Morning Report: Inflation at the wholesale level is decelerating, but still at highs

Vital Statistics:

 LastChange
S&P futures3,910-20.25
Oil (WTI)105.910.19
10 year government bond yield 2.86%
30 year fixed rate mortgage 5.51%

Stocks are lower again on Fed fears. Bonds and MBS are up.

It looks like the “risk off” trade is beginning to positively affect bonds. Bonds are rallying, however MBS are lagging (as usual). The S&P 500 is within spitting distance of official bear market territory, which would be 20% off the high set in January. The Nasdaq entered that territory long ago.

Inflation at the wholesale level rose 0.5% in April, according to the Producer Price Index. This is a deceleration from the 1.5% we saw in March and 1.1% we saw in February. On a year-over-year basis, the PPI is up 11%. The core rate rose 0.6%, which was a deceleration from February and March. It is up 6.9% on a year-over-year basis. While the deceleration in month-over-month increases is welcome, the Fed is probably going to stick to is schedule and hike rates another 50 basis points at the June meeting.

Wages are rising, however they are not keeping up with inflation. Real (inflation-adjusted) wages fell 0.1% month-over-month in April, according to BLS. On a year-over-year basis, real wages fell 2.6%. Separately, initial jobless claims rose 203,000 last week. Overall the labor market is exceptionally strong, although the big question comes out to where inflation plateaus. That will determine whether we get the dreaded wage-price spiral that the Fed is trying to prevent. The low unemployment rate gives the Fed some breathing room to raise rates more aggressively.

With rising rates, ARMs are making a comeback. Last week the 30 year fixed rate mortgage was 5.53%, while 5/1 ARMS were 4.47%. “Despite a slow start to this year’s spring home buying season, prospective buyers are showing some resiliency to higher rates. Purchase activity has now increased for two straight weeks,” said Joel Kan, an MBA economist, in a release. “More borrowers continue to utilize ARMs to combat higher rates. The share of ARMs increased to 11% of overall loans and to 19% by dollar volume.”

ATTOM reported that 45% of mortgaged residential properties were considered equity rich, compared to 32% a year ago. “Homeowners continue to benefit from rising home prices,” said Rick Sharga, executive vice president of market intelligence for ATTOM. “Record levels of home equity provide financial security for millions of families, and minimize the chance of another housing market crash like the one we saw in 2008. But these higher home prices and rising interest rates make it extremely challenging for first time buyers to enter the market.”

Author: Brent Nyitray

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

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