Morning Report: Highest inflation since 1982

Vital Statistics:

  Last Change
S&P futures 4,696 36.2
Oil (WTI) 72.08 1.08
10 year government bond yield   1.48%
30 year fixed rate mortgage   3.34%

Stocks are higher this morning after the inflation came in more or less as expected. Bonds and MBS are flat.

 

Inflation at the consumer level rose 0.8% MOM and 6.8% YOY in November. This was the highest reading since 1982. Ex-food and energy prices rose 4.9% YOY. Rising energy prices were a big driver of the increase in prices. Used cars were another big contributor. Shelter was up only 3.5% YOY, and that number will be rising over the next year. The near 20% increase in home prices will impact the index, albeit with a 12-18 month lag. So these sorts of numbers might be with us for a while.

The Fed prefers the PCE Index (Personal Consumption Expenditures) index to measure inflation. That said, this reading on the CPI probably seals the deal that the central bank will step up the pace of tapering, and will probably get back to neutrality some time in early spring.

If you have noticed that the 10 year yield continues to fall, but mortgage rates are going nowhere, you aren’t alone. Mortgage Backed Securities spreads are widening as the market evaluates how much the reduced central bank demand will affect MBS pricing. The Fed currently owns about 30% of all the MBS outstanding. While the Fed experimented with reducing the amount they hold by runoff, they ended up abandoning it after some unintended consequences.

It is important to remember that the Fed is still buying MBS, just not as much as they used to. Even once they reduce their monthly purchase rate to zero, they will probably still buy enough MBS in the market to compensate for runoff.

 

Consumer sentiment improved in December, according to the University of Michigan Consumer Sentiment Survey. That said, consumer sentiment is down from a year ago.

Interestingly, the sentiment is improving more in the lower income tiers than the middle and higher income tiers. Richard Curtain, the Chief Economist discussed what is going on:

Sentiment posted a small overall gain in early December (+4.5%), although it was still nearly identical to the average reading in the prior four months (70.6). The more interesting result was the large disparity between monthly gain among households with incomes in the lowest third (+23.6%) of the income distribution compared with the modest losses among households in the middle (-3.8%) and top third (-4.3%). While small differences in the direction of change are rather common, it is quite unusual to record such a large change in the bottom third: a larger one-month percentage was recorded only once before, a gain of 29.2% in June 1980. While it is usually assumed that such extreme changes represent an erroneous result due to small samples, in 1980 it was the households in the bottom income third that initially signaled the end of the first part of the double recession in 1980-82, with upper income households following in subsequent months. The core of the renewed optimism among the bottom third was the expectation of income increases of 2.9% during the year ahead; the last time a higher gain for this group was expected was in 1981. This suggests an emerging wage-price spiral that could propel inflation higher in the years ahead. 

The punch line: the wage-price spiral is probably here. Start looking for Gerald Ford Whip Inflation Now buttons on Ebay.

 

Mortgage Credit Availability decreased in November, according to the MBA. This was the first decline in 5 months. “Credit availability in November was down slightly, even as the housing market continues to thrive amidst the improving job market,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “However, the picture was different depending on the market segment. An increase in conventional credit availability was offset by a decrease in government credit, as lenders reduced their offerings of government loan programs with lower credit scores, as well as those for investment homes. Credit supply for jumbo loans increased for the fifth straight month.”

23 Responses

  1. Her body, her problem.

    Like

    • There was just an article in the Washingtonian by a woman complaining about women paying alimony…

      You wanted equality, you got it

      Like

    • I tell my son that half of US marriages end up in divorce, and women initiate 80% of them.

      You make 100k, you are out 50k a year for 20 years. I call it the million dollar coin flip.

      You get heads, you are no worse off financially than you were before. You get tails you are out a million bucks.

      The only reason to marry is to have your own children. Otherwise stay single and don’t cohabitate.

      Like

      • Agree completely 100%. I have now met three different women who married, had a kid (after expensive infertility treatments, because they were older) and then divorced their husbands. All three told me that the only reason they got married was to have children. Two of the three are receiving alimony and child support and the third has to pay alimony and is incredibly bitter about it.

        Like

      • Brent:

        The only reason to marry is to have your own children.

        Yes!

        Like

        • Also why to stay married. Don’t think we would have except for what’s best for the kids (opinions from spoiled children moaning that they wish their parents had gotten divorced because they argued a lot not withstanding, you do a lot more to stick it out when you have kids than you would if you were childless).

          Like

  2. my wife’s grandfather died last weekend. we’ve been going through stuff, handling his affairs, etc.

    in his desk, I found a revolver, his DD-214 (LT, USN), and a playboy from 1967. and a bottle of Cialis.
    way to go, grandpap.

    Like

  3. Taibbi’s first article on Loudoun is up:

    ““You watch. Indian and Chinese immigrants who typically vote Democratic will vote the other way because education for children is their number one issue. It’s why they came here.”

    Patel is one of the switchers. He was “pretty liberal” after graduating from UC-Berkeley many years ago, then steadily became more moderate in his views, which did not mean voting for Donald Trump. “Honestly, I voted for Hillary Clinton,” he says, clarifying that he’s for “common sense,” not being “right-wing” or conspiratorial, “none of that garbage.” Eventually, he returns to the subject of education. “When you start messing with schools, that’s when you’ll get typical Democrats to flip.””

    https://taibbi.substack.com/p/loudoun-county-virginia-a-culture

    Like

    • Read it last night. Looking forward to the next three installments. Taibbi’s doing the sort of thing the media (even though biased left) used to do. There was a time they’d be doing this story.

      Like

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