Is HOUSING inflation dead?

April 23, 2019

–The latest Bloomberg/Businessweek magazine cover asks ‘Is Inflation Dead?’  Not according to the oil market, which is at new highs today with CLM9 above $66/bbl (+0.53) as Trump ended waivers on sanctions for those who buy Iranian crude.  Iran threatened closing the Strait of Hormuz which creates further uncertainty.  However, gold is still a couple of dollars lower this morning.

–On Friday, the Fed Effective rate set at 2.44%, 4 bps above IOER.  This data was released yesterday morning and sparked heavy selling of FFK9 which settled 9757.5.  As a result  May/July FF spread settled -4.5 (down 3 on the day), while Aug/Oct settled -5.0.  Does this mean that an ease in June is nearly the same probability as one in Sept?  No, it’s just a response to a jump in Fed Eff (which covered the weekend).  The broader issue is that lib/ois and other ‘stable’ relationships are now increasingly subject to technical factors that cause squeezes of various sorts.  Unsurprising to see EDU9 and EDZ9 straddles each gain 1 bp to settle at 16.5 and 26.0.  And it’s not because the market laments the loss of the steady hand and intricate policy knowledge that Herman Cain would have brought to the Fed. 

–During the last crisis, housing was torpedoed by subprime mortgages and low equity to loan ratios which somehow slipped past zealous rating agencies. Now, equity as a percent of value has rebounded all the way back to respectable pre-crisis levels as the chart below shows.  But residential real estate is still sluggish at best.  It’s not a crisis but declining home sales are still a drag on the economy at large.  Today features New Home Sales expected 650k, -2.6%.  

Households Owner Equity in Real Estate as % of value
Posted on April 23, 2019 at 5:15 am by alexmanzara · Permalink
In: Eurodollar Options

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