Thoughts: Cleveland Median and Trim CPI are tainted by the fact that Rent is a massive chuck of that number, which means that these are highly correlated with rent. But we know that rent will come down on a forward basis. If the Fed determines they must wait for rent to come down, they are clearly going down the policy mistake road, because they know this will come down. This part of the inflation fabric should be ignored. One other thing which I share with Barry Knapp's view is that there are cracks emerging at the Fed, particularly listening to Brainard who is raising the issue of financial stability and others argue that the global tightening cycle impact is more than the sum of the parts. And another key point is that ahead of Midterms, every Democrat is focused on saying inflation is the problem, the Fed is here to fix it, it's not our problem. They have to say that because that is how polls reflect inflation is the biggest issue. Post-election, look for a 180 degree turn with focus on recession risks and unemployment. It is probably a canary that Brainard--Democrat leaning--is flaggging the initial stages of voices that are beginning to push back on the rate hiking consensus. Looking for the Fed pivot, the illusive one, looks not a bad thought post-Midterms. Could the market begin to price that in before? Obviously, 75bps looks dead certain at November, but the question will be what will that press conference be like? One suspects a more balanced look, which could be hugely positive for the bond market, and unleash the traditional Santa rally before year end. I am not convinced we have to wait for that. After all markets are supposed to be forward looking, right?
Super interesting points. I thought Egan's points on housing were also interesting. Many are waiting for a collapse in housing because of higher mortgage rates but for that to happen you need sellers at those low prices and who is going to sell? Builders are not building after they finish what is being worked on. Existing homes aren't being sold because the people occupying them have nice 4 handle mortgages they don't want to lose. It probably only comes from the non-economically sensitive sales i.e. moving Mom or Dad into assisted living, or the passing of a relative. I think OER can stay high. I can see the Fed get to 4.25% by Dec and decide to pause. Will we know more in early Nov? Perhaps. Do we get the Santa rally? It feels set up for that. I think the economy won't bottom until Q1/Q2 next year. I think the market looks forward, but I am not sure how forward that is anymore with passive money about 50% of AUM. Maybe a month or so. I don't think 6 months.
I am no housing expert but found this interesting---Back in the GFC floating rate mortages where something like 30% of all mortgages. That declined dramatically since then to single digits. This was an argument why the consumer was likely to be less sensitive to rate hikes in this cycle. Now I have just been told (have not checked out) that 35% or so of new mortgages are now floating, with borrowers willing to roll the dice on rates. Speaking of bond yields, just saw that for 11 consecutive weeks UST 10 yield has been higher, longest streak since 1978..Wow!
Excellent! Rj
Thoughts: Cleveland Median and Trim CPI are tainted by the fact that Rent is a massive chuck of that number, which means that these are highly correlated with rent. But we know that rent will come down on a forward basis. If the Fed determines they must wait for rent to come down, they are clearly going down the policy mistake road, because they know this will come down. This part of the inflation fabric should be ignored. One other thing which I share with Barry Knapp's view is that there are cracks emerging at the Fed, particularly listening to Brainard who is raising the issue of financial stability and others argue that the global tightening cycle impact is more than the sum of the parts. And another key point is that ahead of Midterms, every Democrat is focused on saying inflation is the problem, the Fed is here to fix it, it's not our problem. They have to say that because that is how polls reflect inflation is the biggest issue. Post-election, look for a 180 degree turn with focus on recession risks and unemployment. It is probably a canary that Brainard--Democrat leaning--is flaggging the initial stages of voices that are beginning to push back on the rate hiking consensus. Looking for the Fed pivot, the illusive one, looks not a bad thought post-Midterms. Could the market begin to price that in before? Obviously, 75bps looks dead certain at November, but the question will be what will that press conference be like? One suspects a more balanced look, which could be hugely positive for the bond market, and unleash the traditional Santa rally before year end. I am not convinced we have to wait for that. After all markets are supposed to be forward looking, right?
Super interesting points. I thought Egan's points on housing were also interesting. Many are waiting for a collapse in housing because of higher mortgage rates but for that to happen you need sellers at those low prices and who is going to sell? Builders are not building after they finish what is being worked on. Existing homes aren't being sold because the people occupying them have nice 4 handle mortgages they don't want to lose. It probably only comes from the non-economically sensitive sales i.e. moving Mom or Dad into assisted living, or the passing of a relative. I think OER can stay high. I can see the Fed get to 4.25% by Dec and decide to pause. Will we know more in early Nov? Perhaps. Do we get the Santa rally? It feels set up for that. I think the economy won't bottom until Q1/Q2 next year. I think the market looks forward, but I am not sure how forward that is anymore with passive money about 50% of AUM. Maybe a month or so. I don't think 6 months.
I am no housing expert but found this interesting---Back in the GFC floating rate mortages where something like 30% of all mortgages. That declined dramatically since then to single digits. This was an argument why the consumer was likely to be less sensitive to rate hikes in this cycle. Now I have just been told (have not checked out) that 35% or so of new mortgages are now floating, with borrowers willing to roll the dice on rates. Speaking of bond yields, just saw that for 11 consecutive weeks UST 10 yield has been higher, longest streak since 1978..Wow!