Home on the Range
Treasuries Happy in the Range
A slow week of economic data is allowing Treasuries to drift around within the 1.60% – 1.70% range for the 10yr and that is likely to continue for a time. Next week brings personal income and spending numbers for April and the expectation is that they will look a lot like last week’s retail sales numbers and that is pretty much a push against the upside spike in March. That is likely to keep Treasuries in the range until we get to the May jobs report on June 4th and the early expectations are for a 600k jobs print, so good but not great. Perhaps the range trade continues into summer and with that being a seasonally bullish period, those expecting higher yields may have a bit of a wait. Finally, in our latest podcast, Tom and Caleb sit down with Al Dominick, CEO of Bank Director and DirectorCorps to discuss the hallmarks of great community bank leadership, trends in the industry, and what community bankers need to be paying attention to in the coming years. The iTunes link can be found here and the Spotify link here.
Higher Prices Beget Slower Activity
The inflation saga continues and this time it has real world ramifications. The latest housing starts numbers were a bit disappointing and it does speak to actions and reactions. Price changes, particularly price increases, don’t happen in a bubble. People and companies react to them in real-time. The latest example is the housing starts numbers for April. Everyone by now has heard of the jump in lumber prices, particularly since March when futures contracts more than doubled in two months. Prices since then have come off but the damage was done, and it curtailed building activity in April. Expectations were for starts to dip –2.0% for the month to 1.704 million annualized but they instead fell –9.5% to 1.569 million. As the graph below shows, that is still a healthy number, historically speaking, but does speak to the impact of higher input prices limiting economic activity.
Think of other areas of the economy impacted by higher input prices and the limited ability of producers to pass those price increases onto the end customer and you can quickly see how those higher input prices can limit sales and production in all manner of discretionary purchases. Thus, there is some amount of limiting behavior already evident by the price increases seen to date. This limiting behavior could partially explain the limited reaction on the part of Treasury yields to the red-hot CPI report from last week. Absent an acceleration in hiring and wage growth, the consumer will eventually balk at price increases and producers, in this instance homebuilders, are already quick to react by pulling back on construction.
Air Travelers Near Pre-Pandemic Levels
Living in Atlanta we are very sensitized to air travel given the importance of ATL to the domestic and global travel business. I have been waiting to publish this graph for some time as air travel slowly recouped the losses from the pandemic-inspired shutdown. As the graph shows we are basically back to the level of travelers put through TSA screenings as we were just prior to the pandemic. It’s been a long, slow grind but travel numbers are finally back.
The obvious thought from this graph is how high does it go in the summer with more and more families fully vaccinated and with pent-up demand being what it is? It could very well be one for the history books as it pertains to travel demand, but is the airline industry ready for the onslaught of air travelers? We recall recent images of vast swaths of desert-land holding idle aircraft parked during the worst days of the pandemic. Will this be another case, like lumber prices, where limited supply is overwhelmed by outsized demand and pricing skyrockets to balance it all in the end? Or can airlines quickly bring idled aircraft and crews back on-line to meet the demand? It will be interesting to see the balance that is struck between increasing aircraft supply and demanding higher airfares with the existing operating fleet.
Agency Indications — FNMA / FHLMC Callable Rates
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