Morning Report: Inflation comes in hotter than expected

Vital Statistics:

S&P futures3,969-27.25
Oil (WTI)103.814.19
10 year government bond yield 3.03%
30 year fixed rate mortgage 5.49%

Stocks are lower this morning after inflation came in hotter than expected. Bonds and MBS are down.

Inflation rose 0.3% MOM and 8.3% YOY, according to BLS. This is a deceleration from the 1.2% MOM increase we saw in March. The core inflation rate (ex-food and energy) rose 0.6% MOM which was double March’s rate of increase. Since the Fed focuses more on core numbers, this stat is getting the market’s attention. The core rate rose 6.2% YOY.

Energy prices fell, although much of that was due to seasonal adjustments. We are heading into the summer driving season, where demand will spike.

Shelter rose 5.1% YOY, however this number is going up given how fast home price appreciation has been. It generally gets reflected with an 18 month lag, so the torrid price appreciation over the last two years will begin adding upward pressure to the index going forward.

Overall, this report changes nothing with respect to the Fed. It will probably hike another 50 basis points at the June meeting. Stocks and bonds were up prior to the report, so the market is taking it negatively.

Mortgage Applications rose by 2% last week as purchases increased 5% and refis fell 2%. “The increase in mortgage applications last week was driven by a strong gain in application activity for conventional and government purchase loans, even as mortgage rates rose to their highest level – 5.53 percent – since 2009,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite a slow start to this year’s spring home buying season, prospective buyers are showing some resiliency to higher rates. Purchase activity has now increased for two straight weeks.

Mortgage credit tightened in April, according to the MBA. Its Mortgage Credit Availability Index fell by 3.2%. The decrease was driven by government loans, specifically streamline refis. “Lenders reacted to the jump in mortgage rates over the past two months,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “With the rate/term refinance business drying up, lenders have reduced the availability of government streamline refinancing programs, which are no longer as relevant an option for many borrowers.” Mortgage credit overall is about as tight as it was in the aftermath of the financial crisis. Note how much lower it is compared to the bubble years. This is one of the many reasons why the acceleration in home prices doesn’t portend the sort of bust we had in 2006.

Rocket reported that first quarter volumes fell 48% YOY to $54 billion while gain on sale margin contracted to 3.01% from 3.74%. The company is guiding for Q2 volumes to come in between $35 billion and $40 billion and for gain on sale margins to fall to 2.6% – 2.9%. Rocket said that bond market volatility contributed positively to its first quarter gain on sale, so this guidance is probably a reversal of that.

“Rocket delivered a solid performance in the first quarter and achieved our best Q1 volume in purchase and cash out refinances, even as rates rose rapidly. Now, as we move further into the year, we will successfully navigate the mortgage and real estate headwinds by protecting our margin and profitability while continuing to invest in strategic areas such as technology, partnerships and performance marketing to grow share and expand our business for the long term,” said Jay Farner, Vice Chairman and CEO of Rocket Companies.

Rocket’s comments about protecting margin and profitability are probably welcome news for independent mortgage bankers who are worried about a replay of the UWM / Rocket price war of 2018. Rocket’s stock is down 10% this morning.

10 Responses

  1. I’m shocked that nothing happened:

    “Three months ago, Speaker Nancy Pelosi and Senate Majority Leader Chuck Schumer backed efforts to curb stock trading by members of Congress. The two Democratic leaders were responding to a barrage of media reports on stock trading by lawmakers and aides, often in companies that had business before Congress.

    Dozens of lawmakers failed to disclose their transactions in a timely manner, with the value of trades running into the millions of dollars over multiple years. The House Ethics Committee has opened several investigations into these allegations following reviews by the Office of Congressional Ethics, the independent watchdog agency.

    Yet since that time, nothing has happened on the legislative front. Nada. Zip. Zero.”


  2. Good read:

    “A term like “conservative” doesn’t fit the Tesla tycoon; even “libertarian,” while closer to the mark, associates Musk with a lot of ideas that I don’t think he particularly cares about. A better label comes from Virginia Postrel, in her 1998 book “The Future and Its Enemies”: Musk is what she calls a “dynamist,” meaning someone whose primary commitments are to exploration and discovery, someone who believes that the best society is one that’s always inventing, transforming, doing something new.

    If you think this sounds uncontroversial, think again. First, the dynamist may not care where novelty and invention spring from: Unlike the purist libertarian, he might be indifferent to questions of public versus private spending, happy to embrace government help if that’s what it takes to get the new thing off the ground — and happy to take that help from regimes like Communist China no less than from our own. And he may be willing to risk much more than either the typical progressive or the typical conservative for the sake of innovation. Political principle, social stability and moral order are all potentially negotiable when discovery alone is your North Star.”


  3. Scott, you might find this amusing.

    “How to give future humans a voice in government

    Sophie Howe, the future generations commissioner of Wales, is part of a growing movement to safeguard humanity’s long-term interests.

    By Sigal Samuel May 11, 2022, 7:00am EDT ”

    Presumably they aren’t ant-abortion, which is where I would presumably start if you think that “future humans” should get a voice in current decision making.

    Of course, just calling it “long term planning” isn’t controversial enough to merit media attention.


    • File this under things human beings should not try to do, because they can’t be done, and we will inevitably spectacularly awful at trying to do them.

      First of all, everything that remotely does anything to study humans predictive power indicates we are horrible at predicting things. We’re terrible at predicting future events. We are terrible at predicting our own behavior in a hypothetical situation. We are VERY bad at seeing the future. So when we start planning for imaginary futures, we’re almost certainly going to make awful decisions.

      Secondly, I can’t imagine anything much more complicated than basically everything that might impact future generations. And we are also not very good at managing complicated or organic systems (see our history with forest management). We’re not always even good at doing simple things, by comparison: such as running mid-size cities with fairly straightforward requirements.

      This kind of shit is retarded. Pick up the trash. Fix the potholes. Put murderers in jail. The future will take care of itself if you can do the basic stuff well.


      • “One example where my recommendations made a significant impact was with all these changes to our transport policy, starting with the canceling of this big road that was going to be built in Wales.”

        Congrats I guess. I suspect this will end up being another opportunity for NIMBY with a different name.


        • Probably. And I think lots of unintended consequences that are non-confirmable, because there’s no A-B testing. Maybe that road leads to improved supply chains which attracts certain businesses which improves tourism in areas which improves the economy which would have let to much better life outcomes for far more people 50 years or 100 years from now, cumulatively, than stopping the project.

          People are terrible at predicting the trajectory of just their own lives. And that’s one life, with only the inputs of their particular life. The idea that you can do a good job of predicting the trajectory of the lives of hundreds of thousands or millions or billions of people over decades and centuries is . . . insane. The best possible outcome is that you only do minimal damage to future generations. The more likely outcome is you do significant damage to future generations–compared to where they could be, without your well-meaning interference.

          But you can’t prove counter-factuals.


    • How bizarre. I’ve never heard of such a thing. I will have to ask my UK friends if they are aware of it.

      And yes, great point re abortion!


  4. Jeez, slow walking us into war with a nuclear power.


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