The Market Today

Fed Officials Continue to See Inflation Pressure as Temporary; Housing Data Ahead

by Craig Dismuke, Dudley Carter


New Home Sales and Home Prices: Today’s calendar brings key housing reports including two home price reports for March and the April New Home Sales tally.  The FHFA and S&P CoreLogic March home price reports are expected to both rise another 1.0% MoM, or more, bringing both of their year-over-year rates above 12%.  New home sales are expected to recoil 7.0% after jumping 21% in the March data.  Supply continues to be a significant concern.  There is growing evidence of homebuilders waiting until later stages of the construction process before locking in pricing given the 1) robust demand and 2) volatile material costs.

Fed Communications: The Fed’s Vice Chair for Supervision, Randal Quarles, is scheduled to testify before the Senate Banking Committee at 9:00 a.m. CT.  Also speaking today is Chicago Bank President Evans.

Richmond’s Barkin Watching Labor Imbalance, Reiterates Anchored Inflation Expectations: Richmond Fed Bank President Barkin is speaking this morning, highlighting the labor supply problem and anchored inflation expectations.  Barkin noted, “There is still a lot of room to grow in the labor market, it will take until the summer to unclog this.” Applying the labor supply issue to the inflation outlook, he said, “It’s something I’m watching very closely, as well as whether we start to see sustained compensation pressure coming from the shortage.” Yesterday, Florida became the 23rd state to announce an early expiration for the pandemic unemployment assistance programs in its state.  Barkin also noted, “I pay attention to market measures of inflation expectations, and those have not yet escalated over target.”


Treasury Yields Drop Further, Unwinding Post-CPI Rise and Lifting Tech Stocks to Start the Week

Tech companies led a rally on Wall Street Monday as Treasury yields continued to drift lower, with longer yields now having fully unwound their increases driven by a surprisingly hot CPI inflation report for April released two weeks ago. Multiple economic reports released over the last week or so have shown the U.S. recovery accelerating, with the stronger demand possibly exacerbating the effects of supply chain issues on price pressures. Several officials from the Federal Reserve spoke Monday, however, and signaled a continued belief that most, if not all, of the driving forces of some stronger inflation readings over the next several months will prove transitory (more below). The 10-year Treasury yield ended 2.0 bps lower at 1.60%, retracing an inflation-related rise that lifted the benchmark yield to as high as 1.70%. Tech’s daily strength drove the Nasdaq up 1.4% and pushed top industry names to the top of the S&P 500. The broader index rose just under 1%, boosted by gains across all sectors, excluding the safest utilities sector.

Global Shares Leverage Solid U.S. Gains from Monday to Rise on Tuesday, as Treasury Yields Remain Lower

Encouraged by that strong finish for U.S. equities, global shares traded in the green on Tuesday, led by tech shares, as Treasury yields continued to recede. Stocks rose 1.1% across Asia and Europe’s Stoxx 600 had added 0.3% at 7:15 am. CT. Notably, Germany’s DAX was out in front of continental gains, up 0.6% to a new all-time high. Much of Europe entered a double-dip recession in the first quarter as virus concerns led governments to tighten restrictions again; data overnight revised Germany’s unannualized quarterly contraction down from -1.7% to -1.8%. However, more current data have confirmed stronger activity and a brightening outlook as Europe’s vaccination rollout has picked up. In a separate report Tuesday, a measure of German business expectations improved more than expected in May to match its highest level since early 2011. Tech shares continued to set the pace for U.S. gains, sending Nasdaq futures up 0.5% while contracts on the S&P 500 rose 0.3%. Treasury yields remained a tailwind for tech valuations, with the 10-year yield declining again as most longer sovereign yields edged lower. The 10-year yield was -0.7 bps to 1.59% at 7:25 a.m., a two-and-a-half-week low.


Fed Governor Brainard’s prepared remarks focused on central bank digital currencies (CBDCs) and stressed the need for the Fed to play a key role in determining appropriate regulations for digital money. After her speech, Brainard said she expects base effects, bottlenecks, and supply issues amid economic reopening to drive near-term inflation higher, but stressed that longer-run inflation expectations are “extremely well anchored.” The firmer inflation over the next several months should “subside” as global disinflationary forces reassert themselves, but “if we did see inflation that moves persistently and materially above our goals in a manner that also threatened to have some impact on … long-term inflation expectations, we have the tools and the experience to gently guide inflation back to target. And I think no one should doubt our commitment to do so.”

Atlanta Fed President Bostic said that inflation pressures have risen in part because the “demand response” during the recovery “has been much faster than supply responses.” He added, however, that “I am not seeing that it is going to be enduring.”

St. Louis Fed President Bullard said the economy is “not quite there yet” when discussing progress that could warrant tapering bond purchases, but believes additional positive progress in the pandemic could be made in the “months ahead” that would allow officials to “start thinking about” it. Stronger inflation readings will likely stick around into 2022 but will be “mostly temporary.” Despite a rise for unemployment in April’s disappointing jobs report, Bullard said there is overwhelming anecdotal evidence to support the argument that the labor market is tight.

CORONAVIRUS UPDATE  (VS Coronavirus Chartbook – PDF)

Moderna announced early Tuesday that trial data showed its vaccine to be safe and between 93% and 100% effective in stopping symptomatic COVID-19 infections in adolescents between the ages of 12 and 17. The company said it would submit the results to global health regulators, including the U.S. FDA, in early June in order to gain emergency use authorization. Pfizer has already received emergency authorization to use its shot in the U.S. for that age group.

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