In one volatile day for the crypto currency Luna, the coin supply rocketed from approximately 725M to nearly 7T, or increase of 1M times. The value drop was much more significant as some folks investments were worth about 0.000000024% of their original value. The story is still developing and it will be interesting to unpack the cause of the collapse. Terra is a blockchain like etherum and it produces luna tokens instead of ether. To create UST (a stable coin that was also disrupted) you need to burn luna. Part of this collapse was caused by offering a 20% yield on staking UST (crypto terminology for interest on a loan… 20% interest rate on a savings account!!) and before the collapse nearly 70% of UST’s supply was ‘staked’. UST is ‘pegged’ so it could always be exchanged for $1 of luna, no matter the price. A large amount of UST was unstaked and sold, causing the price to go down to 91 cents creating opportunity for arbitrage. Suddenly everyone was rushing to unstake and sell their positions of UST and it becamed unpegged and luna quickly became valueless. The real question is – can this strategy be replicated with other coins?
Rates improved a bit this week as the price of Mortgage Backed Securities ended the week higher than where they started for the first time since the beginning of March. Inflation reports came in slightly lower than expectations this week. Rates are up approximately 2.375% from this time last year.
Jobs – the number of people filing for unemployment for the first time increased by 1,000 to 203,000 last week This is the second consecutive, if not minor, increase. Continuing unemployment claims is down to 1.384M the lowest level since 1970. The labor market remains tight but we will keep a close eye on initial unemployment claims as that can be an early recession indicator.
Freight – the April Cass Freight Index was down 2.6% month over month and down 0.5% year over year. Freight volume is an extremely reliable early-recession indicator – we will see if this decrease in volume continues.
Inflation – the Producer Price Index increased 0.5% in April and is up 11% year over year (this number is down from 11.2% in the previous report). The core rate – which strips out food and energy prices – declined from a 9.6% to 8.8% increase year over year. The Consumer Price Index increased by 0.3% in April and is up 8.3% year over year (down from 8.5% on the previous month’s report). When you strip out food and energy the year over year increase declined from 6.5% to 6.2%.
Fed – Jerome Powell will serve a second term as Fed chair after being confirmed with a 4:1 vote. Powell has walked away from his prediction of a ‘soft landing’ from inflation stating that he could not promise one.
Mortgage Applications to purchase homes increased 5% last week and are down 8% year over year. This shows that demand remains strong despite lack of inventory, higher rates, and higher prices. Refinance applications declined 2% last week and are down 72% year over year.