Rates shot higher and have stayed there (for now). There’s sure “a whole lotta” economic data and headlines out there swaying investor sentiment. There is a global energy crisis that is getting more serious ahead of the winter. Inflation is also rising. Eurozone inflation is the highest in 13 years, while at home, inflation registered a 30-year high for August as demand and supply chain problems drove higher prices. The Fed does intend to let it run hot for a while in order to bring up the running average to 2 percent. The September ISM Manufacturing Index expanded beyond expectations, marking the 16th straight month of expansion for the manufacturing sector. Demand is strong, but manufacturers and suppliers continue to experience supply chain bottlenecks. The final print for the University of Michigan’s Index of Consumer Sentiment was bumped up, though sits well below its level from a year ago. Consumers are starting to postpone purchase activity, particularly for higher-priced homes, vehicles, and durables, on a belief that price spikes will be transient. Finally, total construction spending was flat in August when it was expected to increase, most likely due to (stop me when you’ve heard this one before) ongoing supply chain pressures.
Circling back on some other releases from last week, Q2 real GDP growth was revised up slightly to 6.7 percent and is expected to slow in the third quarter, but pick up again in the 4th based on late Q3 data. Overseas, things may not be as rosy as data from China and the Eurozone has softened. U.S. manufacturing expanded in September as indicated by the ISM’s PMI index increase to 61.1. As has been the case throughout much of the recovery, respondents continue to be constrained by increasing commodity prices, supply chain shortages, and difficulty filling open positions. New orders for durable goods increased 1.8 percent in August driven by demand for commercial aircraft.
Consumer spending picked up in August, but so did inflation which affects the nominal dollar amount. When accounting for inflation, real spending increased 0.4 percent in August and prices were up 4.3 percent from one year ago. Housing prices continued to climb in August, however the pace of increases may finally be slowing with the Case-Shiller House Price Index showing a 1.5 percent price increase at the national level in July. Meanwhile purchase mortgage applications declined 1.2 percent for the week ending September 24 and are down 14.1 percent from their level one year ago.
Turning to this week, attention shifts to the jobs market with ADP on Wednesday and the payroll report on Friday. We also receive other updates including factory orders, trade, nonmanufacturing PMIs, Challenger job cuts, and wholesale trade after payrolls on Friday. The Desk is scheduled to purchase an average of $5.1 billion per day, with agency prepayments released after the close on Wednesday with Class A 48-net out on Friday. This first full week of October gets off to a quiet start with the only data point coming in the form of August factory orders later this morning. We will also receive remarks from St. Louis President Bullard and interim Boston Fed President Montgomery. We begin the day with Agency MBS prices worse/down .125 and the 10-year yielding 1.50 after closing last week at 1.47 percent.
Market Commentary by Rob Chrisman
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