Morning Report: Putting inflation into perspective

Vital Statistics:

S&P futures4,17422.8
Oil (WTI)71.82-0.34
10 year government bond yield 1.47%
30 year fixed rate mortgage 3.22%

Stocks are higher this morning on no real news. Bonds and MBS are up.

The 10-year traded as low as 1.36% in the overnight session. Not sure what was driving that, but after the FOMC increase in rates last week based on the updated dot plot, the 10 year has done nothing but fall in yield. Like usual, mortgage backed securities (which determine mortgage rates) have been lagging the move.

We will have a decent amount of economic data this week with existing home sales, new home sales, personal incomes and spending, and GDP. The GDP number is the third estimate for the first quarter. We will also have a lot of Fed-Speak.

The economy picked up in May, according to the Chicago Fed National Activity Index. That said, the number came in way below expectations. The CFNAI is sort of a meta-index of 85 different economic indictors. The COVID lockdowns of a year ago are introducing all sorts of noise into just about every economic statistic. The punch line is that economic growth has probably peaked for the year.

Invitation Homes CEO Dallas Tanner is sanguine about the housing market: “I would expect that home prices stay relatively stable, if not continue to grow in value for the homeowners in the country, but we’ll find our ways to pick our spots whether through our partnerships with builders or our ability to buy one-off,” Tanner said. “We view the housing environment overall as extremely healthy.”

With the big increases in housing prices this year, the media types are asking questions about whether we have another housing bubble, similar to 2006. The United States does not. Other countries do. Housing bubbles are quite rare, and only come around once or twice a century. A lot of pieces need to be in place to create one, and the biggest one is a belief amongst buyers, sellers, lenders, and regulators that an asset is “special” and cannot fall in price. Anyone who is old enough to sign a mortgage doc knows that isn’t the case.

Buyers are beginning to balk at higher home prices, according to a report from Redfin. Its Homebuyer demand index peaked about 9 weeks ago, and is down 14% since. “Offers no longer pour in the day a home hits the market,” said Phoenix Redfin real estate agent John Biddle. “It has become more common for offers to come in at least a few days after a home is listed for sale. If this were three years ago, we’d marvel at how fast the market was, but it’s a clear slowdown from a few weeks ago. Now that things are opening up again and the summer is almost here, people have other priorities, like going on vacation. Plus, many homebuyers are frustrated and tired of competing, so they’ve stepped back—for now at least.”

With inflation rising, it is helpful to put the numbers in perspective. Inflation is going to be high for the rest of the year as shortages and COVID noise drive up the numbers. The Fed predicts that the Personal Consumption Index will rise 3.5% this year. Take a look at the chart below and see what that looks like historically.

Not too dramatic, is it? Certainly not like the 1970s, which were driven mainly by oil prices. If anything we are headed back to historical norms after a bout of exceptionally low inflation. The question the Fed is grappling with is how much of the current inflation is due to COVID and how much is not. That will depend largely on wage growth, and given the seemingly ubiquitous “help wanted” signs these days these price increases may turn out to be more permanent.


Author: Brent Nyitray

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

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