Morning Report: New home sales disappoint

Vital Statistics:

 LastChange
S&P futures4,395-6.2
Oil (WTI)71.84-0.25
10 year government bond yield 1.24%
30 year fixed rate mortgage 3.03%

Stocks are lower this morning on resurging COVID fears. Bonds and MBS are up.

New home sales fell to 676,000 in June, according to Census. This is 6.6% below the May reading and 19% below last year’s reading. The Street was looking for 800k, so this is a sizeable miss. That said, the margin for error in new home sales estimates is pretty large, so this one might be revised upward in the future.

The big event this week will be the FOMC meeting on Tuesday and Wednesday. No changes in rates are expected, although the market will be looking for language regarding tapering bond and MBS purchases. Aside from the FOMC meeting, we will have some important data with durable goods, personal incomes / spending and GDP.

While the headline inflation numbers seem high compared to recent history, much of this is simply due to COVID-19 – related factors, and should therefore prove to be temporary. The market seems to agree, as longer-term inflationary expectations are falling, at least if you look at the difference between normal Treasuries and inflation-indexed Treasuries. This should give the Fed at least some comfort that inflation isn’t getting out of hand.

Of course the inflation that we have had since the 1970s has been asset inflation, not goods and services inflation. In other words, we have had too much money chasing too few assets, not too much money chasing too few goods. Increased productivity and globalization have also helped keep goods and services inflation low.

IMO the big question re inflation will be wages. Wage-push inflation has largely been non-existent since the 1970s. Union contracts were a big factor in baking in inflationary expectations, and a resurgence of private sector unions probably isn’t in the cards anymore. Job descriptions (and compensation) are way too customized today.

The US population appears to have crested. It looks like the US population grew 0.35% for the year ending July 1 2020. “The economy of the developed world for the last two centuries now has been built on demographic expansion,” said Richard Jackson, president of the Global Aging Institute, a nonprofit research and education group. “We no longer have this long-term economic and geopolitical advantage.”

Economically, an aging population (which is the flip side of low fertility rates) is not inflationary in the least. Old people have bought their stuff already, and their consumption falls. The model is Japan, which has had little to no economic growth (and a debt to gdp ratio of 2.3x) for a generation.

The post-COVID economy will be a test of the Reinhardt-Rogoff model which says that a high level of debt relative to GDP acts as an anvil on economic growth. If the model is correct, we may see flat GDP growth for another decade or two, which is deflationary, not inflationary.

Author: Brent Nyitray

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

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