Morning Report: Some good news on inflation

Vital Statistics:

S&P futures4,107-26.5
Oil (WTI)93.81-4.80
10 year government bond yield 2.60%
30 year fixed rate mortgage 5.30%

Stocks are lower this morning as earnings continue to come in. Bonds and MBS are flat.

We have a big week of data coming up, with the ISM data, job openings, and the employment situation report on Friday. Note that the ADP Employment Report is on hold while ADP works on their model.

Interest rates continue to fall, which is triggering margin calls for originators. This is not just a US-driven phenomenon. The German Bund (a proxy for European interest rates) yields 0.77%, which is down 100 basis points from late June. Global interest rates tend to correlate, and the European economy is weakening.

I sat down with Mike Savino of National Mortgage Professional and did a podcast on the state of the economy. You can access it here.

The manufacturing economy decelerated in July, according to the ISM Manufacturing Index. New Orders and production declined, which shows the economy slowing. On the bright side, prices are beginning to moderate. From the report: “The month-over-month decline of 18.5 percentage points is the fourth biggest decline on record (since 1948) and the steepest since a 22.1-percentage point drop in June 2010. “The slowing in price increases is being driven by (1) volatility in the energy markets, (2) softening in the copper, steel, aluminum and corrugate markets and (3) a significant decrease in chemical demand. Notably, 21.5 percent of respondents reported paying lower prices in July, compared to 8.3 percent in June,” says Fiore. A Prices Index above 52.6 percent, over time, is generally consistent with an increase in the Bureau of Labor Statistics (BLS) Producer Price Index for Intermediate Materials.”

Much of this is due to falling commodity prices, which is partially due to the dollar. The US dollar has been on a tear lately, and since commodities are quoted in dollars, when the dollar rises, commodity prices fall. That said, the Fed will breathe a sigh of relief as one of the big components of our current inflation eases.

Construction spending fell 1.1% MOM in June, according to the Census Bureau. Residential construction was down 1.6% MOM but up 15.4% YOY. I don’t think the construction spending data is inflation-adjusted so that would account for the big YOY increase despite falling housing starts.


Author: Brent Nyitray

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

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