Morning Report: Treasury releases its initial report on financial regulatory reform

Vital Statistics:

	Last	Change
S&P Futures	2431.8	5.3
Eurostoxx Index	388.7	2.1
Oil (WTI)	45.9	-0.2
US dollar index	88.4	-0.1
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	103.47
Current Coupon Ginnie Mae TBA	104.33
30 Year Fixed Rate Mortgage	3.93

Stocks are higher as the Fed begins its 2-day FOMC meeting. Bonds and MBS are down small. 

Producer prices were flat last month on a MOM basis and are up 2.4% YOY. The core rate is up 2.1%, which is more or less in line with the Fed's target. Note this index measures inflation at the wholesale level, not the consumer level which is what the Fed focuses on. 

Small Business Optimism was flat in May and is still much higher post-election. Small businesses expect to make additional hires and increase capital spending, though earnings trends are still net negative. How about this? The net hiring activity (.34 workers per firm) is close to a 43 year high. The report shows that small businesses are increasing compensation to retain and attract workers, although finding quality, qualified workers is a problem - the second biggest one. Taxes and regulation were #1 and #3. A year ago, taxes and regulation were #1 and #2, with poor sales coming at #3. It looks like wage inflation is building at long last, which is exactly what the economy needs, although it will concern the Fed somewhat. 

A better economy means lower delinquencies. 30-60 day DQs dropped down to 2000 levels, while LT DQs fell to a 10year low. 

Last night the Trump Administration released its report on core principles for financial regulatory reform. Any changes to the regulatory system will be generally slow, as rule changes require comment periods and coordination between the different agencies. The Treasury Department principles don't necessarily eliminate the Obama Administration's regulatory regime, but they sand down some of the more sharp edges and attempt to eliminate some of the unintended consequences. Ultimately, ending regulation by enforcement action will go a long way towards increasing capital availability. Needless to say, Democrats are panning the report, however that could be just partisan boilerplate posturing. The need to ease the regulatory burden on small banks is a bipartisan view. Changing the Volcker rule regarding proprietary trading is a different animal, as are changes to CRA enforcement and the CFPB. 

Speaking of regulation, iServe Chief Communications Officer Mike Macari and I penned an article for the California MBA discussing regulation and how it is inhibiting housing growth. When regulatory costs tack on an extra 30% to the price of a starter home, it is difficult to make that starter home affordable for someone in their 20s or early 30s. I have said it before: the difference between 2% GDP growth and 3% GDP growth (or the difference between a "meh" economy and a boom) is housing starts. Starts should be around 2 million per year, and we are barely half that. Home construction employs a lot of people and generates a lot of ancillary jobs as well.