According to the MBA, the average 30 yr mortgage rate held at 3.03% for the 4th straight week. Purchases jumped by 7.5% w/o/w after little change in the week prior. Seasonally though, I don’t know how much the late Labor Day weekend was an influence in the timing and calculations. Versus last year, they are still down almost 12% and we certainly know the major factors of inventory and sky high prices that have slowed the pace of transactions, not really lack of demand. Refi’s fell by 3.2% w/o/w and is lower for the 4th week in the past 5. They are down by 3.2%. Maybe we are just running out of people that haven’t refinanced yet because they already have with rates still historically low. If one hasn’t yet, what are they waiting for?
The no tolerance for Covid spread and the consumer reaction was clearly apparent in the retail sales figure out of China for August. Sales rose just 2.5% y/o/y, well below the estimate of up 7%. Also out was industrial production which increased 5.3% y/o/y vs the estimate of up 5.8%. Fixed asset investment was about as expected with an 8.9% ytd y/o/y print. With many other countries realizing that shutdowns every time there is a flare up is a bad idea and it’s time to start treating Covid as an endemic and no longer a pandemic, I’m just guessing that China will stop with what they are doing after the Winter Olympics in February. Chinese stocks were red again, but mostly the H shares led by casino stocks (which I believe are buys on this selloff) while the 10 yr yield was up 1 bp to the highest since late July at 2.90%. Evergrande is of course the other concern with its $300b of debt/liabilities. Let that sink in for a second. One company with $300b of debt with very lumpy cash flows that can no longer satisfy it, not that they ever could from a cash flow perspective.
The Bank of England is another central bank that is facing intensifying pressure to pivot off emergency policy after August CPI rose .7% m/o/m and 3.2% y/o/y, both above expectations. The core rate rose 3.1% y/o/y, two tenths more than anticipated. There was an easy comp, particularly with last year’s “Eat Out to Help Out” program but m/o/m gains are still pretty aggressive with a 5.4% six month annualized rate. Wholesale pressures jumped as well with the m/o/m increase of .4% twice the estimate and higher by 11% y/o/y. Output charges grew by 5.9% y/o/y. The UK 10 yr inflation breakeven rose for the 9th day in the past 11 and today by 2.2 bps to 3.78%, a fresh 13 yr high.
I still believe positions in the inflation trade are important to have, particularly in precious metals, energy, ag and TIPS. I still remain bullish on uranium which after years of value pain, is finally working.
Price of Uranium per pound
I’ll repeat again my belief that while the sharp pace of inflation increases may slow, we have a problem if it slows to a level even around 3-4% on sustainable basis because the world is just not set up for that. Not current monetary policy, not interest rates, not debt levels, not equity valuations and credit spreads, not profit margins and certainly not income growth to offset it, just yet.