The Market Today

Demand Outpacing Supply Across U.S. Economy

by Craig Dismuke, Dudley Carter


Mortgage Applications Slow Further: Mortgage applications for the week ending May 28 fell another 4.0% on a 3.1% drop in purchase apps and a 4.6% decline in refis.  Purchase apps are now down 23% from their January average and refis are down 34%.  While the housing dynamics remain a net positive, the headwinds are building and are evident in the leading indicators of activity.  The average 30-year mortgage rate ticked down 1bp to 3.17%.

Auto Sales Expected to Drop on Supply Issues: Throughout the day, May auto sales will be released and are expected to show a decline from April’s strong tally as inventories remain hampered by the supply chain issues.

FedSpeak: Philadelphia Bank President Harker, Chicago’s Evans, Atlanta’s Bostic, and Dallas’s Kaplan are all scheduled to speak at a conference on racism and the economy (11:00 a.m. to 1:00 p.m. CT).  The Fed will also release its Beige Book report in advance of its June 16 meeting.


U.S. Equities and Treasury Yields Near Flat for the Week Early Wednesday After Unwinding Bigger Moves Early Tuesday: Overnight strength for U.S. futures proved to be a head fake Tuesday, as the major indices erased solid opening gains to end little changed on the first day of June. The S&P 500 opened 0.7% higher before quickly fading back to near flat, floundering for the duration to close 0.1% lower. Energy companies led gains as crude jumped more than 2%. OPEC confirmed plans to increase production next month, with Saudi Arabia noting, “The demand picture has shown clear signs of improvement.” Additional gains for other cyclical sectors were neutralized by declines in health care and tech. Treasury yields followed a similar path, peaking early in U.S. trading after the release of a pair of solid manufacturing surveys (more below) but retracing most of the daily gains by the close. The 10-year yield added as many as 4.3 bps before closing up 1.2 bp at 1.606%, near its daily low.

U.S. markets were on an even keel early Wednesday. In fact, futures for each of the three major indices were up by under 0.1% and the Treasury curve was lower by less than 1 bp. Those moves were directionally consistent but smaller in degree than trading trends across Europe. Most European 10-year yields were down by around 1.5 bps while the Stoxx Europe 600 had added another 0.2% to a new all-time high.


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Manufacturing Sector Struggling to Keep Up With Strong Demand: A couple of separate surveys showed the U.S. manufacturing sector continued to face supply-side issues in May that were impeding many businesses’ ability to keep up with strengthening demand as more of the economy reopens amid an ebbing pandemic:

Markit’s May PMI was even stronger than preliminarily projected, with revisions lifting the PMI from 61.5 to 62.1. Markit wrote, “US manufacturers are enjoying a bumper second quarter, …new orders are surging at a rate unsurpassed in 14 years of survey history, buoyed by reviving domestic demand and record export sales as economies reopen, …However, … prices charged by manufacturers are also rising at an unprecedented rate, linked to soaring input costs and unparalleled capacity constraints. Not only is operating capacity being curbed by record supply chain delays, … but firms have also been increasingly unable to hire sufficient staff. Hence backlogs of work are building up at an unprecedented rate.

The ISM’s Manufacturing PMI rose more than expected from 60.7 to 61.2, below March’s 64.7 but still one of its strongest readings over the last several decades. Prices paid cooled for just the third time in 12 months, one of several indicators of the continued friction between supply and demand. Lifting orders backlogs to a new record, new orders rose 2.7 points to 67.0 while production dropped 4.0 to 58.5. The 8.5-point separation between the two indices was one of the widest on record, highlighting businesses’ inability to keep up with strengthening demand. The ISM cited “wide-scale shortages of critical…materials,” “worker absenteeism,” and “difficulties in filling open positions” among a long list of growth-limiting headwinds. The employment index fell 4.2 points to 50.9 and supplier delivery times slowed again to a new high since the early 1970s.

Housing Sector Continues to Prop Up Construction Spending: Although the 0.2% gain for construction spending in April disappointed expectations for a 0.5% increase, a net positive revision to the prior two months’ data left total spending at a higher level than anticipated. The underlying dynamics told a story consistent with recent trends. Private residential outlays, or spending on housing-related projects, rose 1.0% MoM, with gains in both new construction and remodeling projects. Spending on business structures, however, declined 0.5%, a ninth decline over the last 12 months, and government construction fell 0.6%. Unadjusted yearly comparisons showed residential spending 27% higher than in April 2020 while non-residential private spending and government construction spending remain 4.8% and 2.4% below year-ago levels, respectively.

A Pair of Fed Governors Stick with Transitory Assessment, Despite Preferred Inflation Measure Hitting Highest Level Since 1992: Despite a larger-than-expected increase last Friday in the Fed’s preferred inflation measure – core PCE inflation jumped to 3.1% in April, its fastest pace since 1992 – a pair of Fed Governors said they still expect the upward trend to be transitory. Governor Quarles said, “A monthly high inflation reading does not necessarily lead to durable high inflation. …Coming out of an event like this, where there are going to be different speeds at which supply chains unblock, different speeds at which different parts of the economy begin to move…you are going to see inflationary pressure…and one would expect it to be temporary.” Governor Brainard noted, “While the level of inflation in my near-term outlook has moved somewhat higher, my expectation for the contour of inflation moving back towards its underlying trend in the period beyond the reopening remains broadly unchanged.”

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