Morning Report: ISM survey points to higher inflation going forward

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Stocks are lower this morning on no real news. Bonds and MBS are up.

Jerome Powell is set to testify in front of the Senate this morning. On Tuesday, he made some hawkish statements about inflation that sent bond yields higher. I doubt we will see a repeat today, but just be aware. 

Initial Jobless Claims fell to 210,000 last week, the lowest number since the 1960s. Last week included the President's Day holiday, which means we could have some sort of funky adjustment going on,  but regardless it speaks to a labor market where employers are hanging onto their employees. 

Personal Incomes rose 0.4% last month, while consumer spending rose 0.2%. The incomes number was a little better than expected. The inflation numbers show a modest pickup, but the core annual growth came in at 1.5% YOY, which is below the Fed's 2% target. 

Construction spending came in flat for January, and is up 3.2% YOY. Residential Construction was up 0.2% MOM and rose 4.3% YOY. 

The ISM Manufacturing Index improved to 60.8 in January. New Orders drove the improvement and employment improved markedly as well. The report often includes some snippets from respondents, and many of them are touching on the same thing:

• “Availability of electronic components, long lead times, allocations and constraints continue to wreak havoc in the purchasing cycle, with no end in sight at this time.” (Computer & Electronic Products
• “Steel market is doing rather well. Everybody is out of what I need.” (Fabricated Metal Products)
• “Employment is one of our biggest challenges. No labor available.” (Food, Beverage & Tobacco Products)
• “Business is very strong, and our lines are running at full capacity.” (Plastics & Rubber Products)

All of these statements relate to demand-driven bottlenecks and point towards inflation going forward. In fact, an ISM reading of this level would normally correspond with GDP growth over 5%. Note that the Fed pays close attention to the ISM numbers. 

CoreLogic has a good retrospective on the state of the housing markets in the US. 

Interesting development in the capital markets: Streaming music site Spotify is going public, without doing an IPO. Instead of selling a chunk of the company to an investment bank, who then sells it to the public, Spotify will skip the whole process and do a direct IPO, where it sells stock directly to the public on the NYSE. Without the certainty of a set number of shares, a set price for the shares and any sort of lock up period, SPOT could be a volatile stock out of the gate. 

The Senate looks poised to tackle banking reform, which essentially eases some of the Dodd-Frank restrictions on smaller banks. The asset threshold will be moved from $50 billion in assets to $250 billion in assets, which will prevent banks like M&T or Zions from having to conduct the detailed, 20,000 page stress tests that the bigger banks have to do. Aside from a few on the far left, there is general bipartisan support for easing the regulatory burden on smaller banks.