Morning Report: Inflation rises

Vital Statistics:

  Last Change
S&P futures 4,308 10.2
Oil (WTI) 74.44 -0.49
10 year government bond yield   1.50%
30 year fixed rate mortgage   3.21%

Stocks are lower as we head into the final stretch for 2021. Bonds and MBS are up.


Personal incomes rose 0.2% MOM in August, which was below expectations. Personal Consumption Expenditures rose 0.8%, which was above expectations. The PCE Price Index (the Fed’s preferred measure of inflation) rose 0.4% MOM and 4.3% YOY. The core PCE Index (which excludes volatile commodity components) rose 0.3% MOM and 3.6% YOY. Inflation is running above the Fed’s target rate of 2%, however they intend to let it run hot for a while in order to bring up the historical average to 2%.


Inflation is rising globally. Eurozone inflation is the highest in 13 years, and German price increases are the highest in 30 years. Blame energy prices. European benchmark yields (Bunds, etc) are up big over the past week or so, which will push up US yields at the margin.


Asking prices increased 12% last month according to Redfin. Prices rose to a record of $361,250. “Home sellers continue to show their optimism with increasing asking prices,” said Redfin Chief Economist Daryl Fairweather. “However, there are already signals from the Fed and markets that mortgage rates are starting to creep up. The hit to affordability that comes with higher rates and higher home prices could let some steam out of the market. It’s never a good idea to overprice your home, but I would be especially wary of overpricing as seasonal cooling trends persist and rising rates take some affordability out of the homebuying equation.”


The ISM Manufacturing index rose to a strong reading of 61.1 in September, driven by higher prices. “Business Survey Committee panelists reported that their companies and suppliers continue to deal with an unprecedented number of hurdles to meet increasing demand. All segments of the manufacturing economy are impacted by record-long raw materials lead times, continued shortages of critical materials, rising commodities prices and difficulties in transporting products. Global pandemic-related issues — worker absenteeism, short-term shutdowns due to parts shortages, difficulties in filling open positions and overseas supply chain problems — continue to limit manufacturing growth potential. However, optimistic panel sentiment remains strong, with three positive growth comments for every cautious comment.”


Construction spending was flat MOM in August, but rose 8.9% YOY, according to Census. Residential construction rose 0.4% MOM and 23.9% YOY. Pandemic-related issues are exaggerating the YOY growth numbers.

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