Morning Report: Markets still reacting to Friday’s inflation data

Vital Statistics:

 LastChange
S&P futures3,809-90.25
Oil (WTI)118.91-1.84
10 year government bond yield 3.27%
30 year fixed rate mortgage 5.66%

Stocks are lower this morning as rates continue to rise in the aftermath of Friday’s CPI report. Bonds and MBS are down. With the stock market hovering just above 3,800 we are officially in a bear market. Having fun yet?

The Fed is almost assuredly going to increase the Fed Funds rate by 50 basis points at its meeting this week. Traders will parse the language for the degree of hawkishness, but I think markets are pretty much factoring in 50 basis points in June, July, and September. That is a lot of tightening in the face of a weak economy. The Atlanta Fed’s GDP Now index has Q2 growth coming in at 0.9%. Don’t forget Q1 was highly negative, so if Q2 ends up being negative, we will officially be in a recession.

Since the unemployment rate is so low, an official recession might not make a difference to the Fed. Their dual mandate is for unemployment and inflation, not growth and inflation.

In other data this week, we will get the producer price index tomorrow, housing starts, retail sales and leading indicators. So a pretty busy week, but the Fed will dominate the data.

About the only good news these days is that house prices are rising and making homeowners wealthier. In the first quarter, home equity rose 32.2%, according to Corelogic. Patrick Dodd, CEO of Corelogic said: “Price growth is the key ingredient for the creation of home equity wealth. Home prices were up by 20% in March compared to one year earlier in CoreLogic’s national Home Price Index. This has led to the largest one-year gain in average home equity wealth for owners and is expected to spur a record amount of home-improvement spending this year.” Over the past year, the average home gained $64k in home equity.

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