Top of the Street: Alternative facts, market volatility and other policy impacts

The open hostility between the new administration and the media may push disclosure of important information into the other agencies and branches of government, where accuracy could take more time to determine. Volatility rises. Also this week: the impact of changes to corporate tax, housing finance and FHA insurance premiums.

Markets: Alternative facts and market volatility
New government in Washington could lead to a remix for the basic fuel of markets: information. The new administration hotly contested photos and ridership data from the Washington Metropolitan Area Transit Authority suggesting a lower turnout for the inauguration than for past administrations’. The president later questioned the honesty of the media in a visit Saturday to the CIA. The open hostility between the administration and the media may push disclosure of key information – either formally or informally – out of the White House and into other agencies and branches of government. That could add volatility to markets since competing sources could come with conflicting agendas, and accuracy will take more time to determine. Heavily regulated markets should be most vulnerable: healthcare, housing and housing finance and defense among others. (Milepost).

Markets: Positioning for policy change
“While many things are possible as the Trump era begins, the market focus now is on divining what is probable, when it might happen, and what that means for the markets,” writes JPMorgan. “The markets’ process of discernment is made all the more challenging by Trump’s many campaign promises,” the bank continues, “his ‘America first’ rhetoric, his otherwise chaotic communication style, and divided Republicans in Congress. To think about what is normal in the early Trump era requires considering a wide range of possibilities and risks. Tax cuts, other stimulus, and deregulation may boost growth and push rates higher, while trade policy, immigration, and healthcare reform each have troubling aspects. Over the course of the past year, markets demonstrated the ability to make rapid reassessments as conditions evolve. Considering this in the wide range of policy possibilities, we should assume that the new, new normal comes with fat tails.” See JPMorgan’s US Fixed Income Weekly: Cross Sector Overview, 20 Jan 2017 (JPM, Milepost).

Markets: Interest deductions and corporate performance
Proposals to eliminate tax deductions for interest expense would fall harder on some corporations than others, according to Deutsche Bank. Utilities, chemicals, media, retail and metals have the highest interest expense as a share of gross earnings. Packaging, automotive, transportation, capital goods and consumer products have the least. If there’s a silver lining, it’s in the linked proposal to allow immediate deduction of capital investments. The most vulnerable industries are ones with high interest expense and little capital investment as a share of gross earnings. By that combined measure, the most vulnerable industries include retail, media and utilities with metals, healthcare and commercial services roughly tied for the next positions. See Deutsche Bank’s US Credit Strategy, 22 Jan 2017. (DB, Milepost).

Markets: “We can find a bipartisan fix” for housing finance
Treasury secretary nominee Steve Mnuchin testified in his Senate hearing last week that he never intended to push for recapitalizing and releasing Fannie Mae and Freddie Mac from federal control. Instead he favors solutions along the lines of past bipartisan efforts to reform the GSEs, which presumably includes the Corker-Warner bill introduced in 2013 and recent proposals offered by former FHFA Acting Director Ed DeMarco at the Milken Institute and a group of authors at The Urban Institute. All of these proposals envision private capital taking almost all of the credit risk with the government providing a full-faith-and-credit backstop guarantee. This arrangement takes most credit risk off the government’s hands while preserving the liquidity of the TBA market. See Goldman Sach’s The Mortgage Trader, 20 Jan 2017. (GS, Milepost).

Markets: MIP switch
The new administration on Friday reversed a 25 bp cut in initial FHA insurance premiums initially announced on Jan 9, triggering a jump in Ginnie Mae MBS prices of as much at 5/32s. Ginnie Mae MBS prices had rebounded from their sharp decline immediately after the Jan 9 announcement. JPMorgan speculates that the new administration may end up pushing FHA premiums even higher, reversing part or all of a Feb 2015 cut of 50 bp in annual FHA premiums. That would likely trim Ginnie Mae’s share of MBS and expand share for Fannie Mae and Freddie Mac. See JPMorgan’s US Fixed Income Weekly: Agency MBS, 20 Jan 2017 (JPM, Milepost).