Land, They Aren’t Making More Of It, Or Are They?

Land, They Aren’t Making More Of It, Or Are They?
Hong Kong is evaluating creating floating offshore communities to help with their housing crisis.  Sound far fetched?  Not really, considering many of our largest U.S. Cities like Chicago and Boston created land to expand their city’s footprint.
But instead of using timbers, cement and land fill to expand the shorelines like in Chicago, Hong  Kong is considering a “floating community” formed of cruise liners, with its own community square, gardens, open-air theater and shopping malls, and taking a ferry to get to work in a downtown area.  It may sound futuristic, but a Hong Kong think tank has suggested this could be an efficient solution to the city’s housing shortage and sky-high property prices.
Each community would comprise 66 cruise ships connected to floating piers and a central deck, with each ship providing some 4,000 flats ranging from 183 sq ft to 549 sq ft.
Based on the construction cost of existing hotels converted from cruise liners and an assumed average living space of 192 so ft. per person, the cost per capita would be about HK$1.2 million.
Technologies have already been developed to support floating facilities, and many existing hotel projects such as the RMS Queen Mary in Long Beach in California proved that the project was feasible.

What Happened to Rates Last Week?

Mortgage backed securities (FNMA 3.50 MBS) gained +37 basis points (BPS) from last Friday’s close which caused fixed mortgage rates to move lower for the week.

Overview:  A very interesting and telling week.  If there was any question on what is the most important thing for long bond traders right now…we answered that question last week.  The answer?  Tax Reform.  We had a Fed Meeting – bonds did nothing, we had a new Fed Chair – bonds did nothing.  We had some of the strongest economic data that we have ever seen – bonds did nothing.  All three of those these would normally be very negative for bond trades (pushing mortgage rates higher).  But instead bonds traded higher (pushing mortgage rates lower).  Why?

Tax Reform: While both sides are debating the merits and impact of the tax cuts on individuals, the bond markets are focusing on Corporate Taxes.  The current proposal of a flat 20% corporate tax rate and a 12% rate on money brought back from overseas is very stimulative to our macro economic picture and would be something that bonds would not like.  However, even Republicans are balking at the changes to SALT deductions, the market sentiment currently is that this tax bill will not pass.  And that means no new stimulative reform to our economy and that is very bond friendly.

Manufacturing: The October ISM National Manufacturing Index was very strong, coming in at 58.7 vs est of 59.5. Any reading in the upper 50’s is huge.  Prices Paid hit 68.5 vs est of 68.0
The October Chicago PMI was a block-buster!  It hit 66.2 vs est of 61.0.  Any reading above 50 is expansionary and a reading above 60 is rare and very robust.  New Orders were very strong and backlogs hit a 43 year high.

ISM Services:  Was a blockbuster, breaking above 60.0 for only the 4th time in 27 years.  The October reading hit 60.1 vs est of 58.6.  This represents more than 2/3 of our economy.

Jobs, Jobs, Jobs:  Big Jobs Friday!
We got a mixed bag with the jobs data with real strength in hiring but real wage pressure is once again evasive.

Tale of the Tape:
Non-Farm Payrolls (1st release) for October 261K vs est of 310K
September NFP (2nd release, one more revision to come) revised higher from -33K to +18K (51K swing)
August NFP (3rd and final release) revised higher from 169K to 208K (39K swing)
The more closely watched 3 month moving average is now 162K.
Average Hourly Wages MOM was flat at 0.0% vs est of 0.3%
Average Hourly Wages YOY increased by 2.4% which was at a slower pace than in September (2.8%).
The Unemployment Rate fell to 4.1% vs est of 4.2%.
The Participation Rate fell from 63.1% in September down to 62.7% in October.

The “Yawning” Fed:  They left their key interest rate and asset purchase program alone.
The Fed seemed slightly more positive (and perhaps hawkish) by upgrading the economy from growth “moderately” to “at a solid rate” even as it cautioned that “Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft.”
Here are a few highlights from their statement:
Fed says economic activity rising at solid rate despite storms
Fed: inflation for items other than food, energy remained soft
Fed: storms unlikely to alter economy’s medium-term course
Fed: labor market continued to strengthen, unemployment declined
Fed: spending rising at moderate rate, investment picked up
Fed repeats market-based inflation compensation gauges still low
Fed repeats sees inflation stabilizing around 2% medium term

What to Watch Out For This Week: