Morning Report: Bonds down as Fed sees uptick in growth and inflation

Vital Statistics:

 LastChange
S&P futures3935-28.4
Oil (WTI)63.33-1.32
10 year government bond yield 1.75%
30 year fixed rate mortgage 3.30%

Stocks are lower this morning as rates head higher. Bonds and MBS are down.

The Fed maintained the Fed Funds rate at 0%, however the dot plot showed more voting members seeing rate hikes in 2022. You can see the change between December 2020 and March 2021 below:

The economic projections also changed a touch, with the 2021 GDP estimate increasing pretty markedly from 4.2% to 6.5%. They also see the unemployment rate falling to 4.5%, however inflation is expected to be above the Fed’s target by the end of the year. The forecast for headline PCE inflation is 2.4% and the forecast for core PCE is 2.2%. In December, they saw both inflation numbers at 1.8%, so the minutes will be an interesting read to see what has changed in their thinking.

Bonds initially rallied, sold off, and then rallied again after the meeting, however they are well lower this morning. European and Asian bond yields are up this morning, so perhaps the inflation numbers has investors spooked.

Lumber prices have tripled since last year, which is adding about $24,000 to the price of a house, according to the NAHB. COVID-19 related shutdowns in lumber mills drove the increase. “The elevated price of lumber is adding approximately $24,000 to the price of a new home,” Fowke said. “Though builders continue to see strong buyer traffic, recent increases for material costs and delivery times, particularly for softwood lumber, have depressed builder sentiment this month. Policymakers must address building material supply chain issues to help the economy sustain solid growth in 2021.” Not sure how policymakers i.e. government can address the issue aside from price controls and jawboning companies like Weyerhauser about “price gouging,” neither of which will do much.

I do wonder if the drop in February housing starts was driven by commodity / labor shortages or weather. Regardless, the price of new homes is rising, along with the cost of financing them. This is not going to help matters with the supply / demand imbalance.

Speaking of the supply / demand imbalance, 36% of home sales in February were above list, a record. “This is the strongest seller’s market since at least 2006,” said Redfin Chief Economist Daryl Fairweather. “Buyers outnumber sellers by such a huge margin that many homeowners are staying put because they know how hard it would be to find a place to move to. It seems like the only move-up buyers who are confident enough to list their homes are those who are relocating to a more affordable area where they’ll have an edge on the local competition.” Biden’s proposed $15,000 first time homebuyer tax credit will help but not much.

Initial Jobless Claims rose to 770,000 last week. In order to really see a meaningful recovery, these numbers have to get back to normalcy, which is in the 200,000 – 300,000 range. That said, the unemployment rate can fall despite this since anyone who has been unemployed for 6 or more months doesn’t count in the BLS unemployment numbers. The stat to watch for improvement is the employment-population ratio.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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