Market Commentary 12/10/21, Market Commentary 12/10/21

Market Commentary 12/10/21

Interest Rates Hold Steady As U.S. Inflation Hits 39-Year High

Inflation readings rose to levels unseen in almost 40 years, with the CPI index clocking in at 6.80% annually. We don’t expect these readings to cool off anytime soon, as the slow housing-related component of the inflation calculation has risen dramatically.  As an example of how bad the supply chain really is, the local Starbucks I usually go to was out of all breakfast items this morning except for one or two of the less popular foods. The manager informed me that they simply can’t get the food on time or consistently from their suppliers. This is holding true for so many goods, leaving companies scrambling.

Further complicating matters is the imbalance between job openings and job seekers which currently stands at over 5 million. Companies are scratching their heads as the promise of higher wages, signing bonuses, and more flexible hours isn’t filling the void. The dynamics of employment have changed since COVID.  Employees have pricing power for the moment and this will lead to still higher inflation. As wages and fixed costs are elevated, companies will do all they can to pass those costs to customers. Supply chain issues will also force companies to bid up inventory. These factors will keep inflation as a key concern for the U.S. consumer through the foreseeable future. 

Bonds curiously took the hot inflation reading in stride.  The reasons for this are many, but, perhaps long-term bond traders know that these soaring input costs and wage increases will lead to an economic slowdown.  The equity market was unconcerned with the news as well.  Equity traders are working hard to keep the year-end rally intact after a quick but violent shake-out at the start of the month.  Rest assured if inflation stays at these levels or higher, volatile days are ahead. The impact probably won’t start to be felt until early next year.

Housing and real estate remain a great hedge against inflation. Low long-term rates are helping borrowers pay for houses, but with low fixed interest expenses. There is something for everyone in terms of mortgages- from private banking with extra-low rates for the ultra-rich, to the community bank who is eager to gain market share, to the alternative doc mortgage bank who is willing to support customers with or without income verification.  Thankfully, Insignia Mortgage has access to all of these products which are keeping us very busy finding solutions for our many clients.

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These are the opinions of the author. For financial advice, please talk to your CPA or financial professional.