Morning Report: 40 years is a long time in retailing

Vital Statistics:

S&P futures4,452-31.2
Oil (WTI)94.55-3.69
10 year government bond yield 2.76%
30 year fixed rate mortgage 5.13%

Stocks are lower this morning as COVID cases ramp up on China. Bonds and MBS are down.

The upcoming week has some inflation data with CPI and PPI on Tuesday and Wednesday. These readings will reflect the impact of the Russian invasion on food and energy prices, and the Street is looking for 8.4% inflation on the headline number and 6.6% ex-food and energy. The Producer Price Index, which measures wholesale inflation is expected to come in at 10% on the headline number and 8.4% ex-food and energy.

My guess is that the Fed is going to hike by 50 basis points at the May meeting regardless of how the numbers come in, so it shouldn’t be market-moving. That said, bond investors are in a “shoot first and ask questions later” mood, so we could see a sell-off regardless.

Mortgage backed security spreads (which are basically the yield on a mortgage backed security minus the yield on the corresponding treasury) are at 1.15%, which is well over long-term averages. Historically, it has been around 0.9%, so perhaps mortgage rates will stabilize around these levels. One can only hope.

The big fear in the markets right now is that the Fed is going to cause a recession in 2023 as increasing interest rates sap economic growth. Investors are watching the spread between the 10 year bond and the 2 year bond as an indicator. If the economy is heading into a recession, you would expect to see corporate bond yields creeping up, and that is most certainly not the case. just issued a 40 year bond at Treasuries + 1.55%. This means you can tie up your money at 40 years an earn a whopping 4.3% per year. In retailing, 40 years is eons. Who were the top retailers in the early 1980s? Federated Department stores, Sears, K Mart, F.W. Woolworth, and Dayton-Hudson (Wal Mart was still in the early growth stage). Federated became known as Macy’s, and Dayton-Hudson is know known as Target.

What do the top 4 have in common? They all have declared bankruptcy at some point, and their debt traded down to distressed levels.


Author: Brent Nyitray

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

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