Morning Report: Inflation is tame, gas is not

Vital Statistics:

 

Last Change
S&P futures 2708 9.25
Eurostoxx index 360.56 -1.71
Oil (WTI) 56.32 0.07
10 year government bond yield 3.11%
30 year fixed rate mortgage 4.94%

 

Stocks are higher as oil stabilizes. Bonds and MBS are up. The 10 year is trading at 3.11%, quite the drop from the 3.27% levels of last week.

 

Inflation remains largely under control according to the Consumer Price index. The CPI in October rose 0.3% MOM and 2.5% YOY, right in line with street forecasts. Ex food and energy, it was up 0.2% MOM and 2.1% YOY.

 

A couple of trade groups wrote letters of support for Kathy Kraninger as head of the CFPB. The agency has been led by Mick Mulvaney, who also head OMB, as Acting Director. Kraninger is the supposed replacement. If she isn’t confirmed by the Senate in the lame duck session, the nomination returns to the President and Mick Mulvaney stays in charge for another 210 days. Kraninger promises to reform the CFPB in the same way Mick Mulvaney is, by ending “regulation by enforcement” and being more transparent about what the rules actually are.

 

It usually pays to keep tabs on markets unrelated to your own. While people have been focusing on the oil market, and the bear market in oil, we are seeing the opposite effect in natural gas. Oil has lost about 24% over the past month. Natural gas gained more than that this week. Seriously. Natural gas closed last Friday at around $3.70 a contract and closed yesterday at around $4.70 a contract. Many commodities, especially¬†natgas, is extremely sensitive to weather forecasts – if you go to the New York Stock Exchange, you’ll see CNBC on the trading floor. If you go to the a commodity exchange like the Chicago Mercantile Exchange, they have on the Weather Channel. So, if you get a forecast for an extra-cold winter, the price can skyrocket. As the link above explains, while we are the Saudi Arabia of natural gas, supply is not the driver here, storage is. And if we have an unusually cold winter, the amount of gas in storage can fall to dangerously low levels, which means higher prices. There are rumors going around of a hedge fund that is short Natgas and in trouble, but who knows? Regardless, it is something to watch.

 

natural gas

 

Speaking of keeping tabs on other markets, watch the corporate bond markets. General Electric has issues. While everyone is aware of what is going on the stock price, the bonds are down about 15 points since early October. In bond market terms, for a household name like GE, that is a lot. Bonds trading in the low 80s aren’t necessarily distressed, but this is GE we’re talking about. If this snowballs, we should see a tightening of credit overall. It probably won’t affect the MBS market and mortgage pricing, but it will almost inevitably act as a drag on interest rates overall, and it could keep the Fed at bay.

 

Chart: Financial Stress Index:

 

financial stress index

Morning Report: Red October ends

Vital Statistics:

 

Last Change
S&P futures 2704 19.25
Eurostoxx index 361.06 5.53
Oil (WTI) 66.46 0.28
10 year government bond yield 3.14%
30 year fixed rate mortgage 4.89%

 

Stocks are recovering as we end the worst month for stocks in a while. Bonds and MBS are down.

 

Facebook reported last night and rose despite a revenue miss. GM is up 10% pre-open on blowout earnings, while GE cut its dividend to a penny. Earnings are generally good this quarter, although if you focused only on the indices you would figure they were terrible.

 

Home prices rose 5.8% in August, according to the Case-Shiller home price index. Las Vegas led the way with 14% growth. San Francisco and Seattle were the other big winners. Underneath the headline number, we are starting to see some month-over-month declines if you look at the seasonally adjusted indices. Ultimately wages need to catch up with the new reality of higher interest rates and higher home prices.

 

Despite what is going on in housing, consumer confidence remains strong, with the consumer sentiment indices just off multi-decade highs. Historically this index has reflected gasoline prices (gas prices up, consumer confidence down), but that has broken down over the past couple of years. This confidence has allowed companies to raise prices for the first time in a decade, with a laundry list of firms from consumer staples to airlines increasing prices in reaction to increased costs, particularly fuel. Some companies are not raising prices, but cutting sizes. Wages are picking up, but they are generally lagging some of these increases in the inflation indices.

 

Freddie Mac sees home sales improving in 2019 despite an uptick in mortgage rates. Originations are expected to be flat at $1.65T while home price appreciation and GDP growth are expected to moderate. The 30 year fixed rate mortgage is expected to average around 5.1% for the year, and then jump an additional 50 basis points in 2020.

 

freddie mac mortgage rates

 

Janet Yellen told a conference that the current deficit track is unsustainable, and that if she had a magic wand, she would raise taxes and cut retirement spending.

 

Part of the inflation puzzle has always been healthcare inflation, especially in prescription drugs. Amazon looks to be entering the Rx business, and CVS is piloting a free delivery subscription program. Health care is a big part of the inflation picture and perhaps these big can take a bite out of inflation via their market strength.