Prices: Groceries, Mortgages, Stocks vs. Bonds

I grant you that these are not the most pleasant notes to start the week, but a) I gotta call it like I see it, and b) read to the end for some truly beautiful notes.

At the risk of starting the week on a less-than-upbeat note, let’s check in on some prices. Not just any prices, but prices both salient and interesting (to me, at least), including the price of groceries, home loans, and the divergence between stock prices and bond yields.

I recently wrote about grocery prices but I wanted to update the key chart with the latest CPI data, reflecting war impacts. As I wrote earlier:

…ever since the Strait of Hormuz has been shut, as it remains today, myself and many other analysts have been worried about its impact on the supply and price of food. In the near term, given that 80% of food in the US is distributed by trucks, which tend to run on diesel, we expected the increase in diesel prices—up by about $2, or 55%—to be mostly passed through to consumers.

Over the longer term, the negative shock in fertilizer supply will have be felt in planting seasons, a particularly acute problem for many developing countries in the region, who are likely looking at lasting food shortages.

The chart below plots the level of the grocery price against a pre-pandemic trend, taken from 2014-19, against the actual level. I and others have argued that the wide gap you see at the end is one way to picture the vibes gap: the difference between what shoppers had gotten used to pre-pandemic and the current price level. This method frames the vibes gap as a price-level-expectations shock.

The good question is: why haven’t people reset their expectations by now? Why haven’t they acclimated to the new, higher price levels. I mean, eventually that has to happen, right? Otherwise, I’d be banging on about how gas used to cost $0.60 a gallon, as it did lo these many years ago when I started driving.

Well, one answer the figure gives is that the gap is widening—the first arrow is shorter than the most recent arrow—which is just another way of saying grocery inflation has been accelerating, due in no small part to the tariffs and the wars. The theory I’m espousing here is that for the vibes gap to close, it has to stabilize, and at least re groceries, that ain’t happening.

This next one is just really working my last good nerve, and I say that having locked in a low mortgage and then refinanced into an even lower one (ok, boomer…). What we have here is the 30-year fixed rate mortgage, which was sliding down nicely through 2025, before spiking after the war started. This rate moves closely with the 10-year bond yield, discussed next, and thus has been driven up by a rising war/tariff-induced inflation premium and the fact that these inflation dynamics have pushed the Fed from a cutting bias to neutral one (more on that below).

30-YEAR FIXED RATE MORTGAGE (Mortgage News Daily)

But wait—isn’t this a post about prices? Why are we talking about a borrowing rate? Because that’s a price too. It’s the price of money, and research, along with common sense, suggests it’s right up there with the other affordability prices.

In fact, consider the median home, which today runs for about $400K. The difference in the monthly payment from the pre-war 30-yr FRM rate of 5.99% and today’s rate of 6.65% is $195/month or $2,300 per year. Add that to the cost of war.

Yeah, but that only affects homebuyers, a relatively small subset of the population, right? Not so. It also affects refinancers, a much larger group. As an industry source reports:

A modest rate increase was enough to drive a ~14–15% drop in refinance applications, showing how little margin remains in the refi market. Total applications fell more than 10% in a single week, reinforcing how quickly demand reacts to even small rate moves.

Finally, in an adjacent move from the affordability discussion, consider the fact, as shown below, that both stock prices and bond yields are now rising together (bond yields move inversely to their prices, so this means stock prices and bond prices are moving in different directions).

This is far from unheard of, though normally stock and bond prices are negatively correlated. Think of “safe haven” dynamics in a down market (equity prices fall and bond prices rise as investors seek the safety of fixed income securities). So, what’s happening here, with “risk on” in equities but “risk off” in bonds?

As the WSJ recently put it:

If that triggers an image of bubbly, endlessly optimistic equity traders partying all day, while grumpy fixed-income investors scold them for their profligacy—ant and grasshopper dynamics—that sounds about right, though there are many investors and funds that are hedging in both markets.

The equity optimism, of course, relates to AI visions of copious future earnings, while the rising—if not spiking—bond yields (which, as noted, bleed into mortgage rates) reflect inflation and probably other risk premia—I’d put the climbing US public debt on the list—and a Fed that has, of necessity, turned more hawkish.

On that last point, here are comments from Fed talkers last week, from a GS newsletter:

• President Goolsbee highlighted services inflation as the “unexpectedly disappointing” part of the April CPI report and described the labor market as “stable but not good.”

• President Collins said she is “particularly concerned about inflation,” thinks “it will likely be important to maintain the current slightly restrictive monetary policy stance for some time,” and “could envision a scenario in which some policy tightening is needed to ensure that inflation returns durably to 2 percent in a timely manner.”

• President Schmid said he sees “continued inflation as the most pressing risk to the economy.”

• President Williams said he doesn’t see “any reason at all ​to raise rates right now or lower rates right now.”

[Note: Warsh has got to be following these comments and wondering “what the hell am I gonna tell Donnie??”]

Who’s right? Who will prevail in this cage match between optimism about future corporate profitability and worries about inflation, fiscal debt, and Fed-hike risks? It’s entirely possible that the answer is both. Profitability could soar, further enriching the already rich, while the rest struggle with paying for groceries.

Like I said, that’s not the right note to start the week. So, here are some very beautiful notes to start the week. I love Mozart’s music above all, and while it’s impossible to pull out a favorite, this serenade is less well known and it has gotten me through all sorts of choppy waters.