Vital Statistics:
Stocks are lower this morning as earnings continue to come in. Bonds and MBS are down small.
Markets seem to be settling down after the pause in tariffs. The past week has been tumultuous as mortgage banks go from dealing with float down requests to a huge uptick in rates. Bond market volatility is still elevated, however it has (hopefully) peaked, and a combination of gradually lower rates and declining MBS spreads will translate into lower mortgage rates.
The MOVE Index is a measure of bond market volatility, which drives MBS spreads:
There is a lot of ink being spilled in the business press about Trump’s tariffs causing Treasuries to no longer enjoy safe haven status. I think this is a remote risk, because some asset has to replace Treasuries that has similar price stability and liquidity. German Bunds UK Gilts, and Japanese government bonds are much, much less liquid than Treasuries, and these economies have their own issues to deal with. China has capital controls, which makes the yuan a non-starter, and the only other options are crypto (which is way more volatile than bonds) or gold, which has the same problem.
Bill Gross used to call the US dollar the cleanest dirty shirt in the bunch, and that means the US dollar is the reserve currency by default. Trump’s tariffs, while inconvenient, will do nothing to change that.
Bank of America reported first quarter earnings that beat expectations. EPS rose 18%, while net interest income rose 1%. Provisions for credit losses were flat on a year-over-year basis, however they did increase 15% on a quarterly basis. Mortgage origination volume was $1.86 billion, an increase of 10% on a YOY basis.
CEO Brian Moynihan said: Our business clients have been performing well; and consumers have shown resilience, continuing to spend and maintaining healthy credit quality. Though we potentially face a changing economy in the future, we believe the disciplined investments we have made for high-quality growth, our diverse set of businesses, and the team’s relentless focus on Responsible Growth will remain a source of strength.”
So notwithstanding the consumer confidence numbers, it doesn’t appear to be changing behavior.
Fed Governor Chris Waller said that he expected any inflation from tariffs to be “transitory,” fully acknowledging that loaded term. “I can hear the howls already that this must be a mistake given what happened in 2021 and 2022. But just because it didn’t work out once does not mean you should never think that way again,” Waller said in remarks for a policy speech in St. Louis that compared his inflation view to the controversial “tush push” football play.
“Yes, I am saying that I expect that elevated inflation would be temporary, and ‘temporary’ is another word for transitory,’” he said. “Despite the fact that the last surge of inflation beginning in 2021 lasted longer than I and other policymakers initially expected, my best judgment is that higher inflation from tariffs will be temporary.”
The inflationary impact of tariffs will be hard to determine up front, simply because foreign sellers may cut prices to keep market share, deals may be cut with in the interim, and Americans might substitute products made in the US (or in countries with lower tariffs) for more expensive goods. Falling commodity prices (especially energy) are helping things.
Note import prices in March fell 0.1% MOM and 0.9% YOY.
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