Morning Report: Digesting the FOMC minutes

Vital Statistics:

S&P futures4,104-8.8
Oil (WTI)62.44-0.97
10 year government bond yield 1.66%
30 year fixed rate mortgage 3.18%

Stocks are weaker this morning as the global sell-off continues. Bonds and MBS are flat.

The FOMC minutes didn’t have anything too earth-shattering. The economic projections prepared for the April meeting were slightly better than the ones for the March meeting. Inflation was expected to increase to above 2% for the rest of the year as COVID depressed prices in 2020, which makes the year-over-year growth exaggerated. Inflation is expected to fall below 2% next year as these YOY comparisons fall away.

The FOMC expects consumption to accelerate this year, driven by pent-up demand. So far, we are not really seeing that in the data – the personal incomes and personal spending numbers show an increase in the savings rate. They believe that the elevated savings rate will translate into higher spending in the future.

The FOMC also mentioned the tight labor market, along with the elevated unemployment rate, but made no effort to try and square the two. Businesses are struggling to find qualified workers (#1 concern of the NFIB Small Business Survey), yet the number of job losses during the pandemic was 10 million and the FOMC considers itself far from achieving its goal of full employment. To me, that is one of the big mysteries right now. It is almost as if these 10 million people exited the labor force and have no intentions of returning. I suspect the answer is a skills mismatch. Skilled labor was hard to find before the pandemic, and that is still the case. That would explain the NFIB data. Unskilled labor should be in a surplus, however it seems like every fast food place and supermarket has a “help wanted” sign on it. Definitely strange.

Regarding real estate, they did note that house prices have accelerated this year, and mortgage credit is bifurcated by credit score. Above 700, one can get a loan easily. Below that level it gets difficult. No mystery there: forbearances explain that.

The conclusion is that the Fed still has a way to go in order to achieve their goal of full employment, but the economy has improved enough that they felt comfortable removing the term “considerable” from its characterization of the downside risks to the economy.

Initial jobless claims are still elevated, with 444k filings last week. Pre-COVID, that number was closer to 200k.

On the subject of inflation, rising housing prices might be a big contributor here going forward. Owner’s Equivalent Rent (which is admittedly an “inside baseball” stat) basically tries to estimate what a homeowner would get for their house if they rented it out. If house prices rise, so does owners equivalent rent. This may sound like a theoretical exercise, and it is, but it is almost a quarter of the Consumer Price Index and 15% of the Personal Consumption Index. It is also a lagging indicator, so this will accelerate the inflation numbers going forward.

Supposedly the Reddit crowd that pushed Gamestop is now chattering about the mortgage bankers, and according to the Detroit Free Press is looking to squeeze the shorts in United Wholesale. This happened to Rocket a month or so ago and pushed it to $40 per share. Note that Loan Depot was up big intraday yesterday as it introduced a quarterly dividend.


Author: Brent Nyitray

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

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