Current position: Carefully Floating
We will be having an interview with Mike Wilson from Morgan Stanley, who is regarded as Wall Street's best analyst, today at 12:00 p.m. ET. Make sure to register HERE.
Stocks are lower and mortgage bonds are slightly higher after another favorable inflation report. The response to bonds has been bizarre, as the sharp declines in inflation would normally be very favorable for bonds.
Looking back to yesterday's CPI report -
Headline CPI fell from 4.9% to 4%, and while bonds initially had a positive reaction, they sold off as the day went on. Our good friend David Rosenberg said, "Who knew that the Treasury market of all asset classes would disapprove of the 3rd most intense inflation decline from a peak in the past 7 decades? In just 11 months, the inflation rate has plunged 510 basis points to 4% on the nose."
Peter Boockvar and Lacy Hunt shared the same sentiment. We know how important shelter costs are in the CPI, and interestingly, if you removed shelter, the CPI would be up 2% YoY and up 1.6% annualized over the last 6 months. We know how badly this number has been lagging and has been elevating the inflation numbers, but the bottom line is that inflation is falling at a good clip.
If you were to replace the shelter costs with more real-time rental and housing index figures, as well as the used car data with the Manheim index, headline inflation would only be at 2% and core inflation would be at 1.5%.
Producer Price Index
The May Producer Price Index (PPI) report showed that overall producer inflation decreased 0.3% in May, which was even lower than the 0.1% drop expected. Year over year, producer inflation fell from 2.3% to 1.1%, which was much lower than the 1.5% anticipated and the lowest level since December 2020.
The Core rate, which strips out food and energy prices, rose 0.2%, in line with estimates. Year over year, core inflation declined 3.2% to 2.8%, which was cooler than estimates of 2.9%.
The BLS said "over 40% of the May increase in prices for final demand services can be attributed to margins for auto and auto parts retailing, which rose 4.2%."
Fed Meeting
Later this afternoon at 2:00 p.m. ET, we will also get the Fed's rate hike decision and Jerome Powell's press conference. The Fed is most likely not going to hike rates, but their language will be very important: will they say they are "skipping" this meeting, "pausing," or something else? We will have to listen closely for their comments and the new projections they will release for the Fed Funds Rate, inflation, the unemployment rate, and GDP.
Mortgage Apps
The MBA released their Mortgage Application data for last week, showing that purchases rose by 7.6 percent last week and are down 27% year over year.
Interest rates decreased from 6.875% to 6.75%, with rates now about 1.125% higher than this time last year. Refinances rose 6% last week and are now down 41% year over year.
MBS Highway Housing Survey
MBS Highway's June 2023 Housing Survey saw a slight pullback in buyer activity, albeit from elevated levels. Higher mortgage rates and low inventory levels are to blame. Demand remains very high, as evidenced by both rising prices and intensified competition nationwide.
64% of respondents in June 2023 characterized their local buyer activity as "very active, "somewhat active, or "steady." While that's modestly down from 72% in May, it remains well above the 22% seen in December 2022. Availability and affordability are the issues for buyers, not the desire to move.
Technical Analysis
Mortgage Bonds are continuing to battle with the important 99.845 Fibonacci level. The 10-year broke above resistance yesterday at 3.77% and is now trading in a new range, with the next ceiling at 3.85 begin the day carefully floating, waiting on the Fed this afternoon.