Morning Report: Trade tensions push down interest rates

Vital Statistics:

	Last	Change
S&P Futures	2681.3	-9.0
Eurostoxx Index	369.2	2.2
Oil (WTI)	61.4	0.1
US dollar index	83.8	0.1
10 Year Govt Bond Yield	2.84%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.4

Stocks are lower this morning the trade cold war between the US and the world escalated. Bonds and MBS are up.

Those hoping that Donald Trump would re-think his position on trade over the weekend were disappointed. He is now threatening EU automakers and demanding a re-negotiation of NAFTA to ease steel and aluminum restrictions with Mexico and Canada. Exiting and / or renegotiating NAFTA will probably not be as easy as he thinks it will be. The US has always had the leadership position globally in encouraging free trade. There is no doubt it that has accepted some protectionism from other countries as a cost of doing business, and in the spirit of moving the ball on free trade in general. In other words, the US has accepted a disadvantaged position, and these "free trade" agreements were in reality a negotiation over how many points the US would spot other countries.

Rates this week will be primarily determined by the fluid state of trade announcements. We will get  some important market-moving data this week with the jobs report on Friday, and productivity on Wednesday. There will also be Fed-Speak all week. 

Big picture, trade tensions are causing a flight to quality, which is pushing down interest rates. This is probably going to be only a temporary phenomenon so I would encourage LOs to push their customers to lock. Despite rising rates, we are not seeing an influx of foreign money into Treasuries, and we are seeing European investors and Japanese investors investing in Bunds and JGBs despite the lower yields. Why would investors accept 62 basis points in Germany or 5 basis points in Japan when they could get 2.8% in the US? Currency hedging costs wipe out the differential. 

Trade battles are generally bad for everyone involved, except for domestic producers in the industries being protected. Note that Secretary of Commerce Wilbur Ross is an ex-steel guy himself and is not an idealistic free-trader. I suspect that is where Trump is getting his advice, although the media claims it was a petulant decision out of the blue as a result of negative headlines. 

Tariffs on steel and aluminum will be bad for the construction industry, especially multi-fam. Don't forget, the housing business is already dealing with a 20% tariff on Canadian soft lumber. Building Material prices are already at record highs. 

The services economy continues to expand, with the ISM Non-Manufacturing index hitting 59.5 in February. This was lower than the exceptionally strong January reading of 59.9. The internals of the report were good, with the New Orders and Employment indices coming in over 60. Some of the comments from business below:

• "Lumber-related costs continue to increase as supply is also starting to become a problem. The market volatility of construction materials and the short supply of construction labor have added difficulty to long-term planning." (Construction)
• "Slight increase in activity; beginning to see some higher cost for goods and services." (Finance & Insurance)

Strong growth and inflation is the takeaway.

Amazon is in talks with JP Morgan to start providing checking account services. Amazon mortgages can't be far behind. Has Bezos ever looked at banking P/E ratios? They aren't triple digit.