Good Tuesday AM,

I hope you had a terrific weekend.

Markets (both equity and bond) are fading a bit today.

The only relevant piece of news today was that OPEC is cutting production by 1mm barrels/day through the end of the year which is going to nudge gas/oil prices higher and make the winter heating season more expensive. That does translate to an uptick in an inflation component, so I think traders are reacting a bit to that.

Friday’s jobs report was pretty much neutral despite the sell off.

Reading through lots of opinions still leaves me a bit blank on why although the below explanation from Matt Graham sounds as good an any.. . “Bonds lost ground today and it definitely wasn’t as simple as traders having second thoughts about the strength of today’s jobs report. While it’s true that the 3.8% unemployment rate overstated last month’s shift (due to the rise in the participation rate), it’s also true that this is the first time since 2020 that NFP has been under 200k for 2 consecutive months (revisions are unlikely to change that, given the prevailing trend). The lopsided nature of the selling pointed to yield curve considerations and the odd combination of positioning for an NFP Friday, a Friday before a 3 day weekend, and the first day of a new month all at the same time. It wasn’t officially an early closer, but the bond market got in and got out by lunch, leaving 10yr yields 7.5bps higher. MBS only lost an eighth and change due to curve steepening (shorter-term yields fared better and MBS aren’t expected to be as long-lived as 10yr Treasuries).”

I did want to share two amazing and on-point graphs.

I continue to mention buy the dip as I see home prices being resilient. The first graph below is a tried and true, trusted economic model of supply and demand.. Maybe from 10th grade. We are the red line… the only way we move back to the black line is with more supply… where will that come from? That is the riddle to solve. Until it is solved, prices will increase… once rates start to drop, that demand side (blue line) will also creep up, pushing prices even higher.

Buy the dip.

The second graph is on inflation.. Remember all that stimulus money the government printed and sent out? That pushed M2 (money supply) to enormously high, unprecedented levels (4x of where we were) and took inflation with it. Look at how M2 is dropping now as the Fed pulls money out of the economy (black line) and what is happening to inflation (red line). Given this trajectory, I think it is tough for the Fed to raise rates again.

Leaving it here for today as we ease into the short week.

Please remain safe and stay healthy, make today great!