Morning Report: Hot CPI spooks the bond market

Vital Statistics:

S&P futures4,117-28.8
Oil (WTI)66.210.97
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.13%

Stocks are lower this morning as the global stock sell-off continues. Bonds and MBS are down.

Inflation at the consumer level rose 0.8% month-over-month and 4.2% on a year-over-year basis. The index for used autos and trucks supposedly drove the increase. The index for food at home (in other words groceries) rose 0.4% MOM and 1.2% YOY. Energy fell 0.1% MOM but is up 25% on a YOY basis. It is unfortunate that COVID shutdowns are messing with the YOY numbers just when inflation data matters more than ever. Bond prices sold off on the report, with the 10 year bond yield rising to 1.65%.

Mortgage Applications rose 2.1% last week as purchases rose 1% and refis rose 3%. “Mortgage rates fell last week to the lowest levels since February, tracking the dip in Treasury yields,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The decline in rates helped the refinance index reach its highest level in eight weeks, driven by a 4 percent increase in conventional refinances. Additionally, refinance loan balances increased for the fourth straight week, an indication that higher-balance borrowers acted to take quick advantage of lower rates.”

United Wholesale reported first quarter earnings, however the forward margin guidance is worrisome. In the first quarter of 2021, gain on sale margin came in at 219 basis points. Second quarter margins are expected to fall to a range of 75 – 110 basis points. CEO Matt Ishbia said: “We welcome the shift to more of a purchase market and the pressure on margins as we believe our business model is built to outperform competitors under those conditions.” Rocket forecasted a big decrease in margins as well, although nothing similar to this. It feels like we are in for a rematch of the Great Detroit Price War of 2019.

Job openings hit a record high of 8.1 million in March, according to the JOLTs survey. The quits rate was flat at 2.4 million.

Back to the Consumer Price Index. FWIW, I find the grocery number hard to reconcile with the steep climb in agricultural prices. Commodity prices are up big over the past year.

Front-month corn:

Front-month wheat

Front-month pork

Back in the mid ’00s, we saw many funds begin to treat commodity products as an asset class in of itself and they would buy futures contracts and hold them as a way to fight off the effect of lower interest rates. I wonder if the same thing is happening now.


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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