Morning Report: Economy accelerating into the fourth quarter

Vital Statistics:

 LastChange
S&P futures4,70013.2
Oil (WTI)78.550.23
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.27%

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

Initial Jobless Claims came in at 268k last week. We are still well above pre-COVID levels, but at least the numbers are trending down.

The index of leading economic indicators increased in October, according to the Conference Board. The index rose 0.9% after increasing 0.7% in August and September.

“The U.S. LEI rose sharply in October suggesting the current economic expansion will continue into 2022 and may even gain some momentum in the final months of this year,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Gains were widespread among the leading indicators, with only the average workweek and consumers’ outlook making negative contributions.

“However, rising prices and supply chain bottlenecks pose challenges to growth and are not expected to dissipate until well into 2022. Despite these headwinds, The Conference Board forecasts growth to remain strong in the fourth quarter at around 5.0 percent (annualized rate), before moderating to a still historically robust rate of 2.6 percent in Q1 2022.”

Here is a good video describing what happened with Zillow Offers and the Orlando housing market. The Wall Street Journal also had a long piece about how Zillow’s algorithm got it so wrong. Zillow was obviously chasing properties in the hottest markets (especially Phoenix) and was overestimating the value that its improvements. It looks like the company is stuck with inventory and will be selling them at a 5% – 7% loss.

New York Fed Head John Williams spoke yesterday about Fed interventions into the Treasury and financial markets. If you were hoping that the Fed might allow the market for interest rates to become, well, a market, then you might be disappointed.

It’s also clear that we need not start from a position of how things are, but instead, how they should be. Let’s not think of how we can reform, but how we can design. Let’s create a system that can better withstand the unforeseeable and the unpredictable.

The problem with “designing a market” is that interest rates are an important input into the economy. They transmit critical information about the supply and demand for capital. For the last 12-13 years, the Fed has been actively intervening in the interest rate markets. God knows how they will handle the disruption if / when the sovereign debt bubble bursts.

The choice for the next Fed Head is between Jerome Powell and Lael Brainard. She is perceived as more dovish than Powell. The market perceives Brainard as more political than Powell: “Powell, I think, will be much less concerned about the midterm elections in determining when they should raise interest rates,” said Peter Boockvar, chief investment officer at Bleakley Global Advisors. “I’m not saying that’s what Brainard is going to do if she’s in that seat, but that’s going to be the perception.” FWIW, the Fed has historically been loath to make any monetary policy changes late in a Presidential election year, but this is the first time I have heard a mention of midterms.

The impact on the Treasury market would be worse (at least for mortgage bankers) if Biden nominates Brainard. She will be viewed as more inflationary. FWIW, the Fed Funds futures are still handicapping either two or three rate hikes next year. Brainard would mean a steeper yield curve (in other words a bigger difference between long-term and short-term rates).

Author: Brent Nyitray

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

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