	2.46%
Current Coupon Fannie Mae TBA	101.91
Current Coupon Ginnie Mae TBA	103.41
30 Year Fixed Rate Mortgage	4.09

We have green on the screen this morning as markets liked Donald Trump's speech to Congress last night. Bonds and MBS are down.

Donald Trump addressed Congress last night (it wasn't a full-on State of the Union address), and laid out broad brush strokes about his priorities going forward, including tax reform and healthcare. Generally speaking, the speech was well-received, although those looking for policy depth were disappointed. Here is a transcript. Regardless, equity markets liked what they heard and we are off to the races this morning. 

On the bond side of things, yields continue to increase, particularly on shorter-term paper as markets handicap a March hike. The 2 year bond now yields 1.31%, which is a post-crisis record. 

Mortgage Applications rose 5.8% last week as purchases rose 7% and refis rose 5%. Refis accounted for just over 45% of all applications last week, the lowest since 2008. 

Personal incomes rose 0.4% in January, a little better than expected, while personal spending rose 0.2%, which was a little lower than expected. The Personal Consumption Expenditure index, which the Fed prefers to use, rose 1.9% YOY. The core PCE index which excludes food and energy rose 1.7% YOY. Note that the PCE index is generally about 30 basis points behind the Consumer Price Index, simply because of the difference in weightings. Note that the second revision of GDP from yesterday had PCE inflation at 2.2% at the end of December, so we are seeing a deceleration in January.

Manufacturing improved in February, according to the ISM Manufacturing Survey. New Orders rose, while employment fell. The reading for February of 57.7 would typically correspond to a GDP growth rate of 4.5%. While manufacturing isn't the driver of the economy that it used to be, this is still good news for growth going forward, especially after a pretty weak 2016. 

Construction spending fell 1% in January and is up 3.1% on a YOY basis. Residential construction rose 0.3% and is up 5.5% YOY. Donald Trump plans to add $1 trillion in construction spending, although he does not say over what period. As we learned from the Obama stimulus of 2009, infrastructure spending has a long lead time. That said, take a look at the chart below, which is of public construction spending. We have averaged about $300 billion a year in public construction spending over the past 10 years or so, which means an additional trillion over something like 4 years amounts to almost doubling public construction spending. This would mean public construction spending as a percent of GDP would be at a 50 year high. 

Delinquency rates continue to fall according to Freddie Mac. The seriously delinquent rate fell below 1% in January, which is down from 1.33% a year ago. The rate peaked in 2010 at 4.2%. Pre-bubble, seriously delinquent rates were in the 60-80 basis point range.