- House Obamacare vote has big implications for corporate tax reform
- Fed Chair Yellen speaks today as Fed officials step up balance sheet talk
- U.S. new home sales expected to remain strong
- U.S. unemployment claims remain in very good shape
House Obamacare vote has big implications for corporate tax reform — The markets are eagerly waiting to see if House Speaker Ryan has the votes to approve his Obamacare repeal-and-replace bill at this planned vote today. If not, then Mr. Ryan will either hold the vote and force the Republican defectors to put themselves on the record or he will have to postpone the vote. Either way, if the votes are not there, then Mr. Ryan will likely be forced to renegotiate the bill with House Freedom Caucus members.
The stock market is hoping that the House can pass the bill and then move on to the corporate tax reform bill, which is of much more direct importance to the stock market. Expectations for a large corporate tax rate cut have been a key driver of the post-election stock rally in our view because those tax cuts would fall straight to the stock market’s bottom line through higher after-tax profits for investors. Republicans need the Obamacare repeal-and-replace bill to cut $883 billion of Obamacare taxes over 10 years so that there will be less heavy-lifting in the corporate tax reform bill. If there is no Obamacare repeal-and-replace bill, then there could be a smaller-than-expected cut in corporate tax rates.
Fed Chair Yellen speaks today as Fed officials step up balance sheet talk — Fed Chair Yellen is due to speak today at a Fed community development research conference in Washington DC. The markets will be watching carefully to see if she makes any comments on the economy or on monetary policy.
In a little-noticed development this week due to the House Obamacare drama and stock market turmoil, several Fed officials have mentioned the Fed’s balance sheet. That suggests that Fed officials may have launched another coordinated communications blitz to notify the markets that there may be some changes in the Fed’s balance sheet policy coming relatively soon.
Cleveland Fed President Loretta Mester was the most hawkish, saying on Tuesday that she would be “comfortable changing our reinvestment policy this year” if the economy evolves as she expects. Dallas Fed President Robert Kaplan on Tuesday said that the Fed still has “more work to do” but that the Fed is “moving toward a period where we should begin allowing the balance sheet to gradually and patiently run off.” Kansas City Fed President Esther George said on Tuesday that a smaller balance sheet probably won’t happen quickly but that “you will hear more people talking about the Fed’s balance sheet.” Noted-dove Minneapolis Fed President Neel Kashkari said on Monday that he would like to see a plan on balance sheet normalization “before we increase the federal funds rate again.”
U.S. new home sales expected to remain strong — The market consensus is for today’s Feb new home sales report to show a +1.8% increase to 565,000, adding to January’s +3.7% climb to 555,000. New home sales have remained strong in recent months at just mildly below the 9-year high of 622,000 posted in July 2016.
New home sales have been driven by strong consumer confidence and the extremely tight supply of existing homes on the market, which has likely driven some buyers to buy new homes instead. In addition, the price of new homes is reasonable compared with existing homes. The ratio of the median price of new homes ($312,900) versus existing homes ($228,900) is currently at 1.38, which is near the middle of the range of 1.20-1.55 seen in the past six years. The question going forward, however, is whether higher mortgage rates will dent new home demand.
The supply of new homes on the market is only mildly tight at 5.7 months, which is just below the long-term average of 6.1 months. The supply of new homes has been boosted by active home building as shown by the fact that U.S. housing starts are near a 10-year high. Home builders are extremely optimistic as seen by the +6 point rise in the Feb National Association of Home Builders’ housing market index to a new 12-year high of 71.
The stock prices of U.S. housing companies have done very well in the past several months due to the strong housing market and the post-election euphoria. While the SPDR S&P Homebuilder ETF (XHB) has fallen this week, it posted a 1-1/2 year high last week and is still up by +15% since the November election.
U.S. unemployment claims remain in very good shape — U.S. businesses continue to engage in the lowest level of layoffs in decades, providing another illustration of the tight U.S. labor market. Initial unemployment claims are only +18,000 above the 44-year low posted in late-Feb while continuing claims are only +47,000 above the 17-year low of 1.983 million posted in Nov 2016. The consensus for today’s report is for initial claims to fall by -1,000 to 240,000 (adding to last week’s -2,000 to 241,000) and for continuing claims to rise by +10,000 to 2.040 million (vs last week’s -30,000 decline to 2.030 million).
10-year TIPS auction to produce yield near 0.41% — The Treasury today will auction $11 billion of 10-year TIPS in the first reopening of the 3/8% 10-year TIPS note of Jan 2027. Today’s 10-year TIPS issue was trading at 0.41% in when-issued trading late yesterday. The 12-auction averages for the 10-year TIPS are: 2.36 bid cover ratio, $22 million in non-competitive bids, 7.0 bp tail to the median yield, 15.3 bp tail to the low yield, and 47% taken at the high yield. The 10-year TIPS is by far the most popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buying, have taken an average of 68.4% of the last twelve 10-year TIPS auctions, well above the average of 59.3% for all recent Treasury coupon auctions.
