Good Morning on this best day of the week, Wednesday,
The hits keep on coming.
The news this morning was overwhelmingly unfriendly to bonds. Bonds are reacting accordingly with the ten-year now above 3.80 and Mortgage Bonds are hanging by a thread at the last level of support. If we close below this support, pricing will erode another 80bps. Tomorrow is PPI and given the bearish tone of the market right now, we need a very low PPI number or the selloff we have been watching will intensify. The caveat here is that we are due for a correction and bonds are at a level that could hold and then bounce. Still, I would think twice about floating until we know this sell off is over. We do not know this yet!
Getting back to inflation since it is the most important topic on the Fed’s mind, January’s core consumer-price index, which excludes volatile energy and food prices, rose 5.6% from a year earlier, down from 5.7% in December. Many economists see the core measure as a better predictor of future inflation than the headline number. While January’s small decrease is welcome, undercurrents suggest that inflation could remain elevated for some time. Core goods prices rose at their slowest annual pace since February 2021. But core services rose at their fastest pace since 1982. The Fed has been especially focused on services and an unofficial category often dubbed supercore inflation, which is services less energy and shelter. Chairman Jerome Powell has for the past three months justified continued interest-rate increases by noting that tight labor markets and rising wages are fueling inflation in labor-intensive service industries.
President Biden reshuffled his economic team yesterday. He tapped the Fed’s vice chair, Lael Brainard, to run the White House’s National Economic Council. That is a fantastic choice as she is incredibly bright and needed in that position but it also means the Fed will lose an influential top official who has advocated for a marginally less aggressive approach to raising interest rates than Fed Chair Jerome Powell. She had become one of the Fed’s most persuasive policy “doves,” officials who think high inflation is likely to slow as lingering effects of the pandemic reverse and who want to minimize potential job losses. I suspect Chairman Powell will need to moderate his position to be more neutral with Vice Chair Brainard out.
Last, Interesting stat from the WSJ…
The number of Realtors rose alongside home prices in 2020 and 2021. When the Covid-19 pandemic eliminated millions of jobs, especially in service industries, career-switchers piled into the housing industry. By late 2020, the number of Realtors surpassed the number of homes for sale. Think about that and how the reduced inventory is impacting the industry.
Please remain safe and stay healthy, make today great!