Morning Report: Donald Trump, the Fed and housing affordability

Vital Statistics:

			Last	Change
S&P futures			2801	-3.75
Eurostoxx index			385.19	-1
Oil (WTI)			69.83	0.37
10 Year Government Bond Yield				2.85%
30 Year fixed rate mortgage				4.50%

Stocks are lower after the Trump Administration threatened more tariffs on Chinese goods. Bonds and MBS are down. 

Donald Trump jawboned the Fed a little yesterday, saying he was "not thrilled" with interest rate hikes.  “I am not happy about it. But at the same time I’m letting them (the Fed) do what they feel is best.” For all the histrionics in the business press, this was pretty mild stuff. As a general rule, presidents respect the independence of the Federal Reserve and don't criticize policy all that much. Obama never criticized the Fed's monetary policy but of course he never had to deal with a tightening, so there wasn't much to complain about. Alan Greenspan was considered "The Maestro" by the business press, so both Clinton and GWB gave him a wide berth. That said, Richard Nixon criticized the Fed, and Jimmy Carter installed a political hack (G William Miller - who was a complete disaster) to run the bank, so it isn't like political meddling is unheard of. FWIW, the correlation between rising bond yields and criticism of the Fed is about 1, so expect more as we move from a secular bull market in bonds to a secular bear market. 

Trump has doubled down by tweeting about the Fed and the dollar this morning: "China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field....The United States should not be penalized because we are doing so well. Tightening now hurts all that we have done. The U.S. should be allowed to recapture what was lost due to illegal currency manipulation and BAD Trade Deals. Debt coming due & we are raising rates - Really? Farmers have been on a downward trend for 15 years. The price of soybeans has fallen 50% since 5 years before the Election. A big reason is bad (terrible) Trade Deals with other countries. They put on massive Tariffs and Barriers. Canada charges 275% on Dairy. Farmers will WIN!"

These comments are smacking the dollar this morning, which is pushing up the 10 year yield. The comments have made no changed to the Fed funds futures, which are still predicting an 85% of a 25 basis point hike in September and a 58% chance of another hike in December. 

Note Russia is dumping Treasuries. Most of its position has been liquidated. This was in response to sanctions imposed earlier this year. 

Housing affordability has been falling as rates and prices rise. The most affordable places in the US are the Northeast and the Midwest. The Midwest is the most affordable despite having the highest regional mortgage rates. There is a surprising amount of variation between mortgage rates in different parts of the country - a range of 25 basis points. The Northeast has high prices (but low rates) and the Midwest has low prices (but high rates). Affordability is back to 2009 levels. 

At least one commentator thinks housing has peaked for this cycle. As a general rule, housing construction is an early cycle phenomenon - in other words it generally leads the economy out of a recession. Since this expansion is very long in the tooth, it would follow that housing might have peaked. The problem with that theory is that housing didn't show up in the early recovery - it kept falling well after the recession ended. FWIW, between the shortage we currently have and the fact that building margins are still healthy indicates housing has room to run.