Morning Report: The Fed’s challenge

Posted on August 28, 2020 by Brent Nyitray

Vital Statistics:

Last Change
S&P futures 3495 8.6
Oil (WTI) 43.04 -0.17
10 year government bond yield 0.72%
30 year fixed rate mortgage 2.91%

 

Stocks are higher this morning as personal incomes and spending came in better than expected. Bonds and MBS are down.

 

Personal incomes rose 0.4% in July, which was well ahead of the expectations of a 0.2% drop. Personal spending was up 1.9% versus expectations of a 1.5% increase. June’s numbers were all revised upward as well. Inflation remains well below the Fed’s target, rising 1% on a YOY basis.

 

Pending Home sales rose 5.9% in July. “We are witnessing a true V-shaped sales recovery as homebuyers continue their strong return to the housing market,” said Lawrence Yun, NAR’s chief economist. “Home sellers are seeing their homes go under contract in record time, with nine new contracts for every 10 new listings.”

 

Luxury home builder Toll Brothers reported record contract signings in June and July this year.

 

Jerome Powell discussed the Fed’s new policy yesterday, and there is some skepticism in the markets that the Fed can get inflation up above its 2% target. For what its worth, there is ample evidence that this can take longer than people think. Japan has been trying to create inflation for 30 years, and it has been unsuccessful. In fact, the younger generation which grew up post 2000 has the deflationary mindset, which is to save, and to wait for products to get cheaper. Inflation and deflation are monetary phenomenons of course, but they are also psychological. The Fed will discuss inflationary and deflationary expectations, and that word is deliberate. The Fed doesn’t want to see Americans get into the trap of saving too much (I know that seems counter-intuitive), so it is jawboning the markets saying essentially “we are going to create inflation, so spend now, before prices go up!” But if people feel like the economy is going to get worse, they will save what they can, pay off debt, and hunker down. This becomes a self-fulfilling prophecy. And anecdotally, that is exactly what is happening now. I was listening to an earnings call from PRA Group (a debt collector) and they said that collections have been better than normal. In a pandemic. People are saving more (paying down debt is considered saving). The Fed sees this and wants to get people spending, which is what gets the economy going.

 

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