Morning Report: Labor costs and compensation rise, profits fall

Vital Statistics:

S&P futures4,631-27.2
Oil (WTI)70.12-1.18
10 year government bond yield 1.44%
30 year fixed rate mortgage 3.31%

Stocks are lower this morning as we begin the December Federal Open Market Committee meeting. Bonds and MBS are down small.

Inflation at the wholesale level rose 0.8% MOM and 9.6% YOY, according to the Producer Price Index. These readings were well above Street expectations. Ex-food and energy, prices rose 0.7% MOM and 7.7% YOY. This is the biggest increase in over 10 years. The PPI tends to lead the CPI, so this is indicating that pricing pressures will accelerate over the near term.

Small Business Optimism increased in November, according to the NFIB. A couple of interesting data points regarding inflation: First, a net 44% of companies reported increasing compensation, which is a 48-year record high reading. 10% of businesses said labor costs were their biggest problem and 29% said that labor quality was their biggest problem. Second, a net 59% of businesses reported raising prices. You can see the chart going back to the mid-80s below:

At the same time, small business earnings are being squeezed by higher prices and shortages.

These two charts don’t look bullish for stocks. Especially since the Fed is taking away the punch bowl.

Home prices rose 1.3% MOM and 18% YOY according to CoreLogic. They forecast that home price appreciation will stall out over the next 12 months as interest rates rise and negatively affect affordability. FWIW, I don’t see it as wage growth will more than offset any increase in mortgage rates, and the supply / demand situation is too imbalanced.

In inflationary times, real estate is one of the best-performing investments. Real Estate outperformed inflation during the 1970s, and destroyed stocks and Treasuries.

New York and New Jersey mortgage brokers throw down in AC.


Author: Brent Nyitray

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

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