Morning Report: Spending falls in May

Vital Statistics:

S&P futures3,775-45.75
Oil (WTI)109.21-0.94
10 year government bond yield 3.03%
30 year fixed rate mortgage 5.90%

Stocks are lower as we end a hideous quarter for the markets. Bonds and MBS are up.

FGMC has filed for bankruptcy. It won’t affect closed loans and the company obtained DIP financing. “While we have made considerable efforts to address our ongoing financial challenges related to the state of the mortgage market, we ultimately must do what is best for our borrowers and consumers,” said Aaron Samples, chief executive officer of FGMC. “After careful review and consideration, the Company determined that pursuing the protections of chapter 11 is the right and responsible path at this time. As part of this process, the Company retained a portion of its workforce to manage the day-to-day business. We are requesting that the court approve a variety of motions that will promote a smooth transition for all pertinent parties while also preserving value for the benefit of the Company’s stakeholders.”

Personal incomes rose 0.5% MOM, according to the Bureau of Economic Analysis. This number was in line with expectations. Personal consumption expenditures came in light, rising only 0.2%, when the Street was looking for a 0.5% increase. If you adjust for inflation, spending fell 0.4%.

The inflation indices were at least somewhat encouraging. PCE Inflation rose 0.6% MOM, which was an increase however the YOY change was flat at 6.3%. Ex-food and energy PCE inflation rose 0.3% MOM and fell to 4.7% YOY.

Overall, the spending number is discouraging, and indicates that second quarter GDP might be weaker than people are thinking.

Jerome Powell said yesterday that he was more concerned about the risk of inflation than the risk of recession. Is there a risk we would go too far? Certainly there’s a risk,” Mr. Powell said Wednesday. “The bigger mistake to make—let’s put it that way—would be to fail to restore price stability.” He was speaking at the European Central Bank’s annual economic conference.

The risk is that the economy transitions into a higher-inflationary regime where higher inflationary expectations get baked into the economy. This happened in the 1970s, and the Fed found itself with a economy where growth stagnated and inflation kept ratcheting higher. The state of affairs was eventually described via the misery index, which was the sum of inflation, unemployment and interest rates.

Inflationary expectations tend to have reinforcing effects. People tend to accelerate purchases in order to buy before prices rise. This exacerbates shortages. Workers expect annual cost-of-living increases which further increases the prices of finished goods. This psychological phenomenon is what the Fed is trying to ward off.


Author: Brent Nyitray

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

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