Morning Report: Will the US have a Wile E Coyote moment in 2019?

Vital Statistics:

			Last	Change
S&P futures			2765.5	-19
Eurostoxx index			385	-3.9
Oil (WTI)			65.16	0.1
10 Year Government Bond Yield				2.91%
30 Year fixed rate mortgage				4.57%

Stocks are lower this morning on trade fears. Bonds and MBS are up. 

We will get a lot of housing-related data this week, but nothing should be market-moving. We will get housing starts and building permits tomorrow, existing home sales on Wednesday, and house prices on Thursday. Otherwise, should be a relatively quiet week. 

The NAHB Housing Market Index (a sentiment indicator for the homebuilders) fell to 68 last month from 70. Rental markets are softening in some of the more pricy MSAs.

OMB official Kathy Kraninger is supposedly the front-runner to replace Mick Mulvaney as the permanent director of the CFPB. The confirmation process will probably take at least through the end of the year. She is not viewed as any sort of financial regulatory expert, so expect to see a lot of objections from Democrats over the nomination.

Ben Bernanke thinks the US economy will have a Wile E Coyote moment in 2019 or 2020 when the tax cut stimulus wears off. His point is that we are enacting fiscal stimulus at "exactly the wrong time" when the economy is already at full employment. Of course the statement about full employment is debatable. The unemployment numbers indicate we are, but the employment-population ratio does not. The employment-population ratio currently stands at 60.4%, and pre-crisis, we were around 63%. That 2.6% difference works out to be about 8.5 million people. We are getting some modest real wage growth (average hourly earnings are up 2.7% YOY and the core PCE index is growing at 2%) however broad-based wage growth probably isn't going to happen until the EP ratio gets back up around 63%. Yes, there is a demographic element to this with the baby boomers retiring, but that is overplayed. Many people who are retiring in their 60s would rather work. You can see just how bad the Great Recession was. Most of the gains that started in the 60s with women entering the workforce were given back. The "retiring boomers" narrative has a kernel of truth in it, but it isn't driving it. 

The FAANG stocks are now worth more than the entire UK stock market. While people talk about short Treasuries as being the most crowded trade on the Street, it doesn't hold a candle to the FAANGs

Goldman's model now suggests the US economy grew at 4% in the second quarter. Friday's Empire State Manufacturing Survey was the catalyst for the upgrade. 

The government is trying to clarify the Volcker Rule, which prohibits banks from proprietary trading. So far, it seems to be clouding the issue as opposed to clarifying it. Ultimately trades held for less than 60 days are considered proprietary trades although there is a carve-out for hedging and market-making. Given the drop in commissions over the past 20 years, and sub-penny bid ask spreads, the economics of market-making are terrible to begin with, but the regulatory uncertainty probably seals the deal. The next crash is not going to be pretty. 

Morning Report: The markets and the Fed are on different pages

Vital Statistics:

	Last	Change	Percent
S&P Futures	1957.3	14.2	0.73%
Eurostoxx Index	3192.0	103.8	3.36%
Oil (WTI)	46.1	0.6	1.23%
LIBOR	0.327	0.003	0.96%
US Dollar Index (DXY)	95.93	0.097	0.10%
10 Year Govt Bond Yield	2.01%	0.02%
Current Coupon Ginnie Mae TBA	104.9	-0.1
Current Coupon Fannie Mae TBA	104.5	0.0
BankRate 30 Year Fixed Rate Mortgage	3.88

Markets are higher this morning on overseas strength. Bonds and MBS are down.

The Labor Market Conditions Index fell from a downward-revised 1.2 to zero. This has been the average since 2000. 

The Markit US Composite PMI came in at 55, while the services PMI came in at 55.1. The ISM Non-Manufacturing Composite fell from 59 to 56.9. 

Aftermath of the weak jobs report on Friday: Fed fund futures assign a 10% probability of an Oct hike, 30% probability of a December hike and 50% probability of a March hike. The markets are increasingly out of sync with what the Fed members are actually saying in the press. Note we get the FOMC minutes this Thursday. That will be the highlight of the week. 

The Bernank weighs in on raising rates. His Rx: don't. Separately, DoubleLine's Jeffrey Gundlach thinks we have further downside in risk assets like junk bonds, US equities and emerging markets stocks and bonds. His point: people are holding and hoping these assets rebound. That isn't the psychology of a bottoming process. That happens when people throw in the towel and sell. 

It is looking like the Trans-Pacific Partnership free trade deal is pretty much done. It still has to get through Congress, although he did get fast-track approval. I suspect it won't move the needle that much for the US economically. It is mainly about intellectual property protection for US firms. 

