Morning Report: Inflation remains high in February

Vital Statistics:

S&P futures3,933 44.75
Oil (WTI)73.50-1.24
10 year government bond yield 3.61%
30 year fixed rate mortgage 6.54%

Stocks are higher this morning as the regional banks rally. Bonds and MBS are down.

The regional banks are all rallying today despite news that Moody’s has placed a slew of them on review for a downgrade. Western Alliance is up big this morning after it increased its liquidity. First Republic is up 50%, as is PacWest.

The 10 year bond yield is up a touch this morning, but the 2 year yield is up 28 basis points to 4.26%.

Inflation at the consumer level rose 0.4% month-over-month and 6% year-over-year. Housing was the big driver of the increase, while lower energy prices helped pull the number down.

If you strip out food and energy, inflation rose 0.5% MOM and 5.5% YOY. The month-over-month number was a 0.1% uptick from January.

If it weren’t for SVB these numbers would justify a 50 basis point hike in the Fed Funds rate next week, but with cracks showing in the financial sector they probably can’t do that. The Fed Funds futures are predicting another 25 basis points with a small probability that the Fed stands pat.

Small business optimism improved in February, but remains well below its historical average. Inflation remains the biggest problem, although it looks like it has peaked, at least if you are looking at the number of firms planning price hikes. Labor is still a problem, as many small businesses have unfilled positions and cannot find the workers.

The report doesn’t mention the issue with the regional banks, although the vast majority of small businesses weren’t interested in borrowing anyway. Overall, small businesses expect a recession, but it is taking some time getting here. Spending remains robust, probably because people have job security.

Rate lock volumes rose 2% in February, according to Black Knight. “Mortgage rates ticked up again in February after a brief respite, showing once again just how rate sensitive the market continues to be,” said Kevin McMahon, president of Optimal Blue, a division of Black Knight. “Conforming rates dipped below 6% early in the month but finished it up 52 basis points from January. Even though the number of rate locks was down month over month, dollar volume increased due to a rate environment that favored jumbo and ARM loans over GSE products. Essentially, though, the story remains the same – one of a market facing significant interest rate-driven headwinds. As Black Knight reported last week in our latest Mortgage Monitor, there were clear signs of buyside demand when rates neared 6% – it just quickly pulled back when rates began to climb again.”

Guild has acquired Cherry Creek Mortgage, a Colorado-based lender.


Author: Brent Nyitray

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

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