All Things in Moderation

Vital Statistics:

Stocks are flattish as bank earnings come in. Bonds and MBS are down small.

Retail sales rose 0.5% MOM in March, according to the Census Bureau. Ex-vehicles, they rose 1% and ex vehicles and gas they increased 0.2%. On a year-over-year basis, retail sales rose 6.9%. It is important to note that these numbers are not adjusted for inflation. In other words, the increase in retail sales looks primarily due to price increases and not increased demand. One print does not make a trend, but it looks like consumers might be getting more cautious. If so, this bodes ill for growth going forward.

Consumer sentiment rebounded this month according to the University of Michigan Consumer Sentiment Survey. The increase was driven by more upbeat expectations for the future. That said, consumers were downright dour in March, so it isn’t like sentiment is good – it is down 26% on a year-over-year basis. Consumer sentiment surveys are particularly sensitive to gasoline prices, although expectations for wage gains were another big component in the improved sentiment.

The labor market remains strong, as initial jobless claims came in at 185,000. Any reading below 200k is an exceptional reading.

The supply chain remains stretched, according to the latest reading on business inventories. Total inventories increased 1.5% MOM and 12% YOY. Like the retail sales number, business inventories are not adjusted by inflation, so on an apples-to-apples basis they were up single digits. A way to measure supply chain pain is to look at the inventory-to-sales ratio. Inventory build is often a big driver of economic growth, and when it is low like it is now, it is an indicator that manufacturers have to catch up, and that process will increase growth. It could also be considered an inflation indicator, however it really means that there is pent-up demand and that is a bullish signal for growth.

The TBA market (which is the basic input into rate sheets) remains incredibly illiquid. For the past week or so, bid-ask spreads have increased from about 1 tick (or 1/32) to 10 ticks (or 31 basis points). I suspect fears of the Fed unwinding its balance sheet are driving this, but it will result in mortgage rates being less sensitive to the movements of the 10 year. Also as rates rise, the price difference between the months is increasing, which will translate into higher lock costs.

This is real capital markets inside baseball stuff, but if you are unimpressed with the latest scenario you run, this is part of the reason why.

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