Good Tuesday AM, I hope you had a fantastic Memorial Day!
Bonds are under some pressure this AM for not such good reasons. Traders exited the building on Thursday for the holiday weekend and didn’t have a chance to react to Friday’s stronger data (PCE, etc…) with the early closing. They are making up for it today. The selling today is likely now, and I would anticipate a bounce in the short term, but that also brings us up on the biggest data set of the month with the Jobs report on Friday. Not to skip too far ahead, today we learned the Construction spending missed expectations by a large margin and this is bullish for bonds. Construction spending is one of the few forward looking indicators that we see. Most of them are telling us what happened last month, which seldom has relevance to next month. Builders, however, seem to know in advance when to pull back. You can often judge metropolitan growth by the number of cranes in the air. The 10-yr is currently at 1.61%. Stocks are flattish and crypto is down.
Now on to the impending jobs report for Friday. I wanted to share the below graph which shows the correlation between Fed bond purchases and home price increases… This is a pretty tight correlation. I would say very tight. So… if the jobs report comes out hot and we hear Fed governors talking about inflation being more sustained than transitory (the Fed’s two targets are full employment and 2% inflation), they will likely slow down bond purchases. That will then take a toll on the home price index… might be a good thing for prices to moderate… but it will most assuredly come on the back of higher interest rates.
Please remain safe and healthy. Have a great day!