May Personal Income, Spending, and Inflation Finish the Week
Personal Income and Spending Numbers Finish the Week
This morning we get personal income and spending numbers for May and while those will certainly get some attention, the inflation numbers in the report will also get their fair share of scrutiny. The income and spending numbers have been buffeted in the last few months from stimulus checks goosing incomes, mostly in March, with spending following suit in March and April. May should be the first month where much of that stimulus-induced influence gives way to a more, dare I say it, normal report. Incomes are expected to be down –2.5% which pales in comparison to the –13.1% plunge in April after the March stimulus checks boosted incomes. Spending is expected to creep up 0.4% after a similar 0.5% creep in April, and that’s actually not bad just holding your own after a stimulus-induced pop of 4.7% in March. The Fed’s preferred inflation number, core PCE, is expected to be up 0.6% for the month bringing the year-over-year number to 3.4% from 3.1%. Unless that number comes in way above expectations it’s not likely to have much impact on the market as the Fed speak this week, for the most part, has re-emphasized the transitory theme for the current bout of price hikes, and the market is so far agreeing with that observation and is likely to continue for a couple more months. Programming note: we will be off next week so the next Market Update will be on July 6th. See you then.
Looking Range Bound for Awhile
Range bound markets are boring things to traders and to market watchers too but it looks like that’s what we have in store as slow summer trading routines settle in for the next month or two. The Fed too, as alluded to above, seems to have done a fair job of taking the edge off the latest dot plots, and except for a few jittery Fed presidents proclaiming tapering and hikes sooner rather than later, the Fed governors continue to exude more calm and hang onto their transitory characterizations of the recent inflation spikes.
The graph above of the 10-Year Treasury shows pretty clearly the range of 1.76% on the high and 1.45% on the low over the last four months. The gravitational pull of 1.50% is pretty evident since the March yield peaks, and there is not likely to be much to upset the range for the next month or two. Next Friday’s jobs report could provide some volatility but after a couple just so-so reports a strong beat is only likely to boost yields in a knee-jerk fashion until several solid jobs reports are produced. Until then, it’s likely to be a drifting, grinding market with limited bouts of volatility in an otherwise slow, summer trading environment. As for the Fed, the August Jackson Hole Symposium stands out as a chance for more tapering details to add some spice but that’s still a couple months away.
Lumber Reverses Much of its Earlier Spike
Much was made earlier this year, and especially in the spring, about the spike in lumber prices and the impact it would have on the cost of homes, etc.. The graph shows the futures pricing for next month delivery of 110,000 board feet of typical construction-grade lumber. That spike in April and early May got a lot of press and fears being stoked about runaway pricing. Well, as you can see that spike has pretty much been reversed in June as weather-related delays abated and sawmills retooled to run full-out and mostly easing the supply constraints. Another similar story is slowly playing out in the used car market. Recall in recent CPI reports used car prices rose 10% in April and another 7% in May and accounted for nearly a third of the 0.5% monthly increase in that month’s CPI. Used car prices are starting to decline now and while not to the degree that lumber has reversed, give it time. Not all the supply bottlenecks that led to price surges will be as quickly and completely reversed but it does illustrate that supply-driven spikes typically get addressed with lower prices following suit. That pattern plays into the Fed’s transitory story and as more examples come forward it’s likely to further their confidence that the price spikes of April and May should start to reverse over the second half of 2021.
Fed Funds Futures for Dec. 2023 Point to Three Hikes
When the Fed unveiled their latest dot plot last week that had them hiking twice in 2023 instead waiting until 2024 the futures market was like what took you so long? You see, the futures market didn’t really believe the Fed would sit on zero until 2024 and as you can see from the graph, a 25bps rate hike by December 2023 had been priced in by last February and now an additional two more hikes are priced in by the time December 2023 rolls around. The futures market prides itself on leading the Fed and for the time-being, despite talk of transitory price increases, futures investors still see the Fed having to up their dot forecasts again, perhaps at the September FOMC meeting when the next forecast is published.
|Treasury Curve||Today||Chg Last Wk.||LIBOR Rates||Today||Chg Last Wk.||FF/Prime||Rate||Swap Rates||Rate|
|3 Month||0.04%||+0.01%||1 Mo LIBOR||0.09%||Unchanged||FF Target Rate||0.00%-0.25%||3 Year||0.578%|
|6 Month||0.05%||+0.01%||3 Mo LIBOR||0.14%||Unchanged||Prime Rate||3.25%||5 Year||0.971%|
|2 Year||0.27%||+0.06%||6 Mo LIBOR||0.16%||-0.01%||IOER||0.15%||10 Year||1.457%|
|10 Year||1.49%||+0.01%||12 Mo LIBOR||0.24%||+0.01%||SOFR||0.01%|
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