Morning Report: Incomes leap, spending not so much

Vital Statistics:

S&P futures4,184-19.8
Oil (WTI)63.53-1.47
10 year government bond yield 1.64%
30 year fixed rate mortgage 3.20%

Stocks are lower this morning on no real news. Bonds and MBS are flat.

Personal incomes rose a whopping 21% in March, driven by stimulus payments. Personal spending rose only 4.2%, which is another indication that people are saving their stimulus checks, not spending them. Saving includes debt payments, which is probably what people are doing with the money.

The Personal Consumption Expenditure price index rose 2.3% in March. Ex-food and energy it rose 1.8%. This is the inflation index the Fed pays the most attention to, and it is really the core index (excluding food and energy) that the the Fed focuses on. Note the “market based” index, which is a supplemental index that excludes some other bootstrapped readings, rose 1.6% ex-food and energy. Bottom line, inflation remains below the Fed’s target rate, and that means policy is going nowhere for the time being.

The employment cost index rose 0.9% in the first quarter and 2.6% on a year-over-year basis. Wages and salaries rose 2.7%, while benefits costs rose 2.5%.

Pending Home Sales rose 1.9% in March, according to the National Association of Realtors. Year-over-year contract signings were up 23%, however they were unusually depressed last year due to COVID. NAR projects that existing home sales will increase by 10% to 6.2 million in 2021, and home prices will rise about 9%. They see housing starts rising to 1.6 million in 2021 and 1.7 million in 2022. That might not be enough to meet demand however.

New Construction accounts for a quarter of homes for sale, according to a study by Redfin. This is due to both increased homebuilding and fewer existing homes for sale. “New construction has typically been a good option for buyers who don’t want to deal with bidding wars because builders don’t usually set deadlines for offers. Buyers also like that they can often buy a new home for what it’s actually listed for rather than having to offer way over the asking price to win,” said Melanie Miller, a Redfin real estate agent in Houston. “However, inventory for new construction is very low and prices are now rising for many new and pre-construction homes because lumber prices have gone up. I had one buyer who came to terms with a builder at a certain price. The builder called us the next day and said they can’t do that price anymore because their suppliers just increased prices.”

The soaring costs of sticks and bricks are a big reason why new home costs are rising so much. For anyone who has swung by the Home Despot to work on a home improvement project, lumber costs are through are up almost fivefold over the past year:


Author: Brent Nyitray

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

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