Mortgage Rates Moved Up in Anticipation of Tax Bill Signing

Mortgage rates moved higher today and once again the 10yr is back working on its support at 2.40% (2.39%). MBS prices lower following the price of the 10yr. This morning the NAHB housing market index for December jumped to 74, the strongest measure since July 1999. The stock market continues to climb, bitcoin a little weaker and the CME began making a market for it.

With tax cuts coming, it is driving stocks higher, while inflation still holding long term rates stable. The House will vote it tomorrow afternoon according to the latest news. The cuts help mostly corporations and businesses but a carrot or two for middle income consumers. The bill caps the amount of state, local and property taxes individuals can deduct from their federal tax bills at $10,000. A mixed bag for individuals, including middle-class workers, by roughly doubling a standard deduction that does not require itemization, but eliminating or scaling back other popular itemized deductions and exemptions.

For investors in equity markets the process has been a green light to keep on buying, the DJIA up 5K in a year (25%), the other indexes also setting big records. At the end of the day, when Trump signs it, there will be much criticism about less for consumers and more for corporations. The counter view - if businesses pay less taxes it will trickle down to everyone with higher wages, but history has not always agreed with that idea. The dollar should be gaining strength on the tax cuts but not so, uncertainty that the bill would indeed be pushed through, and with some doubts also creeping in over the pro-growth effect the tax reforms would have.

There are a few key economic reports later this week but until Trump actually signs the tax cut bill the primary interest in markets is not the data, it is the tax bill. Will it be the trigger for the long overdue correction in the stock markets or fuel for more gains? Usually at year end markets slow and volume decreases as funds close their books and investors having less interest in their portfolios. History would suggest that if the equity markets do enter a correction phase it will likely happen in January and February. No one is selling Berkshire Hathaway, it hit $300K/share today.  In the mid-eighties its stock sold for about $3K.

A company called Longfin, it is a small cap stock that announced it will buy a block chain company, Ziddu.com.  Longfin had its initial offering on NASDAQ last week,  the announcement of the block chain dot com buy  sent the stock price of Longfin up 2000%.

In summary, tax reform passage seems virtually assured, and presumably is reflected in current pricing.  Barring unexpected drama (North Korean or Trump inquiry), I am guessing the rest of the year will be sedate in bond markets.  I have been locking applications closing within 30 days, and discuss the pros/cons of locking for clients further out.