Well, that didn’t take long for bond yields to reassert its upward trend after I expressed surprise that it ignored the vaccine news. It seems that it took the growing expectations that Congress will spend another $1 Trillion. As for stimulus, the vaccine provides a multitude of it that is long lasting while the fiscal spending is just a short term bridge but I guess the Treasury market sees another $1 Trillion add to our debt and deficits and that is dollar negative and in turn inflationary. As I mentioned yesterday, the 10 yr inflation breakeven rose 3.4 bps after Monday’s 3 bps increase. At 1.82% it is at the highest level since May 2019. The 30 yr breakeven is just below the magic 2% at 1.95%. I continue to believe 2021 will be a story of rising inflation, rising long rates and central banks that will be stuck in having to confront it. In this environment I continue to like commodity stocks, banks, EM and the leisure/hospitality/travel space that had a rough 2020. Gold and silver in particular finally bounced yesterday, and people will see that they can rally WITH bitcoin and that it is NOT one or the other.
10 yr INFLATION BREAKEVEN
At a record low average mortgage rate purchase applications to buy a home jumped 9% w/o/w and 28% y/o/y. I’m not sure how the Thanksgiving holiday impacted the seasonal adjustment here. Either way, I believe annual home price gains of 5-7% if it continues will eventual slow the housing recovery while a moderation in price gains would actually sustain it with 1st buyers being the swing factor that is most sensitive to price. Refi’s fell 4.6% w/o/w after a similar rise in the week before. They are up 102% y/o/y. One year ago the average mortgage rate was 3.97% vs 2.92% now.
The only data overseas of note came from Europe. German October retail sales exceeded expectations with a 2.6% m/o/m gain after the drop of 1.9% in September. The estimate was up 1.2%. Household items and online sales led the way. While many countries in Europe instituted selective restrictions in November, Germany did not close its stores, only the restaurants/bars and their famous clubs. Germany has kept unemployment at bay due to their job subsidization program. If one is looking for value stocks, the German DAX has it, trading at 15x 2021 earnings vs the US at 22x. They also have a dividend yield of 2.7%.
The unemployment rate in the Eurozone in October was 8.4%, down one tenth from September and again, job saving programs in some countries have limited the pandemic damage. Spain said its November jobless claims number was better than expected with an unemployment rise of 25.3k vs the estimate of up 55k. If you haven’t seen in a while, the Spanish 10 yr yield sits at just .11% thanks to the ECB.
EUROZONE EMPLOYMENT RATE