KEY DATA: Confidence: +7.3 points; Present Situation: +9 points; Expectations: +6.1 points/ Case-Shiller (National): +2.1%; Over-Year: +14.6%; FHFA: +1.8%; Over-Year: +15.7%
IN A NUTSHELL: “The exuberance is spreading as both confidence and home prices continue to rise sharply.”
WHAT IT MEANS: Happy days are here again. The economy is largely reopened, job growth is strong, confidence is surging and if you are selling your home, it’s nirvana. And today’s reports only add to the belief that the recovery is going full force. The Conference Board reported that consumer confidence jumped in June, with the view of both expectations and present conditions increasing solidly. The confidence measures had been improving at a pace that was disappointing, but it appears that could be changing.
The housing market has gotten out of control, at least when it comes to prices. Both the Case-Shiller and Federal Housing Finance Indices rose sharply in April and over the year, the gains are becoming scary. When you are talking about increases that average in the 15% range with some regions posting gains over-the-year approaching or even exceeding 20%, you have to think bubble. The Fed is intent on keeping longer-term rates down, so low interest costs are offsetting, to some extent, the higher prices. How much longer that can continue is unclear, as affordability is deteriorating. IMPLICATIONS: The economy is in getting back to normal, but inflation remains the great unknown. Normally, facing the sharp acceleration in prices of just about everything and growth at levels that are two to three times trend, economists and the Fed would be putting out the warning signs that something should be done. That something, of course, would be rate hikes. But that is not likely happening for a year or more. Yet the bond and equity markets are seemingly dismissing the possibility of an extended period of high inflation. One major reason is that the strong growth is being driven largely by government stimulus funds. As the income numbers show, wage and salary gains are mediocre. Once the money runs out, growth is likely to moderate and once the economy is largely reopened, the income increases from payroll gains will also fade. Also, the year-over-year numbers are suffering from the pandemic impacts on costs, and that too should start disappearing. But the factors that should lead to lowered inflation mean more moderate growth, and that doesn’t seem to be a part of the thinking of investors. Finally, there is the question I have been asking: Will the new-found pricing power be extended further into the future than most analysts expect?I think it will and we could have elevated inflation not just this year but next year as well. While that may not sound terrible, two years of high inflation could change the long-term outlook for inflation, unmooring inflation-expectations. Investors might consider asking what the markets would look like if trend inflation shifts from an average of 2% to maybe 2.5%? It would certainly change the outlook for interest rates.