Morning Report: Awaiting the FOMC minutes 8/19/15

Markets are lower this morning on overseas weakness. Bonds and MBS are down.

The consumer price index rose 0.1% in July, less than forecast. Ex-food and energy, it was up 1.8% on a year-over-year basis. Shelter and medical care rose the most.

We will get the Fed minutes later on today. Investors will be looking for two things: the Fed’s view on potential wage inflation and the meltdown in China. For those worried about the effect of increasing interest rates, asset prices will undoubtedly be vulnerable to higher rates, however at least this time around, consumption hasn’t been driven by asset price inflation the way it was in the late 90s and the mid aughts.

That said, stocks are predicting a 100% probability that the Fed can hike rates without anyone blowing up.  St. Louis Federal Reserve Bank President James Bullard was warning about asset bubbles yesterday and the need to hike rates to prevent them from blowing up. The only asset bubble I see right now is in sovereign debt, and the Fed is up to their eyeballs in it.

Real average weekly earnings rose 2.2% last week.

Mortgage Applications rose 3.6% last week. Purchases fell 1.1%, while refis rose 7.2%.

Florida real estate is getting back to the go-go days of the mid aughts. Some are worried about another bubble, but if you look at the Florida FHFA House price index, it is still 29% off of peak levels. One other difference this time: the buyers this time around are not dominated by regular people – they are dominated by institutional investors looking to earn rental income and by foreign investors looking to move money out of their home countries. In other words, if prices collapse (and I don’t know what the catalyst would be), the economic effect will be much less.

Zillow has a good article on the first time homebuyer. They note how the median home price to median income ratio for the first time homebuyer has risen from 1.7 in the 1970s to 2.6 today.  That said, interest rates are much lower today than the 1970s. Note that the average years of renting has increased from 2.6 years to 6 years now. This probably represents the fact that people are waiting until they are older to get married and have kids.

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