Morning Report: Inflation rises 6.6%

Vital Statistics:

S&P futures4,233-44.25
Oil (WTI)106.721.39
10 year government bond yield 2.89%
30 year fixed rate mortgage 5.36%

Stocks are lower this morning after disappointing earnings from tech leaders Amazon and Apple. Bonds and MBS are down.

Personal income rose 0.5% in March, according to the Bureau of Economic Analysis. February was revised upward from 0.5% to 0.7% as well. The Personal Consumption Expenditures Index (the Fed’s preferred measure of inflation) rose 0.9% in March, which was a big acceleration from February which rose 0.5%. This was driven primarily by increases in food and energy which increased due to the situation in Ukraine.

The core PCE price index rose 0.3% which was flat with February’s numbers. On an annual basis, the PCE price index rose 6.6%. Ex-food and energy it rose 5.2%. Personal Consumption Expenditures rose 1.1% and the savings rate fell.

Overall this report shows that incomes are expanding, which is good for the economy, however the increase in inflation will keep the Fed in a defensive role. This report also seems to contradict the first quarter’s initial read on GDP, which seems out of step with most of the other data out there. I suspect GDP will be revised upward in future releases.

Employment costs rose 1.4% in the first quarter as wages rose 1.2% and benefits increased 1.8%. On a year-over-year basis 4.5% as wages rose 4.7% and benefits increased 4.1%.

Annaly Capital (one of the biggest mortgage REITs out there) reported first quarter earnings. Book value per share fell a whopping 15% as MBS spreads widened, which was offset by increases in the value of the servicing book.

“The market environment during the first quarter of 2022 was one of the most challenging for fixed-income in decades, characterized by exceptional volatility with substantial spread widening and a notable increase in benchmark rates,” remarked David Finkelstein, Annaly’s Chief Executive Officer and President. “While our portfolio continued to generate strong earnings, our book value was not immune to the effects of Agency MBS underperformance resulting from market turbulence.”

Investors like Annaly are the ultimate buyers of the mortgage banking production. They are wary about the Fed’s impending balance sheet reduction and are therefore unlikely to aggressively bid mortgage backed securities. This flows through to TBA prices and finally through to the rates mortgage bankers can offer borrowers.

Mortgage backed securities are driven primarily by two factors: the level of overall interest rates in the market, and the volatility of interest rates in the market. Volatility is a key driver, since mortgage backed securities exhibit what bond geeks call negative convexity. This is because of prepayment risk. The takeaway should be that if Treasuries settle down and find a level, then we should see an improvement in MBS spreads, which will help push down borrowing rates.

Consumer sentiment improved in April, according to the University of Michigan Consumer Sentiment Survey. While sentiment is better than it was in March, we are still well below levels from a year ago. Even if you look at a longer-term chart, you can see that the mood of consumers is quite dour.

The downward slide in confidence represents the impact of uncertainty, which began with the pandemic and was reinforced by cross-currents, including the negative impact of inflation and higher interest rates, and the positive impact of a persistently strong labor market and rising wages. The global economy has added even more uncertainties about prospects for the U.S. economy, including the growing involvement in the military support for Ukraine, and renewed supply line disruptions from the covid crisis in China. Who would not be apprehensive about future conditions, even if on balance they anticipated a continued expansion? 

12 Responses

  1. Taibbi weighs in on Musk & Twitter:


  2. Interesting interview on Musk & Twitter:

    “If you believe — and I think this is roughly correct — that Twitter is the most important narrative setter in the most important industries in the world — politics, finance, entertainment, media, technology — and you are somebody like Musk who believes it is very important that people have narratives of the future that he thinks are good ones because he’s trying to instantiate a particular idea of the future in the present, and Twitter is a place those narratives are really at war, then how that place evolves, whatever the near-term question of an Edit button is, becomes really, really important.

    And beyond the valuation of any particular stock, I think his view — and I think it’s a reasonable view — is that storytelling drives much more of the economy, much more of politics, and much more of long-term investment and even buying decisions than people want to believe. And that storytelling now happens on these social platforms. Like the billionaires before Musk bought newspapers. But he sees further than they are. So he’s buying the platform.”


    • I watched Musk interviewed on a TED session and simply do not understand why there is any turmoil about his taking Twitter private. Also, I don’t understand why a brilliant guy with so many pies that are tasty [Tesla, SpaceX, the battery gig] and within his expertise even wants to mess with this, but it’s his $$$ not mine so God bless and hope he makes a bot free twitter work, but especially I hope he doesn’t put his engineering accomplishments in jeopardy. I intend to take my granddaughters on a tour of his Austin truck building facility this summer.

      Meanwhile, as I don’t use twitter and am stuck in an information age previous, I think this article from The Economist about the status of the Russian Army is worth a read.


      • “Also, I don’t understand why a brilliant guy with so many pies that are tasty [Tesla, SpaceX, the battery gig] and within his expertise even wants to mess with this”

        I think it’s a sign of how Twitter has captured the public awareness. Of the space it occupies in the lives of so Jane people. There’s nothing Twitter does that could not be duplicated and done better for well under a billion … except for be Twitter.

        He’s buying the public mindshare … apparently because he thinks it’s worth it. I suspect he also sees money being left on the table and I think he’s right about that. Still … too many irons in the fire could be a real problem here.


      • Thanks Mark. Good read.


      • Mark:

        I watched Musk interviewed on a TED session and simply do not understand why there is any turmoil about his taking Twitter private.

        If you pay attention to where the “turmoil” is coming from, it is hardly a mystery. His offer to buy the company was an explicit response to the corporate censorship that Twitter (and the left more broadly) has been engaged in since before the last election. Musk is seen by the left as a threat to the left’s attempts to control the public conversation and silence any political opposition, hence the “turmoil” among leftists.

        If you saw the Dems for what they actually are and what they are trying to do, I don’t think you would be so perplexed.


        • I think there is an issue to where the Democrats are now versus as recently as 2008, where progressives are now versus where most of them were 20 years ago. These highly visible Democrats and progressives of today are not the Democrats of the 1970s—or at least or more visible and more influential than then, and have captured more of academia and the corporate world than 20-30 years ago.

          In other words they weren’t nearly as far in their long March through the institutions as they are now.

          I don’t get it, either, but for different reasons, maybe. I think this is way too much of saying the quiet part out loud. The stealthiness and “just pushing to the breaking point” that allowed so much academic and industrial community to be captured.

          They are behaving is if they have absolute control and have had for 50 years. That I don’t get. They should be plotting how to run a fifth column in Twitter, not announcing their love of censorship out loud.


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