Top of the Street: 700 Trumps, regulation and growth, weak inflation versus a determined Fed and more

Trump shows up in SEC filings, deregulation may not ignite growth, weak inflation likely will not stop the Fed. Contributions from DB, GS, NY Fed, JPM, WSJ and, of course, Milepost.

Markets/economy/banking: 700 Trumps!
Public companies mentioned President Donald Trump in nearly 700 annual reports or quarterly filings during the first 100 days of the new administration, according to research company Sentieo, the Wall Street Journal reported last week. That is nearly triple the number of references to President Barack Obama in similar public company filings during his first 100 days in office. While the references did not necessarily portray the administration negatively, they often cautioned that potential benefits from deregulation, tax law reform or changes to healthcare may not occur as quickly as expected, or at all. Companies in financial services also highlighted uncertainty about a Dodd-Frank overhaul. Every portfolio should weigh political uncertainty in its positioning. (WSJ, Milepost).

Economy: The costs and benefits of regulation
The benefits of regulation still far outweigh the costs, according to figures reviewed last week by Goldman Sachs. Environmental regulations, for instance, cost an average of 0.27% of GDP annually but generate 2.45% of GDP in benefits. The Office of Management and Budget estimates the total annual cost of major regulations at 0.5% of GDP. Goldman argues that deregulation might help specific industries but is “a minor issue for near-term growth.” See Goldman Sachs, US Economics Analyst: Deregulation: What’s Really at Stake?, 12 May 2017. (GS, Milepost).

Markets/economy: Weak inflation, but a determined Fed
The Fed still looks set to hike in June despite weak inflation. April’s core CPI came in up only 0.07% on Friday, well below consensus expectations of a 0.20% gain. And the year-over-year rate printed 1.88%, the lowest since August 2015. Year-over-year core PCE should come in at 1.46%, according to JPMorgan, well below the Fed target. Low inflation may change Fed messaging. But a tight labor market should still spur the Fed to deliver on clear market expectations of a 25 bp hike on June 13-14. See JPMorgan, Fixed Income Markets Weekly: Cross Sector Overview, 12 May 2017. (JPM, Milepost).

Markets: Range roving rates
The forward curve projects 10-year Treasury rates at 2.50% on December 31, with 2-year rates at 1.57%. That would nudge the curve only modestly higher than where it stands today. The Street still is arguing for higher rates, but not by much. Deutsche Bank expects 10-year rates to print at 2.75% on the last day of the year, and JPMorgan looks for 2.65%. The Street started the year expecting 10-year rates to make a run at 3.00% or higher. The bearishness has clearly faded. See Deutsche Bank, US Fixed Income Markets Weekly, 12 May 2017, and JPMorgan, Fixed Income Markets Weekly: Cross Sector Overview, 12 May 2017. (DB, JPM, Milepost).

Markets: MBS goes to Japan
Japan led $90 billion in net foreign buying of agency MBS for the year ended June 2016, according to recently released Treasury data. Japanese investors added a net $53 billion in agency MBS, and JPMorgan estimates that Japan added another net $21 billion in the second half of last year. Japanese portfolios have been the most reliable MBS investors. Currently China, Japan, Taiwan, South Korea and Hong Kong account for 75% of MBS held outside the US, with the traditional hedge fund hubs of Ireland, Luxembourg, Bermuda and the Cayman Islands accounting for 13%. See JPMorgan, Fixed Income Markets Weekly: Cross Sector Overview, 12 May 2017. (JPM, Milepost).

Markets: A lesson on student loan ABS
The market in student loan ABS continues to shrink, according to JPMorgan, but change continues. FFLEP ABS outstanding dropped to $145 billion as of 1Q17, down year-over-year by 7%. Fitch and Moody’s finished revising their ratings methods last year, leading them to downgrade 40% to 50% of senior FFELP ABS classes. Payment deferral and forbearance rates keep declining, prepayments remain stable, average daily trading volume keeps running between $500 million and $1 billion daily. See JPMorgan, Fixed Income Markets Weekly: ABS, 12 May 2017. (JPM, Milepost).

Economy: Consumers get more bullish on housing
Consumer expectations of home price growth over the next year have risen to their highest level since 2014, according to the NY Fed’s 2017 SCE Housing Survey released last week. Five-year growth expectations have also risen, although more modestly. Most households continue to view housing as a good investment. And consumers expect slightly larger increases in mortgage rates than they did in last year’s survey. Renters’ perceived access to mortgage credit continued to ease. The Fed report is here. (NY Fed, Milepost).