Stocks are lower this morning after the US conducted some additional strikes on Iran. Bonds and MBS are down small.
Personal incomes were flat in April, according to the Bureau of Economic Analysis. Personal consumption expenditures (i.e. spending) rose 0.5%. The PCE Price index decelerated to 0.4% MOM from 0.7% in March. This was better than expectations. Ex food and energy, the index rose 0.2%, again below expectations. YOY numbers were 3.8% on the headline and 3.2% on the core.
Chicago Fed President Austan Goolsbee said that energy inflation has been persistent and represents a potential stagflationary shock for Asian economies. Given that China is still in the very early stages of dealing with a burst real estate bubble, that gives them an incentive to tell Iran to knock it off and re-open the Strait of Hormuz.
Separately, he said he didn’t regret his dissenting vote at the last Fed meeting and worries about AI investment and the stock market creating artificial wealth that fuels excessive consumer spending. “I want people to just pay attention to, are you seeing big increases in consumer spending fueled by stock market wealth increases? Are you seeing data center investment driving up the cost of electricity of construction workers and having this short-run impact upon inflation in the U.S.?”
Ultimately, AI should be a productivity-enhancing phenomenon which raises the speed limit of the economy. In other words it should allow the economy to grow faster while containing inflation. But in the short term, the chip stocks are headed to the moon, and AI data center construction is consuming resources.
Minneapolis Fed President Neel Kashkari said that the inflation fight takes precedence over the labor market. “I am focusing heavily on inflation. I’m not ignoring at all the labor market. We need to pay attention to both sides, but the labor market is in decent shape right now, while inflation is simply much too high,” he said.
Inflationary expectations are increasing, at least according to some of the consumer sentiment surveys like the University of Michigan Consumer Sentiment Index. If inflationary expectations become embedded into the economy and start to drive behavior, it could cause the Fed to act more aggressively. “If that were to happen, then we’d have to respond even more aggressively, so we’re much better off doing what we need to do to keep inflation expectations anchored.”
University of Michigan Inflation expectations:
All-cash purchases declined to 29% in March, according to research from Redfin. All-cash purchases peaked at 35% in 2023, largely because mortgage rates were elevated during that time. Even though the 10 year bond has been relatively steady over the past year, mortgage spreads (i.e. the difference between the mortgage rate and the 10 year treasury) have fallen. Add to that the increasing uncertainty overall over the past year or two (tariffs, Iran) and investors are reluctant to commit that much cash. The outsized home price appreciation we saw during 2022-2023 is also over and real estate prices are flattish on a YOY basis. This tends to draw speculative money out of the system.
All-cash purchases were most prevalent in Cleveland and West Palm. Florida was ground zero of the real estate gold rush during COVID, then it went through a decline due to expensive HOA assessments and insurance worries. The Rust Belt never experienced much of a rally after the bubble burst but is now becoming attractive to buyers who have been priced out elsewhere.
