Morning Report: Personal incomes fall while employment costs rise

Vital Statistics:

S&P futures4,560-27.2
Oil (WTI)81.66-1.01
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.30%

Stocks are lower this morning after Apple and Amazon both missed earnings expectations. Bonds and MBS are down.

Personal incomes fell 1% in September, according to the Bureau of Economic Analysis. The drop in government assistance as extended unemployment benefits expired was the big driver. Wages and salaries rose by $80 billion while unemployment benefits fell by $255 billion. Consumer spending rose by 0.6%.

The Personal Consumption Expenditures index (PCE) rose by 0.3% MOM and 4.4% YOY. Ex-food and energy, it rose 0.2% MOM and 3.6% YOY. This is higher than the Fed’s preferred level, however the central bank (and Treasury) still consider the current spate of inflation to be temporary.

The Employment Cost Index rose 3.7% YOY as companies are raising wages in order to attract employees. One thing to keep in mind is productivity and wages. We saw 3Q GDP come in at 2%, while employment costs are rising much faster. This would imply falling productivity (output increasing slower than wage growth). Increasing productivity is the key to higher living standards, and when productivity is low, you generally see inflation and stagnation. Which is kind of where we are now.

To that point, Treasury Secretary Janet Yellen is peddling the idea that the Administration’s big spending package will be anti-inflationary because it will include subsidies for healthcare and childcare.

Pending Home Sales fell 2.3% last month, according to NAR. “Contract transactions slowed a bit in September and are showing signs of a calmer home price trend, as the market is running comfortably ahead of pre-pandemic activity,” said Lawrence Yun, NAR’s chief economist. “It’s worth noting that there will be less inventory until the end of the year compared to the summer months, which happens nearly every year.”

The hottest markets were Jacksonville, Tampa, Nashville and Denver. Pending Home sales dropped almost 19% YOY in the Northeast, while they declined mid-to-high single digits everywhere else.

Despite some of the disappointing economic data, the Fed Funds futures are increasing bets that interest rates rise next year. The December 22 Fed Funds Futures seem to be coalescing around 2-3 rate hikes next year. This is a huge jump from a month ago.


Author: Brent Nyitray

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

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