Morning Report: Wholesale inflation falls

Vital Statistics:

 LastChange
S&P futures3,9599.50
Oil (WTI)88.431.16
10 year government bond yield 3.43%
30 year fixed rate mortgage 5.97%

Stocks are higher this morning after yesterday’s bloodbath. Bonds and MBS are down small.

Inflation at the wholesale level fell 0.1% MOM and rose 8.7% YOY. The decline was driven primarily by a big decrease in energy prices. Ex-food and energy, the monthly index rose 0.2% MOM and 8.1% YOY. The report was more or less in line with Street expectations, so we aren’t seeing any sort of major reaction in the markets.

The encouraging thing is that the monthly core numbers (ex food, energy and trade services) is on a general downtrend over the past year. Will this have an effect on the Fed’s plans next week? Nope.

The Fed Funds futures now see a 70% chance of a 75 basis point hike and a 30% chance of a 100 basis point hike.

The effect on the yield curve is much more pronounced at the short end. The 2 year bond yield has picked up 23 basis points in yield over the past two days, while the 10 year is up about 8 basis points. The yield curve continues to invert, and the spread between the 2 year and the 10 year is now negative 36 basis points. The amount of tightening that has yet to hit the market is piling up. IMO, this is going to increase the chance for a hard landing.

Luckily since mortgage rates are more influenced by longer-term rates we aren’t seeing much of an impact on mortgages, at least not yet.

Mortgage applications fell 1.2% last week as purchases increased 0.2% and refis fell by 4%. Last week was short with the Labor Day holiday. “The 30-year fixed mortgage rate hit the six percent mark for the first time since 2008 – rising to 6.01 percent – which is essentially double what it was a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Higher mortgage rates have pushed refinance activity down more than 80 percent from last year and have contributed to more homebuyers staying on the sidelines. Government loans, which tend to be favored by first-time buyers, bucked this trend and increased over the week, driven mainly by VA and USDA lending activity.”

Median incomes fell about 2.9% to $67,251 in 2020, according to the Census Bureau. I’m sure the pandemic wreaked havoc on the numbers, so I would put an asterisk next to this one.

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