Morning Report: Supply bottlenecks remain a headwind

 LastChange
S&P futures4,31322.2
Oil (WTI)78.741.16
10 year government bond yield 1.50%
30 year fixed rate mortgage 3.16%

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

Home prices rose 18% in August, according to CoreLogic. Frank Martell, CEO of CoreLogic said: “Home prices continue to escalate at a torrid pace as a broad spectrum of buyers drive demand for a limited supply of homes. We expect to see the trend of strong price gains continue indefinitely with large amounts of capital chasing too few assets.” Some of the states experiencing high appreciation include Idaho (up 32%), Arizona (up 30%), and Utah (up 24%). New York and North Dakota increased less than 5%. CoreLogic sees home price appreciation pretty much ending here, with only a 2.2% increase over the next year.

The number of loans in forbearance fell to 2.89% of servicers’ portfolios last week. “Exits increased and new requests and re-entries declined,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “While 1.4 million homeowners remained in forbearance as of September 26, this number is expected to drop sharply over the next few weeks as many are reaching the 18-month expiration point of their forbearance terms. Most borrowers exiting forbearance through a workout are opting for a deferral plan, which allows them to resume their original payment, while moving the forborne amount to the end of the loan.”

The ISM Services index rose 0.2% in September to 61.9%. “According to the Services PMI®, 17 services industries reported growth. The composite index indicated growth for the 16th consecutive month after a two-month contraction in April and May 2020. The slight uptick in the rate of expansion in the month of September continued the current period of strong growth for the services sector. However, ongoing challenges with labor resources, logistics, and materials are affecting the continuity of supply.”

The overall theme of the report is that demand is strong, however persistent supply shortages and a lack of workers continue to be a headwind for the economy. Here are some comments from respondents:

We continue to deal with extended delivery lead times and high costs. Stress on the supply chain beginning to be reflected in the quality of products offered and delivered. Current buying strategy is to wait — except with equipment, as (price) increases are expected.” [Utilities]

Continued constrained supply of many key product groups. Also, inflationary pressures in most areas of the business keep driving costs higher. Inconsistent COVID-19 restrictions throughout the country are creating unstable business conditions that are concerning. However, business continues to be strong overall.” [Wholesale Trade]

“Retaining clinical and temporary staffing is critical at this time. With the Delta variant’s spread, we continue to see increased (COVID-19) cases, but not as bad as January 2021. Vaccinations are clearly working. Most inpatient hospitalizations are of unvaccinated patients. The supply chain is still being impacted significantly by increased lead times for equipment and supplies.” [Health Care & Social Assistance]

The Evergrande situation in China continues to snowball. The troubled real estate developer is looking to do a $5 billion property sale, which is a drop in the bucket compared to the $300 billion it owes. Fantasia Holdings, another Chinese developer just missed a bond payment as well.

If the Chinese real estate bubble is indeed finally bursting, this will be a worldwide drag on asset prices and interest rates.

Author: Brent Nyitray

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

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