MBS Highway Daily Updates 05/10/2023
Current position: Continue Floating
The rollover yesterday was only -2 bp, which was a nonevent.
Stocks and mortgage bonds are both nicely higher to start the day, following a cooler than expected inflation report for April.
April Consumer Price Index
The April Consumer Price Index (CPI) report showed that overall inflation increased by 0.37%, which was a little below estimates. Year over year, inflation declined from 5% to 4.9%, which was lower than the 5% expected. Inflation has declined sharply from the 9.1% peak and has continued to make progress every month since that peak.
The main focus is the core rate, which strips out food and energy prices, and it increased by 0.41%, which was in line with expectations. Year over year, the core CPI decreased from 5.6% to 5.5%, which was also lighter than estimates.
Shelter costs rose by 0.4% and have clearly been decelerating. Year over year, shelter rose by 8.1%, which was less than the 8.2% in the previous report. Rents rose 0.6% last month and remained up 8.8% year over year; clearly, this has not caught up yet. Owner's equivalent rent, which tries to capture the rise in home prices but does a poor job, rose 0.5% and is up 8.1% year over year, which was up 0.1%. With rents and OER not falling much, where did the help come from? Lodging away from home, which is a volatile number, fell by 3% last month after a few months of higher numbers, as we predicted. We felt this would be the case, especially after AirBnB reported weaker earnings.
It does appear that shelter costs are no longer accelerating on a year-over-year basis, have reached a peak, and are starting to crest.
As we anticipated yesterday after hearing from GS and JPM, used car prices and gasoline prices added inflationary pressure, but gasoline prices will work in our favor next month as they have come down since then.
A lot of the inflation came from used cars, which were up 4.4% last month and are up 50% year over year, which can't continue. Since used cars make up 3.25% of the Core CPI Index, it pushed the reading up 0.14%. Without this jump, core inflation would have risen 0.27% instead of 0.41%, which means the year-over-year rate would have gone down to 5.4% instead of 5.5%, and it would have been a party. We were right in insinuating that lodging away from home would decline, which is why it came in less than the GS and JPM estimates.
This summer will be favorable for rates, as we expect shelter to continue to crest and the comparisons from last year to get higher. Additionally, the increase in used cars will likely not continue. While we are seeing a nice move in the bond market as we saw more progress on inflation today, we think we are embarking on a good time for interest rates. We believe next month could show even more progress!
Following the lower inflation data, the Fed futures market is now pricing in a 100% chance of a 25-bp rate cut in September, clearly not believing the Fed, who is saying they will not cut this year. This could also help bond prices.
Zip recruiter reported earnings and said that they have been seeing demand for recruiting services continue to decline. Job postings have decreased across the majority of industries and across companies of all sizes. These declines are coming during a historically strong time for hiring.
They went on to explain that there has been an acceleration in the deceleration in the demand for recruiting services.
The CEO said that just last week they had an enterprise summit where they spoke to 30 of the largest hires in America. These are companies that hire between thousands and tens of thousands of employees per year. Across the board, all of them have reduced their hiring plans in the face of the economic uncertainty their businesses face.
This report is a lot more real-time than the Jobs Report and points to a slowdown and weaker job growth going forward.
The MBA released their mortgage application data for last week, showing that purchases increased by 5%. They are now higher in seven out of the last ten weeks. Purchases are still down 32% from this time last year.
Interest rates remained around 6.5%, with rates now about 1.125% higher than this time last year. Refinances increased 10% last week and are now down 32% year over year. It appears refinances are getting a boost from cash out refinances and debt consolidation. Make sure to use our debt consolidation tool under Loan Advisor.
Mortgage bonds are moving higher, breaking above the 50-day moving average, and now testing a quadruple overhead ceiling of resistance, which will be difficult to break through. The 10-year is moving lower and is now testing the 25-day moving average. If this level is broken, yields will likely move towards 3.43%. Continue floating.