Morning Report: Don't fear the flattening curve

Vital Statistics:

	Last	Change
S&P Futures	2692.5	10.5
Eurostoxx Index	392.1	3.9
Oil (WTI)	57.5	0.2
US dollar index	86.9	-0.2
10 Year Govt Bond Yield	2.37%
Current Coupon Fannie Mae TBA	102.531
Current Coupon Ginnie Mae TBA	103.591
30 Year Fixed Rate Mortgage	3.88

Stocks are up this morning on optimism over tax reform. Bonds and MBS are down small. 

This should be a quiet week as people prepare for the holidays, however we will get a lot of economic data. The biggest one will be personal incomes and outlays on Friday. 

Homebuilders are more optimistic now than they were during the bubble years, according to the NAHB Homebuilder Sentiment Index. 

Congress worked on making smallish changes to the tax bill over the weekend. Marco Rubio held out for an increased child tax credit. The state and local tax deduction was supposedly widened to $10k. Another change involves tax breaks for real estate pass-throughs, which caught one wavering Republican Senator - Bob Corker - by surprise. Since it looks like John McCain will not be voting on the plan this week, Republicans need Corker's vote. It is a fluid situation, to say the least. 

The New York Fed took up its estimate for Q4 GDP to 4%. We will get the final revision to third quarter GDP on Thursday. 

One of the biggest trades on the Street right now is the yield curve flattening trade, where investors bet the difference between long-term rates and short-term rates will decrease. There are many reasons to put on the trade, but the most common one is that the yield curve tends to do this during tightening cycles, and people are making the bet that history will repeat itself. The side effect of this trade is a whole lot of articles claiming that the changes in the yield curve are predicting a recession going forward. Given that the NY Fed just took up its Q4 GDP estimate up to 4%, a recession doesn't seem to be on the horizon. But here is the bigger issue: What information is the yield curve transmitting when it is being influenced by global central banks? Yes, before the Fed was buying (and holding) 4.5 trillion worth of bonds, the yield curve was probably providing useful information. But now? I would argue that all of this central bank buying is distorting the signals the curve might be sending. And therefore I would caution against reading too much into it. 

Freddie Mac weighs in on the housing market and makes its predictions for 2018. Big picture: the economy is getting better, Millennials are beginning to buy, and increased homebuilding should alleviate the big inventory problem. That said, cuts in the mortgage interest deduction and increasing supply should dampen home price appreciation. Basically the current housing market is great and that should continue, albeit at a somewhat slower level. FWIW, I suspect the demand for housing is only going to get bigger, and will dwarf whatever homebuilding is being done.