"No winter lasts forever; no spring skips its turn." -- Hal Borlund
Salting the Road
If you live somewhere that sees snowy weather throughout the Winter season, then you know that most municipalities prepare for a coming storm by laying down a layer of salt on the road ahead of time. Bond traders have prepped the road, so to speak, placing some pressure on not only the benchmark U.S. 10-year, but the entire curve in general and the corporate debt space as well. The week ending March 8 saw a net $2.7 billion come out of high yield mutual and exchange traded funds, which was the most aggressive move in that direction since November. Speaking of the U.S. 10-Year Note, that yield hit its highest levels in over two years in yesterday's trade, and has for the most part held the level overnight.
Better economy? The Atlanta Fed's model still has the first quarter tracking at 1.2%, after the fourth quarter came in at a screaming 1.9%, so officially no. Yet, improved numbers in the job space, manufacturing sector expansion over a six-month stretch and January's CPI and retail sales data all point upward. More on that tomorrow morning ahead of the Fed. Then there's corporate earnings, which in aggregate are now on a two-quarter winning streak, and the economy will go nowhere without. So gang, where does this all leave us?
I believe that both equity and debt markets are pricing in an increase of about 3/8 of one percent from where the fed funds rate is now. Fed funds futures markets are fully pricing in a rate hike tomorrow. Also priced in are a better than 50/50 chance for another hike in June, as well as a third increase in December. Of course, it's silly to look that far ahead, but that's what markets do. The point is that these markets either believe that the economy will improve at an increasingly rapid pace, or that the FOMC will significantly change the language in their policy statement. In other words, markets are looking for progress on the federal budget, tax cuts, and the potential infrastructure build, or the removal of the word "gradual" (maybe even an overt attempt to address balance sheet management) from that statement.
Remember Tom Hoenig?
Of course you do. Hoenig is the former regional president of the Kansas City Fed, who actually, in my opinion, had a far better understanding of monetary policy than did most of his peers. His views ran alongside fairly well with those of former Dallas president Richard Fisher. See why there is immediate respect? Hoenig, now the vice-chair of the FDIC, made some comments yesterday regarding the future of banking that ran beneath the financial media's radar. Hoenig's ideas regarding "large, complex banks" would be to break up those banks, or at least their riskiest businesses, into holding companies. The idea would be an alternative to the current Dodd-Frank law and would still protect U.S. taxpayers in the event of another crisis level event.
In Hoenig's words, "each intermediate holding company that houses nontraditional banking activities would become a separate affiliate, separately capitalized and separately managed from the insured bank". Better than banks setting aside sizable portions of capital in order to protect taxpayers, as Dodd-Frank requires? Probably, from a profitability point of view, and it may leave the financial space with more product to trade. This idea clearly needs to be followed up on.
The Kick is ...
Good? No, wait ... no good? Hard to tell. The Congressional Budget Office (CBO), and the Joint Committee on Taxation (JCT) released their estimates on the American Health Care Act (the GOP health care plan) after the close last night. There's a lot to summarize, and there is both good and bad here, and let's it forget, CBO estimates can, and have been wildly inaccurate in the past, even on healthcare matters.
The estimates show that by enacting this legislation, Federal budget deficits would be reduced by $337 billion over the next decade. Basically, costs over 10 years would likely drop by $1.2 trillion, while revenues would also drop ($0.9 trillion). This savings would be produced through reductions in outlays for Medicaid, and by subscriber subsidies with tax credits.
Projections are that as soon as 2018, 14 million more people would end up uninsured than are left in that condition under the current law. The curve suggests that this number increases to 21 million by 2020 and to 24 million by 2026. These numbers grow, in all likelihood, as states drop their expansion on Medicare eligibility and as folks who simply bought health insurance due to the existing penalties just simply refuse to go the expense.
... Not Sure?
The CBO suggests that premiums paid for health care insurance would rise into 2020, then start dropping at that point going forward through the 2026 end date of the study. Younger purchasers would benefit most from any discrepancy between the laws, as older folks could end up paying five times as much as those younger enrollees (up from the current 3x). The study makes clear that the tax credit would be sufficient as a replacement for the subsidies that the health insurance market itself would not become unstable.
About the only thing we do know is that the future is unsure for the entire sector, particularly hospital names.
06:00 - NFIB Small Business Optimism Index (February): Actual 105.3, January 105.9. Small businesses have absolutely burst with screaming optimism in the wake of the U.S. election. January's 105.9 was indeed the strongest headline number in this space since 2004, and for the most part, February held the level. Still to see this item go even higher, we'll need to see actual improvement in earnings. A nice inventory build wouldn't hurt either.
08:30 - PPI (February):Expecting 0.1%, January 0.6% m/m.
08:30 - Core PPI (February):Expecting 0.2%, January 0.4% m/m. The headline print easily topped expectations in January, thanks largely to a 4.7% m/m increase in the energy component. That said, even the core rate (less food & energy) showed signs of inflationary pressure for the month. With fuel prices trading sideways for most of the month of February, a repeat performance at the headline is not expected. Markets generally do not react to producer level pricing, and will likely keep their powder dry for tomorrow's macro/policy feast.
08:55 - Redbook (Weekly):Last Week 1.0% y/y. Year over year, this item came in at a more than respectable increase from 2016 for the fifth week in a row. However, on a month-over-month basis, same store sales showed considerable contraction (-0.8%).
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2398, 2390, 2382, 2372, 2365, 2356
RUT: 1384, 1378, 1370, 1362, 1355, 1349
Tuesday's Earnings Highlights (Consensus EPS Expectations)
You're Invited ...
Wall Street Goes to Washington. In the first of a series of conversations with President Trump's economic advisers, acclaimed author and columnist Michael Wolff will sit down with Trump insider Anthony Scaramucci, co-founder of private-equity firm Skybridge Capital. They'll discuss the Trump administration, Scaramucci's thoughts on the policies and regulations under debate and his outlook for the next four years. Join us for this cocktail party on Monday, March 27, at The Metropolitan Club in New York. The event is free, but seating is limited and reservations are required. For more information or to RSVP, email email@example.com.