Good Friday AM,
I am a bit baffled at the moment.
Yesterday CPI came in tame, and the bond market blew up for no real reason. Today, headline PPI was not our friend but the details and backward revisions do show more softening, yet we are seeing a muted reaction. We were on this really nice path to lower rates and now, we’re not.
Bloomberg shed a little light on it.
It took a tricky set of inflation figures to help underscore the risks, but ultimately this week’s boost to Treasuries issuance did end up causing some level of indigestion. The highest 30-year yield at auction since 2011 met sketchy demand, sending Bloomberg’s benchmark Treasuries index toward a fourth-straight week of declines.
That also meant the surprising trend for a so-called bear steepening of the yield curve gathered momentum.
The difficulties were especially noticeable given July inflation data mostly came in a little softer than forecast, as traders judged that the Federal Reserve was likely to suggest that their job isn’t done yet — even if they do leave interest rates unchanged at their next meeting.
Fed officials had spent much of the week making it clear rates aren’t going to come down in a hurry, even if they stop going up. Governor Michelle Bowman was of a mind to back further hikes, while New York Fed President John Williams stressed the likelihood that restrictive settings would be needed for some time. The Philadelphia branch’s Patrick Harker echoed those sentiments, even if he sounded more confident than many of his peers in seeing an end to hikes.
The conundrum for investors and central bankers is only becoming more difficult.
Signs are multiplying that the past year-and-a-half’s steep tightening campaigns are delivering economic pain. At the same time, inflation is remaining sticky, while labor markets are holding up far too well for central bankers to feel comfortable.
Moody’s Investors Service disconcerted investors by lowering the ratings on 10 US regional banks, with higher funding costs a key reason. Over in Europe, the economy is facing the biggest policy-inflicted blow in the euro era, as higher rates and fiscal restraint raise the risk of a nasty recession. For all that, a key bond-market indicator is signaling doubts the Fed has accomplished its mission of taming inflation.
Interesting insights from the Mortgage Bankers Association on defaults. I am not talking about mortgage defaults where are low but take a look at autos and credit cards…
This week’s Chart of the Week shows that while mortgage delinquencies are at historic lows, data from New York Fed shows that early-stage delinquencies are rising for other forms of credit, specifically credit cards and car loans. The share of credit card balances moving into delinquency rose from 6.51 percent in the first quarter to 7.20 percent in the second quarter of 2023, the highest level since 2012. At the same time, the share of auto loan balances moving into delinquency rose from 6.88 percent in the first quarter to 7.28 percent in the second quarter of 2023, the highest level since 2018. The early-stage delinquencies for credit cards and car loans were well above the 30-day delinquency rate for mortgages and more than double the overall delinquency rate for mortgages, potentially an early sign that some weakness is starting to show in the broader economy.
Please remain safe and stay healthy, enjoy the weekend and first, make today great!