Morning Report: Inflation at the wholesale level rises

Vital Statistics:

	Last	Change
S&P futures	4,394	1.2
Oil (WTI)	101.89	3.59
10 year government bond yield		2.68%
30 year fixed rate mortgage		5.15%

Stocks are flattish as we kick off earnings season. Bonds and MBS are up.

Inflation at the wholesale level rose 11.2% in March, according to the Producer Price Index. Ex-food energy and trade services prices rose 7%. Over half of the increase was driven by rising energy costs. These numbers were hotter than what the Street was looking for, but bonds seem to be behaving this morning. You can see below we are at extremely elevated levels historically:

Note that inflation is not just a US phenomenon. UK inflation surged to a 30 year high as well.

Mortgage applications fell by 1.3% last week as purchases rose 1% and refis fell by 5%. Refis are down 62% on a YOY basis. “Mortgage rates across all loan types continued to move higher, with the 30-year fixed rate exceeding the 5-percent mark to 5.13 percent–the highest since November 2018,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance activity as a result declined to the slowest weekly pace since 2019.”

Separately, the MBA is forecasting that 2022 originations will come in at $2.58 trillion compared to roughly $4 trillion in 2021.

MBS spreads continue to widen, along with bid-ask spreads in the TBA market. I assume this is being driven by fears of the Fed’s exit from the MBS market. While we are not at the wide levels of early 2020, MBS spreads are wider than they have been historically. This would indicate that mortgage rates might move lower if the 10 year stabilizes here.

JP Morgan reported earnings this morning. Earnings fell on a YOY and QOQ basis as provisions for loan losses increased. Mortgage banking volume fell 37% YOY to $25 billion. The home lending segment reported profits of $1.2 billion, up 8% compared to Q421 and down 20% on a YOY basis. Rising servicing income offset declining gain on sale and volumes. The stock is down about 3% on the open.