Morning Report: Manufacturing Remains Strong

Vital Statistics:

S&P futures4,126-0.25
Oil (WTI)101.32-3.39
10 year government bond yield 2.98%
30 year fixed rate mortgage 5.42%

Stocks are flat this morning as we head into a big week of data. Bonds and MBS are down.

The FOMC is meeting this week, and the market is looking for a 50 basis point increase in the Fed Funds rate. There won’t be any new projections, although balance sheet reduction is one of the big issues going forward.

In terms of economic data, we will get ISM numbers this week, along with the jobs report on Friday. We are also in the heart of earnings season, with a couple thousand earnings reports coming.

The Street is looking for 400,000 jobs to have been created in April, a 3.6% unemployment rate, and 5.5% wage growth.

Institutional investors in the rental space are getting static from government and consumer groups. The complaint is that first time homebuyers are getting priced out of the market by investors. Is that true? Investors bought something like 80,300 houses in the fourth quarter, which is a drop in the bucket compared to the 6.5 million existing and new home sales we generally get in a year. It doesn’t seem like that sort of incremental buying is moving up house prices.

The usual suspects are writing letters asking the institutions to explain why they are raising rents, and have been accused of “running a scam.” They are going after Invitation Homes, American Homes 4 Rent and Progress Residential. Rents are rising because home prices are rising. Shortages of workers and materials are delaying homebuilding, along with regulation which adds to the price of a new home.

Manufacturing decelerated in April, according to the ISM Manufacturing Index. Sentiment is still strong, but shortages remain an issue. Of note is the idea that inflation may be moderating:

“The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment. In April, progress slowed in solving labor shortage problems at all tiers of the supply chain. Panelists reported higher rates of quits compared to previous months, with fewer panelists reporting improvement in meeting head-count targets. April saw a slight easing of prices expansion, but instability in global energy markets continues. Surcharge increase activity across all industry sectors continues. Panel sentiment remained strongly optimistic regarding demand, though the three positive growth comments for every cautious comment was down from March’s ratio of 6-to-1, Panelists continue to note supply chain and pricing issues as their biggest concerns.”

You can see that the ISM is still pretty strong over the longer-term, however it is heading down as inflation and bottlenecks remain an issue:

Construction spending rose 0.1% MOM and 11.7% YOY, according to Census. This was a touch below expectations. Residential construction rose 1% MOM and 18% YOY.

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