Morning Report: Supply chain issues moderating?

Vital Statistics:

 LastChange
S&P futures4,80217.2
Oil (WTI)76.990.91
10 year government bond yield 1.68%
30 year fixed rate mortgage 3.41%

Stocks are higher this morning despite the backup in rates. Bonds and MBS are down.

Is inflation beginning to moderate? According to the latest ISM Manufacturing Index, prices paid fell from a net 84.2% to 68.2%. This is a survey-driven number, so accept it for what it is however this is at least the first indication that supply chain issues are beginning to ease up. Demand is still strong, which is a good sign, and employment rose as well.

Job openings decreased to 10.6 million in November, according to the JOLTS jobs report. Most of the decrease was in the leisure and hospitality sector. The quits rate increased to 3%, which matched the series high set last September. The quits rate is a good predictor of future wage inflation.

The Fed is looking at balance sheet reduction as another way to combat rising inflation. Prior to the pandemic, the Fed tried to reduce its holdings of Treasuries and mortgage backed securities, however it found that the economy was too weak to withstand it. Inflation was running below the Fed’s 2% target, and the central bank was worried about the economy slipping into disinflation, if not outright deflation.

The situation today is much different. Inflation is running above the Fed’s target, and the labor market is much stronger. In mid-December, Jerome Powell said:  “This is just a different situation, and those differences should inform the decisions we make about the balance sheet at this time.”

Strategists are lobbing in their forecasts for rates next year. Bankrate sees the 30 year mortgage rate hitting 3.75% next year before falling to 3.5%. The MBA sees the 30 year fixed rate hitting 4%. Everyone agrees that 2022 will be a purchase-driven market as rate / term refi activity dries up.

Home price appreciation hit 18.1% in November, according to CoreLogic. Lower-priced homes are seeing the fastest appreciation. Arizona, Florida and Idaho all experience 25%+ growth. Separately, affordability has fallen below historical average, according to ATTOM. Home ownership costs on the typical home constituted 25.2% of the average wage in the fourth quarter, up from 24.4% in Q3 and 24.1% last year. That said, the labor market is tight and wages are rising.

Author: Brent Nyitray

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

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