Fed Setting the Stage for Big Core PCE Number

There has been a lot of Fed Speak this week and it mostly has been focused on the reoccurring theme that near-term inflation indications are transitory and not of long-lived concerns. We think part of the jawboning this week is pointing towards the Friday release of the April Personal Income and Spending numbers. While that report is expected to show some noise created by the stimulus checks with income down in April but spending holding its own against a strong March, the real nugget may be the Core PCE number, the Fed’s favorite inflation index. Core PCE for April is expected to increase 0.6% for the month, and 2.9% year-over-year. That YoY figure would be the largest since 1992. While we agree with the Fed’s transitory characterization, expect some buzz to follow the release of those numbers on Friday.  Finally, in our latest podcast we sit down with Lon Langston, founder of the Engaged Banker Experience. We discuss culture, leadership, and the cost of low engagement.  The iTunes link can be found here and the Spotify here.


Home Price Gains Approaching Past Highs

You can always count on housing, especially when it comes to home price appreciation. Whether it’s lack of inventory, and/or strong demand, annual price gains are approaching the highs from the housing bubble of the early 2000’s. The latest S&P CaseShiller 20-City Home Price Change (YoY) was better than expected and is closing in on the rates last seen in 2013 and 2005/6. Home prices rose 13.2% on an annual basis for March with western states leading the way. The annualized gain in March was the largest since December 2005.


Yearly gains were led by Phoenix at 20.00%, San Diego at 19.10%, Seattle at 18.26%, and Boston at 14.87%.  Even the lowest of the 20-city gains was a solid 9.03% for Chicago. Low inventory is facing off with continuing demand for suburban locations in city-centers and that is driving much of the annualized price gains. Despite gains approaching levels last experienced during the Housing Bubble 15 years ago, lending criteria seem to be much more conservative this round versus the crazy spell of lending that drove much of the gains that ultimately were reversed in the subsequent plunge in housing prices. Thus, we don’t see the elements in place this time for a similar outcome. Instead, it’s likely that increasing prices will act as a limiting factor to increased sales activity in the months ahead. In fact, some of the timelier housing indicators like Pending Home Sales and New Home Sales for April are showing some signs of moderation. With prices continuing to rise, and wage gains still lagging those gains, we expect a further moderation of activity unless lending criteria are loosened, which we don’t expect will happen.

Copper/Gold Coming Back Towards Treasury Yields

Frankly, we’ve marveled a bit how the Treasury market rallied in April and largely held those gains in May despite the ongoing rally in commodity prices, like the copper/gold ratio. That ratio, however, has started to falter as shown in the chart below. The weaker-than-expected April jobs report plus some subsequent softening in housing numbers, and lumber costs, are a good example of a change in outlook that has had commodity prices weakening of late.   Treasuries have been steadfast in refusing to follow the last few months of commodity gains higher. Now it appears some of those commodity gains are going to be reversed and come back towards Treasury yields.


Source: Bloomberg

As the above graph illustrates the near lockstep movements between copper/gold and 10-Year Treasury yields broke down in late March and into May. The spike of copper/gold in mid-quarter was subsequently worked off while Treasury yields resisted the early move higher.  Currently, copper prices look to be rolling over as a subtle loss of economic momentum (see April jobs report and latest housing numbers), signal some issues as we head towards the second half of 2021.  For now, the bet remains in the Treasury market that second half momentum slows given the reluctance to see yields increase. Will commodity prices follow? For now, the Treasury market is betting that is the case, implying a softening in some of the earlier economic projections and a belief that current inflationary spikes are transitory just as the Fed has been repeating for some time now.

Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 0.10 0.31 0.63 1.00 2.04 2.50
0.50 0.09 0.28 0.57 0.89 1.90 2.39
1.00 0.08 0.25 0.54 0.85 1.80 2.26
2.00 0.24 0.48 0.77 1.69 NA
3.00 0.72 1.62 NA
4.00 1.58 NA
5.00 1.54 NA
10.00 NA

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Published: 05/25/21 Author: Thomas R. Fitzgerald