Mortgage deduction might be going away

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Published Date 10/16/2017

A weaker open in the rate markets this morning; the stock indexes continue to advance. Once again back in earnings season: one-third of the DJIA stocks will report this week. The overall outlook looks good for earnings and will continue to drive stocks further into the stratosphere.

Last Friday, a strong rally in the bond and mortgage markets. September PPI and CPI out last week, adding more debate about why inflation is not increasing. The Fed released the minutes from the September meeting, noting that there was an increasing debate within the FOMC about why inflation isn’t following historic models that imply by now inflation in wages should be increasing with unemployment at 4.0% levels (4.2% in September). The Fed is still widely expected to increase the Federal Funds rate again in December, although we doubt it is built into present interest rate levels; too much time between now and December for traders to begin making serious bets.

Boston Fed Eric Rosengren speaking; believes the Fed will have to increase the FF rate three to four times over the next year, beginning at the December meeting. But as always with Fed officials that have outright forecasts, Rosengren fell back saying it depends on increasing inflation. The Fed and its regional presidents continue to say the same thing, always ending it with the IF about inflation. We agree; inflation in wages then in prices is not marching to the prior drummers. The comments mark Rosengren, who does not vote on policy this year, as slightly more hawkish than most of his colleagues.

This afternoon at 2:00 pm EDT, Treasury will report the September balance, expected +$3B in September after $107.7B in August. It is the end of fiscal 2017, so we will have the annual deficit for the year.

The unfolding tax cut plans, still in flux, but what is being discussed: the potential to virtually eliminate a break lawmakers once considered untouchable--the mortgage interest deduction. So far it hasn’t been ruled out, but it may not matter if the standard deduction doubles as is being talked about. Only the highest earners would continue to itemize their deductions, and only a few of them would take the mortgage break. For most taxpayers, the standard deduction is likely to be the better option. Under current law, a typical homeowner would need to purchase a home worth at least $305,000 to make taking the break worthwhile, according to Zillow, while under the proposed law that would shoot up to $801,000. The median home value in the U.S. is just over $200,000. Tax reforms (cuts) still far from being close to any significant agreements.

Technically, the 10 yr. note has near term support at 2.32%, after declining Friday on weaker CPI data back to 2.30% this morning on the usual stock market gains. Crude oil higher on concerns supply lines may be interrupted from Kirkuk as Iraqi fighting intensified; also, the constant talk from oil producing companies on continuing to keep cuts announced last November will continue.

This Week’s Calendar:

Today
- 8:30 am NY Empire State manufacturing index (expected at 21, increased to 30.2 from 24.2)
- 2:00 pm September Treasury budget statement (+$3.0B; 2017 deficit also calculated)
Tuesday
- 8:30 am September Import and Export prices (imports +0.5%, exports +0.4%)
- 9:15 am September Industrial production and capacity utilization (production +0.1%, cap utilization 76.2% from 76.1% in Aug)
- 10:00 am Oct NAHB housing market index (64, unch from Sept)
Wednesday
- 7:00 am MBA weekly mortgage applications
- 8:30 am September housing starts and permits (starts 1170K -0.8%: permits 1230K -5.4%)
- 2:00 pm Fed Beige Book
Thursday
- 8:30 am weekly jobless claims (-3K to 240K) Oct Philadelphia Fed business index (20.2 from 23.8 in Sept)
- 10:00 am September leading economic indicators (+0.1%)
Friday
- 10:00 am September existing home sales (5.30 mil from 5.35 mil; -0.9%)

Source: TBWS

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