Morning Report: Inflation rises 7.9%.

Vital Statistics:

	Last	Change
S&P futures	4,232	-41.2
Oil (WTI)	114.10	5.39
10 year government bond yield		1.99%
30 year fixed rate mortgage		4.21%

Stocks are lower this morning as commodities continue to rise. Bonds and MBS are down.

Inflation at the consumer level rose 0.6% MOM and 7.9% YOY. Ex-food and energy, it rose 0.5% MOM and 6.4% YOY. Food, shelter and energy were the biggest contributors to the increases. Food prices rose 8.6% YOY which was the biggest jump since 1981. Fertilizer prices have doubled, which is filtering its way into commodity prices like wheat, corn and soybeans.

Last year’s torrid increase in home prices has yet to show up in the CPI, but it will. The shelter index rose only 4.7% YOY, while rents and home prices are appreciating close to 20%. Rising real estate prices impact the indices with a 12-18 month lag, so its impact has yet to be felt.

The labor market is still tight, according to the JOLTs index. There were 11.3 million job openings at the end of January. This is a slight decline from December, but still quite strong. The quits rate slipped to 2.8% from its record high in December. The quits rate is a leading indicator for wage growth, so wage-push inflation is on the table as well.

Nickel is still suspended in London, as far as I know. But it isn’t just nickel that is rising. Take a look at the year-over-year numbers for these metals (and coal). Pretty astounding.

These input prices will filter into final prices with a lag, so consider this to be sort of a preview of what is to come. For example, nickel is an input into stainless steel, so expect things like appliances to increase in price.

Mortgage credit availability increased in February, although we are still well below pre-pandemic levels. “Credit availability increased to its highest level since May 2021, driven by growth in jumbo loan programs, as well as those that include allowances for ARMs and expanded credit score and LTV requirements,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “In a period of rising mortgage rates, affordability challenges, and declining volume, lenders have made efforts to slightly broaden their product offerings.”  

Mortgage applications rose 10% last week as purchases rose 9% and refis increased 11%. On a YOY basis, the refi index is down 50%, while the purchase index is down about 7%. “Mortgage rates dropped for the first time in 12 weeks, as the war in Ukraine spurred an investor flight to quality, which pushed U.S. Treasury yields lower. A 6-basis-point decline in the 30-year fixed-rate mortgage led to a slight rebound in total refinance activity, with a larger gain in government refinances. Looking ahead, the potential for higher inflation amidst disruptions in oil and other commodity flows will likely lead to a period of volatility in rates as these effects work against each other,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Purchase activity also increased, as prospective buyers acted on lower rates and the early start of the spring buying season. The average loan size remained close to record highs, with higher-balance loan applications continuing to dominate growth.”  

Mortgage lenders are glum about future prospects, according to the Fannie Mae Lender Sentiment Survey. “For the sixth consecutive quarter, mortgage lenders expressed bearishness about near-term profit margin expectations amid headwinds from declining refinance activity, slower purchase mortgage demand growth, and narrowing spreads,” said Doug Duncan, Senior Vice President and Chief Economist at Fannie Mae. “For consumers, rising interest rates, lack of supply, and strong home price appreciation have reduced refinance activity and further constrained home purchase affordability, which, of course, is dampening lenders’ expectations of future business activity. Numerous uncertainties, including heightened inflation and the Fed’s monetary policy reaction, which must now also account for the inflationary impact of Russia’s war on Ukraine, suggest increased market volatility, but the general underlying, upward rate trend aligns with lenders’ expectations.”