After hearing from Fed President Mester Monday and Kaplan today with Evans and Barkin also speaking today, there is still no direct commentary from them on the red hot US housing market. In fact, what we’ve heard so far is that the economy still needs the same level of policy accommodation which implies that Mester and Kaplan wants to continue to throw gasoline on the housing market. Evans and Barkin will echo the same theme. 10% home price gains I guess is not fast enough. That said, it doesn’t matter anymore what they think because the market has raised rates for them with the rise in longer term rates and in turn mortgage rates. We’ll get the FOMC minutes from the meeting three weeks ago but after hearing from so many members since, including Powell, don’t expect anything new.
The ECB is beginning to think about when it will be their time to slow down asset purchases. Governing Council member Klaas Knot said today “If the economy develops according to our baseline, we will see better inflation and growth from the 2nd half onwards. In that case, it would be equally clear to me that from the 3rd quarter onwards we can begin to gradually phase out pandemic emergency purchases and end them as foreseen in March 2022.”
If the Fed also starts to taper in the back half, we could have a really interesting summer and fall in the world’s bond markets and not in a good way. To this, Governing Council member Wunsch of the ECB said yesterday “I hope that at some point we’re going to discuss an exit, because it will show that our policy is effective. But exit is never a piece of cake.” It’s not like watching paint dry either.
With the 3 bps rise in the average 30 yr mortgage rate to 3.36% after last week’s 3 bps drop, mortgage applications fell w/o/w. Purchases declined by 4.6% w/o/w and down for a 2nd week. While they are still up 51% y/o/y, that is purely an easy comparison thing. Refi’s fell for the 8th week in the past 9, by 5.3% w/o/w and are down 20.4% y/o/y. Refi’s were the initial reaction to the drop in rates one yr ago while purchases took a pause with all of us locked down. Refi’s are now the obvious immediate causality to the uptick in mortgage rates. With respect to purchases, rates are still low and buyers are getting a sense of urgency to act before the possibility of another leg higher in mortgage rates. But, aggressive price increases along with the mortgage rise is enough to pause transactions, especially with so little inventory.
A few more PMI’s from overseas are out today. Australia’s March services index rose 2.1 pts m/o/m to 55.5 after falling by 2.2 pts in February. “Both activity and new business recorded further sharp expansions in March, with firms noting that the continued easing of Covid restrictions had boosted client confidence across much of the services economy.” With respect to prices, “Inflationary pressures remained at Australian private sector firms in March. Input prices increased at a series record pace, surpassing the previous record set in February. Businesses widely commented that rising input prices were the result of higher raw material and wage costs. Increased cost burdens led to private sector businesses raising output charges for the 5th time in as many months in March” said Markit. Inflation pressures are a global thing right now. The Aussie $ is down for a 2nd day after the dovish RBA comments yesterday.
I forgot to mention Singapore’s PMI yesterday which slipped to 53.5 from 54.9. “The next stage in Singapore’s return to normality is the resumption of tourist activity…Plans currently in place detail the inoculation of the majority of the nation by the end of the year.” Interestingly that Asia nations did a great job of containing Covid but are mostly lagging in rolling out the vaccines. On prices, “Overall input price inflation softened in March but remained historically elevated. Purchase prices rose amid higher freight costs, while an increase in workforce numbers added to wage expenses. Consequently, selling prices rose, as firms sought to pass on part of the burden. That said, the rate of output price inflation was only marginal.” Singapore is an ever more important economic gauge with its trade presence and it being a beneficiary of population and business shifts from Hong Kong. I remain bullish on Singapore stocks.
India’s services PMI fell to 54.6 from 55.3. India is now dealing with another Covid flare up but “rates of expansion for output and new business remained strong relative to the survey trend. The elections supported the uptick in demand, but the Covid pandemic and reduced footfall restricted the upturn.” The RBI met today and kept rates unchanged as expected but felt the peer pressure to do QE and announced that they will purchase 1 Trillion rupees of bonds in Q2 (about $14b). Debt monetization is fully global but other Asian nations outside of Japan have mostly avoided this trap. India remains an amazing long term growth story.
The March Eurozone services PMI was revised slightly higher to 49.6 from 48.8 where the estimate was for no change. Service PMI’s in Germany and Ireland were above 50 while France, Italy and Spain’s were below. Covid restrictions remain a drag but with the vaccines here “business expectations reached the highest for over three years.” On prices, “operating expenses increased for the 10th successive month in March, with inflation rising to its highest since February 2020. Output charges subsequently increased for the 1st time in over a year, though only slightly.” I believe the pricing pass thru to the rest of us is just beginning as companies realize their rising costs aren’t so temporary. With manufacturing already strong in the region, the upcoming vaccine driven improvement in services will be welcome for the region.
The UK services PMI was revised down by .5 pt to 56.3 but that is still up from 49.5 in February and 39.5 in January as the UK has half their population with at least one shot. Markit said “UK service providers were back in expansion mode in March as confidence in the roadmap for easing lockdown restrictions provided a strong uplift to new orders.” With prices, “There were further signs that strong cost pressures have spilled over from manufacturers to the service economy, especially for imported items. Higher prices paid for raw materials, alongside rising transport costs and utility bills, meant that operating expenses across the service sector increased at the strongest rate since June 2018.”
Bond yields in Europe as well as in Asia have moderated following the drop in US Treasury yields yesterday.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor.