Morning Report: Trump interviews possible replacements for Yellen

Vital Statistics:

	Last	Change
S&P Futures	2555.0	-1.3
Eurostoxx Index	391.2	-0.2
Oil (WTI)	52.1	0.2
US dollar index	86.7	0.2
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.86

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

Neel Kashkari speaks at 10:00 am. The Fed funds futures are pricing in a 93% chance of a rate hike at the December meeting. 

Industrial Production increased 0.3% in September as the effects of the hurricanes probably depressed the number by 0.25%. Capacity Utilization rebounded from August but is still lower than where it has been most of the year. Manufacturing capacity utilization is around 75%, which is 3% below its longer-term average. 

Small business optimism fell in September, as the hurricanes in Florida and Texas took their toll. Job creation fell during the month by .17 workers per firm. We saw firms cutting workers in most census divisions, so this isn't just a hurricane effect. That said, 19% of firms listed "difficulty in finding qualified workers" as their single most important business problem. This was the second overall issue, with the highest being taxes. Access to credit remains a non-problem as only 1% said their credit needs were not being met. Overall, sentiment declined from a historically high level. 

Donald Trump met with John Taylor yesterday, and came away very impressed. Kevin Warsh had been seen as the front-runner, however he has attracted criticism from economists on the left, particularly Paul Krugman. Taylor is known for the Taylor Rule which sets the proper Fed Funds rate based on what his model tells him. He is probably more hawkish than Warsh, and certainly more than Janet Yellen, who Trump will interview this week. A Reuters poll of economists has Jerome Powell as the most likely choice. 

Tax reform has the potential to make the mortgage interest deduction irrelevant for most homeowners. Note that many articles will breathlessly say the MID is "threatened," however in reality it will just become irrelevant, as the standard deduction will increase and most people will be better off taking the standard deduction instead of itemizing. You can't really call it "threatened." Currently about 30% of the homes in the US are valuable enough to take the MID. Under tax reform, that number should drop to 5%, according to Zillow. 

A warning? Credit card delinquencies have risen for the third month in a row, as lenders have pushed the envelope credit-wise to increase revenues. Both JP Morgan and Citi reported 14%-15% increases in DQs for the third quarter. 

The Census Bureau reported that building permits for the first 8 months of the year are up 7.5% compared to the first 8 months of 2016. Where are the most expensive places to build? The Left Coast, where it costs roughly $164 a square foot to build a spec house. The national average is $101. New England is second at $147, while the cheapest is the West South Central (TX, OK, AR and LA) at $81 a square foot. 

A trailer in New York City just went for $150,000. 

Morning Report: JPM kicks off earnings season

Vital Statistics:

	Last	Change
S&P Futures	2549.3	-3.8
Eurostoxx Index	389.9	-0.3
Oil (WTI)	50.6	-0.7
US dollar index	86.5	0.1
10 Year Govt Bond Yield	2.35%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.9

Stocks are lower as third quarter earnings season begins with results from the banks. Bonds and MBS are flat. 

JP Morgan reported better than expected earnings this morning, posting a 7% increase in net income. Higher lending revenues offset lower trading revenues. Mortgage origination was flat YOY, but revenue dropped 17%, which means margins are falling. The stock is flat pre-open.

Initial Jobless Claims came in at 243k last week, historically a very low number. For those wondering about places like Puerto Rico, their number is estimated. 

Wholesale inflation remains close to the Fed's target rate of 2%, according to the Producer Price Index. The PPI rose 0.4% MOM and 2.6% YOY, however if you strip out food, energy, and trade services, it rose 0.2% MOM and 2.1% YOY. 

The FOMC minutes really didn't provide much in the way of additional information. There was some discussion that low inflation might not just be a temporary phenomenon, which was interpreted as dovish by some observers. The 10 year didn't react to the minutes, but the dollar sold off a tad. The December Fed Funds futures decreased the implied probability of a rate hike by a couple points.

Kevin Warsh is now the favorite of economists to run the Fed after Janet Yellen's term. He is a Wall Street type who worked for Morgan Stanley during the crisis and has been critical of monetary policy since then. He is generally regarded as more hawkish than Yellen, and will definitely be less of a regulatory hawk than she is. Paul Krugman (Dr. Cowbell) threw a little shade Warsh's way.

Donald Trump is re-thinking the state and local tax deduction after it turns out that about 30% of people making between 50k and 150k a year could be hit with a tax increase under the new plan. The state and local tax deduction (along with the mortgage interest deduction) are two immensely popular deductions which have managed to survive numerous assaults over the years. House Republicans in blue states, like Peter King of NY, will not support tax reform if it means giving many of their constituents a tax hike. If the state and local tax deduction remains, something else has to give, which will probably mean the estate tax (something loathed by the right) remains. 

Congress is preparing legislation to subject the credit bureaus to Federal cybersecurity inspections, and to end the use of social security numbers in credit reporting by 2020. The bill will also require the credit agencies to provide free credit freezes. 

How tight is the housing market? So tight that people will put up with living in haunted houses. 

Morning Report: Incomes rise, but wages flat

Vital Statistics:

	Last	Change
S&P Futures	2506.8	-1.0
Eurostoxx Index	386.5	0.1
Oil (WTI)	51.6	0.1
US dollar index	86.3	0.0
10 Year Govt Bond Yield	2.31%
Current Coupon Fannie Mae TBA	103.05
Current Coupon Ginnie Mae TBA	103.98
30 Year Fixed Rate Mortgage	3.88

Stocks are flattish on no real news. Bonds and MBS are flat as well.

Personal Incomes rose 0.2%, right in line with estimates. The prior month was revised downward to 0.2%. The increase in personal incomes largely came from increased rental income, transfer payments, and interest income, not wages and salaries. Consumer spending rose 0.1%, while all of the inflation numbers came in a touch light. Weak auto sales drove the low consumer spending number. The personal savings rate was 3.6%. It probably won't affect any of the Fed's thinking with respect to a December hike, however the declining annual PCE inflation will concern some of the doves at the FOMC, as will the lack of wage growth. Note that these numbers will have some effects of the TX and FL hurricanes, and BEA is unable to separate them out. 

The Chicago Purchasing Manager Index bounced back in September, hitting 65.2, way above expectations. While several regions have been reporting strength, Chicago has been an outlier. 

Consumer sentiment slipped slightly in September, showing only a modest impact of the hurricanes, according to the University of Michigan survey. 

Donald Trump reportedly met with Kevin Warsh to discuss the Federal Reserve Chairman position. The choice will probably end up either Warsh or Yellen. 

Tax reform could be a big boost for the financial sector, especially banks. Since banks generally have fewer deductions than other businesses, a drop in the tax rate disproportionately benefits them. Note that lowering rates will create issues with pass-through small businesses, and could be subject to abuse. Note that the Admin is already softening its stance on state and local tax deductions, which has always been a tough one politically. Given the probability that no Democrats will support tax reform (at least at the individual level), a few blue state Republicans could sink it. 

Most renters would like to own a home someday, however the up-front costs are the biggest obstacle. Renters need to be educated more on FHA loans, which are designed specifically to get the first time homebuyer into a home with a minimum down payment. 

An improving economy means less payday loans. I wonder how much of this has been due to the CFPB too.