Up until yesterday the only Fed members expressing a desire to taper this year have been some regional presidents. Now we can add a Governor. Chris Waller in a Bloomberg interview last night said “We are now in a different phase of economic policy so it is appropriate to start thinking about pulling back on some of the stimulus.” To my constant complaint on why is the Fed still buying MBS, he said “I am much more sympathetic to tapering MBS first.” Now we know agency MBS is essentially government paper but the aggressive purchases by the Fed has certainly narrowed the spread between the two, has sent a clear signal to those that finance the housing market and is a form of credit allocation to one favored part of the US economy. As to when this might begin he said, “I think everybody anticipates tapering could move up earlier than when they originally thought. Whether that’s this year, we’ll see, but it certainly could.” If the Fed has any credibility, it will happen soon as Waller also said this, “Right now the housing market is on fire. They don’t need any other unnecessary support so I would be all in favor of that.”
We are now past peak dovishness and have approached peak QE.
We are currently seeing the fallacy of the desire to run things hot because too hot always eventually flames out. While Waller said the housing market is on fire, the aggressive price gains in response to the lack of inventory continues to slow the pace of transactions. The MBA said purchases fell 4.8% w/o/w and 17.3% y/o/y to the slowest level since early May 2020. Refi’s have run out of steam too, falling by 8.2% w/o/w and 15% y/o/y. This component is now where it was pre Covid in February 2020.
So we have Fed policy driving still full speed ahead and the most interest rate sensitive part of the US economy is slowing down because of the consequences of driving full speed ahead. Again, they have turned economically impotent, and now restrictive in housing in that it is slowing, other than in monetizing US debt and elevating asset prices.
PURCHASE APPS
REFI APPS
The soon departing Bank of England chief economist Andy Haldane is not pulling any punches on the inflation debate. In a speech today he said “By the end of this year I expect UK inflation to be nearer 4% than 3%. This increases the chances of a high inflation narrative becoming the dominant one, a central expectation rather than a risk. This would leave monetary policy needing to play catch up to re-anchor inflation expectations through material larger and/or faster interest rate rises than are currently expected. If this risk were to be realized, everyone would lose – central banks with missed mandates needing to execute an economic hard brake turn, businesses and households facing a higher cost of borrowing and living, and governments facing rising debt servicing costs. As in the past, avoiding that inflation surprise is one of the central tasks of central banks.” I’m sorry that Haldane is leaving because he seems to be one of the few central bankers that get it, I believe.
Bottom line as we look to the 2nd half of 2021 for markets and the economy it is all about inflation, inflation, inflation I believe and whether it is sticky or not. Rates, valuations, the central bank response and ultimately the economy will all be in response to where this goes.
While there is a growing worry about the Delta variant in European markets today as seen with the action in travel and reopening stocks, oil prices continue to power on at $74. I mentioned yesterday the CRB raw industrials index and yesterday it rose for the 7th straight day and is back within 1 pt of a 10 yr high.
China saw moderation in its state sector focused manufacturing and services composite PMI which fell in June to 52.9 from 54.2 with most of the decline seen in services as manufacturing was little changed. That is a 4 month low. Within manufacturing and likely in response to the government crackdown on commodity price inflation there was a m/o/m drop in input and output prices (they have to satisfy the government) off very elevated levels. New orders were little changed and export orders fell slightly and still below 50. Business activity expectations fell a touch to 57.9 but Chinese companies are experiencing the same supply issues as we are. With services, new orders slipped below 50, backlogs fell further below 50 at 43.8 and exports declined to 45.4. Pricing fell too. I’m sure some Covid flare ups impacted the services component.
The market response in China was mixed as the Shanghai comp got back what it lost yesterday but the H share index was down by .9%. The yuan is up slightly vs the dollar. The 10 yr yield is down just under 1 bp to 3.085%.
It’s more dated data as it comes from May but South Korea and Japan both reported industrial production figures that missed expectations but we know semi’s and auto’s and the supply of them have been big swing factors.
The Eurozone June CPI rose 1.9% y/o/y headline and by .9% core, both as expected. Up to this point, the aggressive inflationary pressures have been mostly felt at the wholesale level but inevitable it continues to filter into CPI in coming quarters as the region’s economy further normalizes. On a m/o/m basis, headline CPI in the Eurozone is running at a 5% annualized rate in the 1st half of 2021. With deeply negative rates and massive QE, the ECB better pray this is transitory too. The 5 yr 5 yr euro inflation swap is up to 1.60%, matching the highest since mid May.
5 yr 5 yr Euro Inflation Swap
Germany said the number of unemployed workers in June fell by 38k, well more than the expected drop of 20k and the unemployment rate is down to 5.9%. I do expect the Germans to get more vocal about inflation. The euro is down a touch as are bond yields.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.