A boring Fed makes the rest of Washington look either exciting or risky by comparison. Meanwhile, money returns to bond trading, and MBS and corporates have notable starts to ’17.
Markets: The most boring place in Washington
The Fed has quickly become the most boring place in Washington after saying little last week that it hadn’t said before. The FOMC recited its usual mantras. Then the labor report on Friday came in above expectations on payrolls but below expectations on wage growth. Rates dipped on the Friday report, with the weak wage numbers leaning against a March hike. Fed Chair Yellen steps into the partisan crossfire on Feb 14-15 with semiannual monetary policy reports to the Senate and House. (Milepost).
Markets/economy: Shifts in policy risk
The potential economic lift from tax cuts and infrastructure spending was always going to battle it out this year with the drag from limits on trade and immigration, but momentum lately has swung from lift to drag. The slow road so far for Obamacare reform could signal similar challenges for tax reform and infrastructure spending. Toxic politics and the new administration’s high priority on trade and immigration also get in the way. Goldman now thinks fiscal lift comes at the earliest, if at all, in 2018. See Goldman Sach’s US Economics Analyst: Q&A on the Policy Outlook, 03 Feb 2017. (GS, Milepost).
Markets: There’s money again in trading!
There’s money again in trading fixed income, according to the latest quarterly earnings from banks. Year-over-year FICC revenues at Morgan Stanley jumped 173%, Goldman 78%, Citi 36%, JPMorgan 31%, Bank of America 12% and Deutsche Bank 11%. A sharp rise in interest rates and tightening credit spreads helped drive client repositioning. None of the banks predicted that this would repeat itself, however. And by the end of last week, Deutsche announced it would cut positions in fixed income. See JPMorgan’s US Fixed Income Markets Weekly: Cross Sector Overview, 03 Feb 2017. (JPM, Milepost).
Markets: Higher rates land hard on MBS
Mortgage refinancing hit a plateau last fall after 30-year mortgage rates jumped 80 bp to around 4.20%, and evidence that refinancing collapsed in January looks set to arrive this week with the latest MBS prepayment reports. January prepayments should drop by 30% against December levels, according to Goldman Sachs, on a lower day count, lower housing turnover seasonals, and higher mortgage rates. Credit Suisse expects a 35% MoM drop in January and 8% in February before a March bounce higher The MBA mortgage refinance applications indices are now 50%-60% below 2016 peaks. The government refinance index remains solidly above the conventional index, suggesting prepayments in FHA/VA loans should remain elevated. See Goldman Sach’s The Mortgage Trader, 03 Feb 2017. See Credit Suisse’s January 2017 prepayment forecast, 17 Jan 2017. (CS, GS, Milepost).
Markets: Tough to make predictions about corporates
January surprised the corporate debt market with near record issuance right after almost every voice on the Street predicted a plunge in supply. Elimination of tax deductions for interest expense and repatriation of overseas cash were supposed to discourage debt. Instead, $167 billion came to market in January, including a large deal from Microsoft, which has more than $100 billion offshore. A debt surge could make sense if the issuer expected deduction of interest on existing debt to get grandfathered under new tax reform. There’s no precedent for grandfathering with changes to individual tax rules, but maybe with corporate efforts this time will be different. It’s tough to make predictions, as Yogi said, especially about the future. See JPMorgan’s US Fixed Income Markets Weekly: Corporates, 03 Feb 2017. (JPM, Milepost).