All Things in Moderation

Vital Statistics:

Stocks are lower this morning as bonds continue to sell off.

The global reflation trade seems to be the story these days, with bonds selling off and commodities rising. The important thing to stress is that it isn’t just a US phenomenon: rates are rising overseas as well. The German Bund is now trading at -29 basis points. This is the highest yield since June of 2020, and is really pushing towards pre-COVID levels.

Is the global economy really back to pre-COVID levels? Emphatically not. While the worst is probably over, there has been a lot of economic damage done. Commodity price driven inflation generally isn’t lasting, and IMO you don’t get inflation without wage hikes. Wages have been rising in the US, however that is a function of lower-compensated workers losing their jobs, which pushes up the average hourly wage. It is a technical increase due to unusual economic circumstances and not a signal that we are on the brink of an overall increase in worker compensation.

Jerome Powell heads to the Hill today for his semiannual Humphrey-Hawkins testimony. I suspect he will stress how fragile the economic recovery is and press Congress for more fiscal stimulus.

Tight inventory is pushing up housing prices. The Case-Shiller Home Price Index rose 1.3% MOM and is up over 10% YOY. The FHFA House Price Index rose 1.1% MOM and is up 11.4% YOY.

Loans in forbearance fell to 5.27% last week, according to the MBA. “The share of loans in forbearance has declined for three weeks in a row, with portfolio and PLS loans decreasing the most this week,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “This decline was due to a sharp increase in borrower exits, particularly for IMB servicers. Requests for new forbearances dropped to 6 basis points, matching a survey low.”

The Street is skeptical of the current refi boom’s durability, as seen by lackluster IPO activity. Five mortgage vendors have postponed or canceled plans to go public as investors are reluctant to award anything higher than a mid single-digit P/E ratio. Amerihome was slated to go public for $1.3 billion, and ended up selling to Western Alliance for a number well south of that. The MBA is forecasting that refinances fall 50% in 2021 compared to 2020.

Janet Yellen said that Biden wants to raise corporate taxes and increase the taxes on capital gains. That said, it sounds like a wealth tax might be a bridge too far.

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