Powell’s Not Worried About Overheating Economy Nor Inflation
Fed Chair Jerome Powell delivered an as expected performance yesterday in his virtual testimony before the Senate Banking Committee. Don’t expect any changes in rates or QE purchases anytime this year, and maybe next year too. Powell emphasized in the Q&A that the labor market is worse than official statistics imply. For example, when including those who have given up looking for work the unemployment rate would be nearly 10% and not the official 6.3%. Also, given the nature of the questions, Democrats shouldn’t expect any Republican votes on the $1.9 trillion stimulus package. Republicans repeatedly worried it will be inflationary and the economy seems to be doing ok without it. While offering no opinion on the bill, Powell said any inflationary impact would be temporary, and given the uneven nature of the recovery much repair work remains. Finally, in our latest podcast we sit down with Mark Galvin, founder and CEO of ePresence. Mark started ePresence to serve business professionals that seek expertise in developing a more effective social media presence, especially via LinkedIn. The iTunes link can be found here and the Spotify link here.
It’s not news that the housing market has been the leading sector coming out of last spring’s lockdowns but that strength in housing has turned red-hot. Almost every housing indicator points to activity that is at or approaching the levels reached in the housing bubble in the mid-2000’s. The latest indicator pointing to near-record strength is the December S&P CoreLogic 20-City Home Price Change which popped to a 10.10% (YOY) price gain compared to expectations of 9.90% and November’s 9.20% gain. Phoenix (14.39%), Seattle (13.56%), and San Diego (12.99) led the YOY gains. As shown in the graph below, dating back to the housing bubble period, the December gain was the largest since 2014 and not too far off the bubble period gains of the mid-teens.
While it’s too early to say we’re entering another housing bubble we’re clearly heading in that direction. One thing that we can say for certain is that as housing prices increase by double-digit rates it implies larger mortgages to finance those purchases. As most MBS investors know, larger mortgages are more likely to be refinanced when economically prudent. Thus, specified pools of lower loan balance loans will likely continue to be well bid as investors continue to seek ways to limit excessive prepayments.
Copper/Gold Ratio Points to Higher Treasury Yields
One unique relationship that we sometimes look at to inform us as to the future direction of Treasury yields is the Copper/Gold Ratio. The idea behind the ratio is rather simple. Copper is a key component in many areas of the global economy; thus, as its price rises that typically implies increased demand from growing economies. Conversely, gold is seen as a hedge in times of uncertainty, especially the economic variety. Thus, as the ratio rises it implies growing economies and increased confidence in that growth. Overlaying the 10yr Treasury yield with the copper/gold ratio one can see the close relationship between the two over time.
We started showing the ratio compared to Treasury yields last June when the ratio spiked coming out of the spring lockdowns but Treasury yields initially lagged. Since August, however, yields have been tracking the ratio higher. But as is clearly shown in the graph, copper prices, like many other commodity prices, have spiked lately as global economies emerge from the deleterious affects of the pandemic and demand increases. Even if the latest spike is partially reversed, it still implies further yield increases are in store for the 10yr Treasury. The 1.50% level has plenty of technical underpinnings, and is a logical psychological target as well in this latest push higher in yields. If the recent spike in the ratio holds, however, it seems 1.50% may be just a waystation to even higher yields, perhaps in the second half of the year if global economies continue to improve and another round of stimulus is pumped into the US economy as seems likely.
Agency Indications — FNMA / FHLMC Callable Rates
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