Sometimes bad ideas get implemented, fail, become forgotten, and then come back, like Freddy Kreuger. One such idea is the financial transactions tax, also known as the Robin Hood tax. It is back in vogue in Europe, and Bernie Sander wants a 50 basis point tax on all stock trades, a 11 basis points on bonds and 5 on derivatives will be able to fund a slew of new government benefits. Don't believe it. While leftist politicians love to promote ideas like this as new, they aren't. They have been tried and discarded. Sweden implemented on in the 1980s, only to see most stock trading in Swedish stocks flee to London. The UK in fact did implement one for stock trades, and all it did was drive institutional investors to use swaps to sidestep it and retail investors to go to betting parlors like City Index. They will sell it as raising a lot of revenue - it won't simply because it will kill high frequency trading, and volume will dry up. They will sell it as reducing volatility - some (not all, but some) of HFT is actually market-making which is stabilizing. We don't really have market-makers or specialists on the floor of the New York Stock Exchange like we used to. You could make the argument that it will increase, not decrease volatility. Anyway, #FeelTheBern is big on this idea - he should take a look at how it has (not) worked in the past. 

Morning Report: The Bernank is sanguine on China

Vital Statistics:

	Last	Change	Percent
S&P Futures	2106.9	2.0	0.10%
Eurostoxx Index	3638.4	19.1	0.53%
Oil (WTI)	57.54	-0.5	-0.84%
LIBOR	0.285	0.003	0.89%
US Dollar Index (DXY)	97.68	0.377	0.39%
10 Year Govt Bond Yield	2.15%	0.01%
Current Coupon Ginnie Mae TBA	102	-0.1
Current Coupon Fannie Mae TBA	101	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.92

Markets are flattish as Greek talks plod along in a directionless fashion. Bonds and MBS are flat.

Mortgage Applications fell for the fifth week in a row, according to the MBA. Rates rose last week so that isn't a surprise. Purchases were up 1.2% while refis fell 3.9%. 

Luxury homebuilder Toll Brothers reported this morning with EPS of 37 cents a share better than the Street estimate of 35 cents, however it looks like the beat was due to a lower-than-expected tax rate. Revenues were light as deliveries declined 1% in dollars and 2% in units. Net signed contracts rose 25% in dollars and average selling prices for net signed contracts increased 13% to $826,000. California demand is "very strong" as well as Texas and NYC. The rental business continues to grow. Overall, the high end of the market continues to perform very well. 

Was Elmer Fudd correct about adjustable rate mortgages? Seemed ill advised at the time, right ahead of a rate hike - seriously, with perfect clairvoyance he told people to take out ARMs before rates went up. Well, it required a bursting of the real estate bubble to make it work out. That said, if people move often, ARMs may in fact make sense. 

The Bernank doesn't think China will have a hard landing. Given their real estate bubble, and the fact that their stock market has doubled over the past year, I find that wildly optimistic. It seems like countries that experience decades of fast growth tend to have hard landings (the US in the Great Depression, Japan now). Bull markets are a natural breeding ground for dumb debt-financed investments. Maybe the government wonks that run China's economy can manage it through heavy-handed intervention in the markets, but it hasn't been done before. 

The Feds are on the trail of massive corruption at FIFA. You mean to tell me there might be some jiggery-pokery going on in soccer?

Venezuela has found a solution to its toilet paper shortage. Make the Bolivar note worth less than toilet paper. 

Morning Report - Ben Bernanke has a blog

Vital Statistics:

	Last	Change	Percent
S&P Futures	2075.1	22.4	1.17%
Eurostoxx Index	3668.4	-1.4	-0.04%
Oil (WTI)	50.85	-0.6	-1.13%
LIBOR	0.269	-0.001	-0.30%
US Dollar Index (DXY)	97.28	-0.152	-0.16%
10 Year Govt Bond Yield	1.98%	-0.01%
Current Coupon Ginnie Mae TBA	102.5	0.0
Current Coupon Fannie Mae TBA	101.9	0.2
BankRate 30 Year Fixed Rate Mortgage	3.82

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

Personal Income came in at .4%, higher than the Street estimate. Personal Spending however disappointed. The PCE Core rate (the inflation rate preferred by the Fed) came in at 1.4%, lower than the Fed's 2% target.

Pending Home Sales rose 3.1% in February, higher than the estimate. The Northeast was affected by the weather, but the Midwest jumped. February is a short month and during the seasonal slow period, so it is hard to read too much into these numbers.

Beard has a blog. Supposedly he will dish on his critics and go after the "audit the Fed" crowd. It might be interesting as a "Talking Points Memo" on monetary policy, where surrogates argue with critics, leaving the official participants out of it.