Morning Report: Small Business is raising prices

Vital Statistics:

S&P futures4,150-31.8
Oil (WTI)64.45-0.47
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.10%

Stocks are lower this morning as the global tech stock sell-off continues. Bonds and MBS are down.

Small business optimism rose to a level of 99.8 in April, according to the NFIB Small Business Optimism Survey. Interestingly, the biggest problem for companies is finding qualified workers. 44% of companies reported having issues in hiring, which is a record. Companies are offering higher compensation and bonuses. On the inflation front, a net 36% of business owners reported increasing prices, which is the highest level since April 1981 when a net 43% reported raising prices. The big question is whether this is a temporary phenomenon, driven by COVID shortages or something more permanent.

Loans in forbearance fell again last week, declining 11 basis points to 4.36% of servicers’ portfolios. Private label loans were unchanged while government and GSE both fell. “The pace in the declining share of loans in forbearance quickened in the last week of April. This 10th week of decreases reflected a faster rate of exits and a steady, low level of new requests,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Homeowners who have exited forbearance and been able to take up their original payment again are performing at almost the same rate as the overall mortgage servicing portfolio.”

Mortgage credit expanded in April, according to the MBA. “Credit availability rose in April, fueled by a 5 percent increase in conventional mortgage credit, as well as an expansion in agency programs for ARMs and high-balance loans,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The uptick in credit supply comes as the housing market and economy continue to strengthen. One trend that has developed in recent months is the rising demand for ARMs, driven by higher rates for fixed mortgages and faster home-price appreciation.” 

Despite the new limits out of Fannie and Fred, demand for second homes is more than double pre-pandemic levels. “The combination of the wealthy becoming wealthier, remote work turning into the new normal and low mortgage rates is creating an ideal environment for affluent Americans to buy vacation homes,” said Redfin Chief Economist Daryl Fairweather. “As long as the economy continues to grow, I don’t foresee demand for second homes slowing down anytime soon.” In seasonal towns, home prices are up a whopping 27%.

Dallas Fed President Robert Kaplan thinks the job market will strengthen this year and we should be ready to discuss tapering bond purchases soon. “Discussion is healthy, again sooner rather than later, because of these, maybe, side effects or even in some cases unintended consequences,” Kaplan said on Bloomberg TV, noting “excesses and imbalances” in financial markets including a sharp rise in house prices with private investors increasingly squeezing out families. “I hope at some point here in the not too distant future we can begin discussing this.”

One of the biggest quandaries for business and economists revolve around the disconnect between what employers say about the availability of labor and the unemployment numbers. Policymakers and the Fed are pulling out all the stops trying to support the labor market, believing that we have a major labor problem. At the same time finding qualified workers is the biggest problem for business. Wages are increasing, but jobs are not getting filled. What is going on?

If you ask the left, they will say that business owners are being greedy and they need to be forced to increase wages via higher minimum wage laws. If you ask the right, they will say that unemployment insurance is acting as a disincentive to work. I suspect that there is still a large number of people who are worried enough about COVID that they would rather stay home and avoid working. As more of the population gets vaccinated that number should fall.

Below is a chart of inflation versus productivity. Productivity determines real wage growth, although wages do correlate with inflation. Take a look at where inflation was in 1981, the last time the NFIB Small Business Survey reported this number of businesses raising prices.

To me, the big takeaway from the chart above is that inflation cycles are long and I don’t think we are headed back to the 1970s. That said, global central banks are working overtime trying to create inflation (and have engineered a sovereign debt bubble in the process). Given that COVID will create all sorts of statistical noise over the next year, I would be reluctant to buy into the inflation story quite yet.


Author: Brent Nyitray

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

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