Enough with the NIRP debate/Inflation/Sentiment/Housing

You don’t need central bank induced negative rates to have negative rates. The UK sold 3 yr gilts totaling 3.75b pounds at a yield of .003%. Now we can call that a ‘technical’ difference and that it is still essentially zero. BoE Governor Andrew Bailey does speak today and I do expect him again to downplay the implementation of negative rates. After the experience seen in Europe and Japan with NIRP, it is completely beyond me why it is even being debated.

The CPI in the UK in April came in about as expected with a headline gain of .8% y/o/y and a core rise of 1.4%. Producer prices saw sharp declines unsurprisingly. There remains this amazing obsession with avoiding deflation, nonsensically I believe, but prices are going to go where they are going to go in response to supply and demand. Either way, the only focus of central bankers right now is buying time to better economic growth. The pound is little changed as are gilt yields and the FTSE 100.

As for my belief that inflation does follow this current period, here are the reasons:

1)The cost of doing business is going higher as companies implement multiple steps to be covid ‘compliant’. ‘Compliant’ will entail all the steps needed to stay clean and safe.

2)Productivity numbers will go down as we spend more time and money on this ‘compliance.’ Think about all the actual compliance people in the banking system post financial crisis that produce nothing but make sure regulatory rules are being followed.

3)The cost of labor can thus go higher and more money might have to be paid to employees in certain ‘higher risk’ industries. Also, if generous unemployment benefits get extended past July 31st, it will take higher pay to entice many workers off the sidelines.

4)The supply of things will take time to adjust to the rise in demand. As an example, according to Sea Intelligence Consulting, spot container rates are higher by 25-40% y/o/y because of capacity cuts in the shipping sector.

5)You can be sure that the Fed and other central banks will overstay their welcome with all this money raining from the sky.

After hearing from Jay Powell yesterday and multiple Fed members over the past few weeks, today’s FOMC minutes from the meeting three weeks ago will be uneventful.

Bullish sentiment according to II continued its ascent higher with Bulls up for the 7th week in the past 8. Bulls rose to 49 from 47.1 with anything above 50 beginning the process of getting extended. Bears fell for an 8th straight week falling to 24.1 from 26 last week. Bottom line, the sentiment gauges really have been all over the place. We have bullishness within this data point and the Citi Panic/Euphoria index but bearishness seen in last weeks AAII and a neutral read in the CNN Fear/Greed. I do believe that the AAII read on individual sentiment is capturing people’s economic mood more so than chasing stocks higher like the II gauge is likely doing.

Thanks to low rates and maybe the greater desire for suburban living, purchase applications to buy a home rose 6.4% w/o/w and is now down just 1.5% y/o/y. This is the 5th straight week of gains. Refi’s though fell another 6.3% w/o/w and I think are still getting caught up in the growing forbearance challenges. They do though remain up by 160%.