MBS Highway Daily Updates 04/12/2023
Current position: Floating
Both stocks and mortgage bonds are higher this morning following today's CPI report.
Consumer Price Index Inflation Data
The March Consumer Price Index (CPI) report showed that overall inflation increased by only 0.1%, which was lighter than the 0.2% expected. Year over year, inflation declined from 6% to 5%, which was lower than the 5.1% expected. Inflation has declined sharply from the 9.1% peak and continues to make progress, as we have been saying.
The main focus is the core rate, which strips out food and energy prices, and it increased by 0.4%, which was in line with expectations. Year over year, Core CPI increased from 5.5% to 5.6%, but this was covered in yesterday's update because of a small replacement figure from last year. With this in the rearview mirror, we expect core inflation to move considerably lower from here.
Shelter costs accounted for more than 60% of the total increase in the CPI, which is still lagging behind. Shelter spending rose by 0.6% and is now up 8.2% year over year, which is an increase from the previous 8.1%. Rents rose 0.5% last month and are now up 8.8% year over year, which is unchanged. Owner's equivalent rent, which tries to capture the rise in home prices but does a poor job of it, rose 0.5% and is up 8% year over year, also unchanged. While the CPI shelter costs are still catching up and adding inflationary pressure, real shelter costs have been coming down. Because shelter makes up 43% of core CPI, it was the main cause of the 0.4% monthly gain...but imagine when this catches up and starts to add deflationary pressure.
It does appear that shelter costs are no longer accelerating on a year-over-year basis and have reached a peak. We know that real shelter costs are up roughly 2.6% year over year, compared to the 8.2% reflected in the CPI. If this were caught up, and because shelter makes up 43% of the core index, the core CPI would be 2.4% or 3.2% lower, not 5.6%. The point being, this is coming and disinflation is in the pipeline; the question is when this gets caught up. We think this may start to happen in the April reading, which we will get on May 10.
Chicago Fed President and voting member Austan Goolsbee explained in a speech to the Economic Club of Chicago why he feels the right monetary approach for the current situation calls for prudence and patience. He acknowledged that the recent turmoil in the banking sector could lead to tighter credit conditions. He said analysts have speculated that this could be the equivalent of hiking rates by 25 to 75 basis points. This view is in sharp contrast to Philly Fed President (also a voting member), Patrick Harker, who wants to hike again at the May 3rd meeting to "get above 5% and sit for a while." He also said, "If we see inflation not budging, then I think we'll have to take more action. But at this point, I don't see why we would just continue to go up, up, and then go, Whoops!" And then go down, down, down very quickly. Let's sit there."
Commercial Loan Rates
The rapid pace of Fed rate hikes is beginning to have a large impact on commercial loans. Houston apartment owner Applesway Investment Group lost around 3,200 units to foreclosure as their float rate debt went from 3.4% to 8%. A record $151.8 billion in US mortgages backed by rental apartment buildings are set to expire this year, so it is unlikely that Applesway will be the last to experience this.
The MBA released their mortgage application data for last week, showing that purchases rose almost 8% last week, rising five out of the last six weeks. Purchases are still down 31% from this time last year, but are starting to make progress in reducing the deficit.
Interest rates decreased slightly from 6.4% to 6.3%, which is about 1.25% higher than this time last year. Refinances were unchanged last week and are now down 57% year over year.
Mortgage bonds are higher following this morning's CPI report, testing resistance at the 200-day moving average. The 10-year has moved beneath support at the 3.431% Fibonacci level. If this result holds, we can see yields move down to retest support at 2.291%. Begin the day floating.