Morning Report: Possible government shutdown?

Vital Statistics:

	Last	Change
S&P Futures	2801.3	12.5
Eurostoxx Index	399.0	1.2
Oil (WTI)	63.9	-0.4
US dollar index	84.6	0.2
10 Year Govt Bond Yield	2.54%
Current Coupon Fannie Mae TBA	101.75
Current Coupon Ginnie Mae TBA	102.875
30 Year Fixed Rate Mortgage	4.03

Stocks are higher this morning as on overseas strength. Bonds and MBS are up small. 

Not a lot of market-moving data this week, however we do get housing starts and the FHFA House Price Index. Bank earnings will dominate the releases this week. 

The Empire State Manufacturing Survey came in a little weaker than expected, but was still pretty strong. Employment-related indicators (number of workers and average workweek) decelerated a touch, however the inflation indicators (both prices paid and prices received) increased. The bond market seems to be taking the inflation data in stride. 

The big thing this week will be a continuing resolution to keep the government open. The government will shut down if a budget deal isn't reached by Friday. Democrats are holding out over immigration. Republicans are weighing another short-term funding measure that will last until mid-February. 

So far, it looks like the meta-issue for 2018 will be inflation. Numerous companies have announced wage increases in response to the tax bill, and some states have raised the minimum wage. Commodity prices remain firm (especially food and energy). In order to really get inflation, we need wage inflation and so far we haven't really seen a lot in the BLS numbers. That said, with all the company announcements over raises this could be the year. 

Dallas Fed President Robert Kaplan believes we are going to "overshoot full employment" and he thinks we will need to see 3 rate hikes this year. His personal GDP forecast is 2.75% growth. "The history of overshooting full employment in this country has not been a happy one," he added. "Normally, what happens is you get an overheating, the Fed has to play catch up, and what happens then is you tend to often have a recession." Historically (post-Great Depression) that has been the case: the economy grows, inflation starts, and the Fed causes a recession to beat back inflation. That model probably works 90% of the time, but post-bubble economies are different, and have longer (and shallower) recoveries. The excesses of the bubble years may have been worked off, however the psychology of the bust instills a risk-aversion on the part of the business community that isn't necessarily conducive to inflation. Japan has been trying to create inflation since the early 90s and they still haven't been able to do it. The US isn't necessarily Japan, however the Japanese experience shows that the usual economic playbook goes out the window after asset bubbles. 

The black swan for US inflation? The bursting of the Chinese real estate bubble. This will be a drag on overall global growth and commodity demand.