Morning Report: Dissecting the FOMC minutes

Vital Statistics:

	Last	Change
S&P Futures	2718.8	7.8
Eurostoxx Index	389.3	0.9
Oil (WTI)	60.8	0.4
US dollar index	85.7	-0.2
10 Year Govt Bond Yield	2.48%
Current Coupon Fannie Mae TBA	102.375
Current Coupon Ginnie Mae TBA	103.25
30 Year Fixed Rate Mortgage	3.91

Stocks are higher this morning on no real news. Bonds and MBS are down.

There is some labor data this morning. Initial Jobless Claims came in at 250k last week, while job cuts in December were 32,423 in December, according to outplacement firm Challenger, Gray and Christmas. This is the lowest year for job cuts since 1990. Finally, the ADP employment report showed 250,000 jobs created in December, which came in well above the consensus number of 188,000. Tomorrow's jobs report is looking for 190,000. Mark Zandi, chief economist of Moody’s Analytics, said, “The job market ended the year strongly. Robust Christmas sales prompted retailers and delivery services to add to their payrolls. The tight labor market will get even tighter, raising the specter that it will overheat.” 

Regarding Zandi's comment about overheating: there are certainly labor shortages, and perhaps the slew of year end bonuses given out by employers are signaling wage growth ahead. So far, wage growth has been faster than the official inflation estimates, but not by much.  

There was nothing earth-shattering in the FOMC minutes, (the bond market didn't move at all on the release) however the prospect of tax reform did cause some members to take up their estimates for interest rates going forward. The FOMC did expect tax reform to boost growth this year, which accounts for the increase in their GDP forecast for 2019 to 2.5% from 2.1%. They consider the labor market to be generally strong, especially for unskilled entry-level workers, where we are seeing some wage growth. Some firms are coping with a tight labor market by raising wages, while others are using more flexible working arrangements. Some are spending money on productivity-improving technology in lieu of raising compensation. 

Regarding the Fed Funds rate, we are seeing a wider dispersion in terms of opinion:  While most members were comfortable with the projected path of rates, both hawks and doves expressed concern: "A few participants indicated that they were not comfortable with the degree of additional policy tightening through the end of 2018 implied by the median projections for the federal funds rate in the December SEP. They expressed concern that such a path of increases in the policy rate, while gradual, might prove inconsistent with a sustained return of inflation to 2 percent, or that the level of the federal funds rate might already be near its current neutral value. A few other participants mentioned that they saw as appropriate a pace of additional policy tightening through the end of 2018 that was somewhat faster than that implied by the December SEP median forecast. They noted that financial conditions had not materially tightened since the removal of monetary policy accommodation began, that continued low interest rates risked financial instability in the future, or that the labor market was increasingly tight."

The wider dispersion of opinion on the part of the FOMC is new and will be something to monitor, especially since we have a new FOMC Chairman. 

We tend to take FICO scores for granted. They have been around forever, everyone pretty much understands them, and we have all sorts of data from which to backtest loan performance versus FICO. Now, some lenders are pushing FHFA to allow scores from Experian, Equifax, and Transunion for conforming loans. These alternative scoring methods tend to be a little more forgiving than FICO (which comes from Fair Issac). The FHFA is considering the suggestion, however there is always the fear that credit scoring companies could create a "race to the bottom" by becoming more lenient. The non-FICO companies launched VantageScore, which supposedly can grade 30 million more people than FICO can. Of course having competing credit score companies can open up lenders to charges of discrimination, particularly if they use different scores for different borrowers.