Morning Report: Inflation rises 2/15/18

Vital Statistics:

Last Change
S&P Futures 2707.0 10.3
Eurostoxx Index 377.0 2.5
Oil (WTI) 60.4 -0.2
US dollar index 82.9 -0.2
10 Year Govt Bond Yield 2.90%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.44

Stocks are higher this morning on no real news. Bonds and MBS are flat.

Inflation at the wholesale level came in higher than expected as the Producer Price Index rose 0.4% MOM and 2.7% YOY. Ex-food and energy, the index was up 0.4% / 2.2% and the core rate was up 0.4% / 2.5%. The US dollar is weaker on the data, which adds to inflationary pressures. I suspect at some point dollar weakness will feed higher rates, but we aren’t there yet. Treasuries look like they want to test the 3% level we reached after the taper tantrum. The 10 year yield hit 2.94% overnight, so we aren’t all that far away. Goldman is forecasting 3.5% on the 10 year within the next 6 months on monetary tightening. Other strategists are raising their forecast for Fed tightenings as well, based on the additional stimulus of the budget deal and tax cuts.

FWIW, after the inflation data, the Fed Funds futures are now predicting a 83% chance of a hike at the March meeting, and sentiment is coalescing for a total of 3 hikes this year, to take the Fed Funds rate to 2.0% – 2.25%.

In other economic data, Initial Jobless Claims rose to 230k last week, while the Philly Fed rebounded to 25.8. The Empire State Manufacturing survey slipped. Industrial Production fell a tenth of a percent while Manufacturing Production was flat. Capacity Utilization fell 20 basis points to 77.5%. So, between the higher than expected inflation data and weaker manufacturing data, bonds are pretty much flattish.

Donald Trumps proposed 2019 budget contemplated an 18% cut in HUD’s budget, with the cuts largely coming from the end of the Community Development Block Grant program. At the end of the day, this budget is a messaging document and has 0% chance of becoming law as-is.

Builder Sentiment was flat in February according to the NAHB.

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