Stocks are higher this morning on no real news. Bonds and MBS are down.
Oil prices are working their way higher as optimism for a deal in the Strait of Hormuz fades. Markets are “confident that we can get to some sort of agreement, even if it may be a fudge,” Modupe Adegbembo, an economist at Jefferies, told CNBC’s “Squawk Box Europe” on Monday. “It may not be a great agreement, but it may be something that allows more oil and more things to flow through the Strait of Hormuz.”
If no deal materializes, we could see oil prices push higher, however the longer prices stay elevated the more marginal supply comes to market, especially in North America.
Small business optimism improved in July, according to the NFIB. The index rose above its highest level in a year. Hiring drove most of the increase, and eight of the ten components rose. Uncertainty rose, and expected sales fell. We got some good news on the inflation front – the net number of firms raising prices fell for the first time in four months. Labor quality / availability was listed as the number one problem, while fewer firms cited inflation.
Main Street has become a bit more optimistic about future economic
developments. The NFIB Small Business Optimism Index improved
significantly, managing to exceed the 52-year average. The gain was driven by a substantial improvement in hiring plans, accompanied by an improvement in plans to make capital expenditures. Capital investments have been driving economic growth, primarily AI investments in chips and structures to house them in. Although this is not primarily a small-firm activity, it looks like spillover business opportunities are reaching them.The stock market has been rewarding shareholders very well, and this is supporting a lot of spending by the wealthier consumers who hold equity. Restaurants, car dealers, home improvement companies, etc., all benefit from the wealth being created in the tock markets. Enjoy it while it lasts. The unemployment rate is staying low, and the inflation rate is bothersome, driven primarily by oil prices. A favorable resolution of the war with Iran will significantly reduce oil prices when it finally happens. The world has plenty of oil.
There was a significant decline in the full suite of inflation metrics, led by the percentage of owners raising their average selling prices. This is an especially good sign since it occurred while consumer spending stayed solid and compensation was still rising. The Fed has turned its attention to managing the inflation rate, which is well above the 2% target. Interest rates respond to expected inflation using current experience as a guide. The Fed has indicated that it will pay close attention to developments. Uncertainty remains high, most likely due to the status of the war with Iran. A meaningful resolution will be a major plus for the economy and small business owners.
The part about the wealthy spending is interesting and it highlights the K-shaped economy, where the top end of the income distribution is doing fine, but the lower end is not. This phenomenon is driving some of the Democratic Party’s flirtation with socialism and this will not be a positive for small business, especially small businesses in deep blue cities like Seattle and New York City. I would expect to see the uncertainty index rise, driven by political risk as much as oil prices. This will be something to watch.
Still it looks like business optimism is on the upswing, so this is some to watch
Cleveland Fed President Beth Hammack doesn’t think a quarter point increase in the Fed Funds rate will do much damage to the economy. “I don’t know exactly where we’ll end…in general one 25-basis point move probably doesn’t do a whole lot for the economy,” Hammack said Monday in an interview with Yahoo Finance. “It’s probably…some number of movement, but I don’t want to prejudge what that number is going to be.”
“When I’m talking to businesses, I’m not hearing that they’re sensing any restraint from investments in growth based on where interest rates are,” Hammack said. “So to me that says that now is the time to act.”
Mortgage credit availability increased in July, according to the MBA. “Credit availability in June increased to its highest level since July 2022, as greater availability and expanded guidelines for ARM and streamline refinance loans, including some with lower documentation requirements, drove most of the increase,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Jumbo credit availability has grown in almost every month this year and this month’s increase brought the jumbo index to its highest level since 2020. Additionally, non-QM loan programs continue to account for a substantial share of this growth.”
If the government wants to privatize the GSEs, it might want to pay attention to how much volume is going to non-QM. Fan and Fred market share will continue to erode.
