As the carnage in the stock market continues, look at what just hit the highest level in 13 years.
Fed Will Pivot
May 11 (King World News) – Garic Moran: Bernanke said FED mistake was not flooding market with liquidity during 29 crash; I say mistake was intentionally flooding market with liquidity in 27. FED flooded market with liquidity to save market from covid; now facing same dilemma. 1000 PHDs believe Bernanke; FED will pivot: question when?
More “Transitory” Inflation
Peter Boockvar: Headline CPI in April rose .3% m/o/m, one tenth more than expected and the core rate was up by .6% m/o/m, two tenths more than expected. On a y/o/y basis, consumer inflation is up 8.3% y/o/y and 6.2% y/o/y, a slight comedown from the 8.5% and 6.5% y/o/y gains seen in March but we know this gets to the tougher comparison story, and nothing more. And this comes with the rent component still badly being undercounted but is slowly catching up.
Services inflation ex energy jumped .7% m/o/m and up by 4.9% y/o/y. Owners’ Equivalent Rent rose .5% m/o/m and Rent of Primary Residence was up by .6% with both up 4.8% y/o/y. An accurate measure would have them up twice that.
Services Inflation 4.9%. As Always, Reported
Numbers Way Below True Level Of Inflation
Medical care prices rose .4% m/o/m and 3.2% y/o/y. Reflecting the higher cost of parts and for mechanics, auto insurance prices rose .8% m/o/m after being up .7% in March and 1.2% in February. It’s up 4.4% y/o/y. And to this, vehicle maintenance costs rose .5% m/o/m and 5.3% y/o/y.
Goods prices ex energy and food rose .2% m/o/m and up by 9.7% y/o/y but that is a slower pace mostly because of tough comps.
Core Goods Prices Soar Year-Over Year
While used car prices fell for .4%, and down for a 3rd month (but still up 23% y/o/y), new car prices jumped 1.1% m/o/m and 13.2% y/o/y. Apparel prices did fall .8% but only after rising by .6% last month and .7% in the month prior and is up 5.4% y/o/y.
Bottom line, so yes the rate of change is likely topping out led by the goods side and will continue to as the May 2021 y/o/y comp goes up to 5% from 4.2% but inflation will remain very sticky and just because global growth slows down doesn’t mean that prices will immediately fall sharply as some seem to think. That’s why stagflation is an economic word used. And if rents, 30% of headline CPI and 40% of core CPI, were accurately calculated, we’d have 10% headline inflation. The 5 yr inflation breakeven, after the recent pullback, is up by 9 bps and back above 3% at 3.02%. The 10 yr yield is back above 3% and the dollar reversed its early morning losses.
In terms of rate hikes, the fed funds futures were pricing in a 100% chance of two more 50 bps hikes and an 80% chance of a 3rd. Now we’re pricing in 92% of a 3rd…
VERY BIG DEAL!
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13 Year High
With another acceleration higher in the average 30 yr mortgage rate to 5.53% from 5.36%, the highest in 13 years, people rushed to lock in on the purchase side as applications rose 4.5% w/o/w but still are down 7.7% y/o/y.
30 Year Mortgage Rate Highest In 13 Years!
Now they are not doing this because there are bargains out there, they are doing this in a race against the rates. Refi’s fell another 2% to another multi year low and are down 72% y/o/y.
As long yields are falling in the face of hotter inflation tells us that at least for now, the rise in rates have priced in the current inflation situation. From here though, we’ll see how sticky inflation is and what I keep talking about, where do rates go from here in Europe and Japan, the two main epicenter’s (with the US a close 3rd place) of the epic bond bubble that is now unwinding which will in turn influence US long rates. Also, to what extent, or not, do buyers step up in place of the Fed and foreigners (have reduced their ownership of US Treasuries to a 20 yr low, see chart below), and likely banks too (as they own so much already), in buying US Treasuries.
Foreigners Have Significantly Reduced
US Treasuries Holdings
I’ll also repeat that 3.24% is the key 10 yr yield to watch as it was the closing high in Q4 2018 when the Fed was last hiking rates and reducing the size of its balance sheet.
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