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Morning Report: Inflationary expectations increase


Vital Statistics:

Stocks are higher this morning as earnings season begins. Bonds and MBS are up.

Consumer sentiment fell 7% in October, according to the University of Michigan Consumer Sentiment Survey. Importantly, the expectations of future inflation increased, which is a worrisome sign than inflationary expectations are becoming entrenched. Year-ahead expectations increased from 3.2% to 3.8%, while longer-term expectations rose from 2.8% to 3.0%. While longer-term expectations are still in the post-COVID range of 2.9% – 3.1% they remain well above pre-pandemic levels.

JP Morgan reported better than expected quarterly numbers to kick off earnings season. Book value per share rose 15%, while earnings per share rose 39% on a year-over-year basis. The acquisition of First Republic is affecting the comparisons. Net interest margins increased as the rates charged on loans rose faster than payouts on deposits. Jamie Dimon said: “Now may be the most dangerous time the world has seen in decades.”

Mortgage origination volume was $11 billion, which was down about 1.5% compared to Q1 and 9% from a year ago. Despite general fears about commercial real estate, we didn’t see any big provisions for credit losses; indeed we saw a decline in provisions. The stock is up 4.3% on the open.

Boston Fed President Susan Collins said that we are close to the peak in interest rates and that higher rates will have to stay in place longer than expected. “Overall, it is too soon to be confident that inflation is on a sustainable trajectory back to the 2 percent target we associate with price stability.” A further rate hike isn’t off the table yet.

Philly Fed President Patrick Harker thinks that the Fed can stand pat, for now: “Absent a stark turn in what I see in the data and hear from contacts … I believe that we are at the point where we can hold rates where they are,” Harker said in prepared remarks for the Delaware State Chamber of Commerce. “Look, we did a lot, and we did it very fast.”

The 30 year bond auction yesterday didn’t go well, which added upward pressure to yields. There was a 3.7 basis point “tail” which is the difference between the expected yield prior to the auction and the actual clearing price. This was the third bond auction this week that tailed, which shows limited appetite for duration. It also shows the safe haven bid isn’t there.

The Fed Funds futures increased their bets on another hike slightly, to a 13% chance of a hike in November and a 33% chance of a hike by the end of the year.

The number of people holding 2 full time jobs is increasing. Is this a sign of economic stress, or the new reality with more people having gig jobs and side hustles?

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