Morning Report: Inflation comes in hotter than expected

Vital Statistics:

S&P futures4,134-12.50
Oil (WTI)78.09-2.78
10 year government bond yield 3.73%
30 year fixed rate mortgage 6.39%

Stocks are lower after the bad inflation print. Bonds and MBS are down.

We will have 3 Fed speakers today. It will be interesting if the CPI print comes up.

The consumer price index rose 0.5% MOM in January, breaking a streak of lower monthly numbers. Excluding food and energy the CPI rose 0.4%. Inflation rose 6.4% on an annual basis. Shelter was the biggest addition to inflation, and that will fade as we get into summer where home prices peaked last year.

The part the Fed is worried most about is services ex-housing, which is basically wage inflation. The labor market remains tight as a drum and wages are still increasing at a faster pace than the Fed would like to see. The White House just put out something on this subject – average hourly earnings for the non-housing services. You can see the spike in this index over the past year

Luckily it is going in the right direction, but we are still above the highest pre-pandemic level going back 30 years. That fact is going to keep the Fed on the inflation beat. People hoping for a Fed pivot will need to watch this index.

Small Business Optimism increased in January, according to the National Federation of Independent Businesses. Prices are still increasing, although the net number of businesses raising prices did moderate a touch.

“The Index of Small Business Optimism has been in recession territory
all last year and into 2023. If it weren’t for the Job Openings and Hiring
Plans components, the Index would be much lower
. Actual capital
spending and inventory investment are very weak as are plans to
spend. Earnings are dismal. Actual sales trends are negative and
expected real sales are also. When we ask owners if they have any job
openings they reply “yes, I’d hire more if I could,” so hiring plans are
historically high as is the level of job openings. Everything else is pretty
much in the tank
. When we ask owners if they were successful in hiring
and filling open positions, the answer is “no,” more firms reported
reducing employment than increasing it and the average addition of
workers is smaller than the reported reduction. These openings and
hiring plans roll over from month to month.”

If you look at the historical chart, you can see things are pretty much lousy, back towards what we saw during the Great Recession.

Black Knight is close to selling its Empower LOS is order to gain antitrust approval to merge with Intercontinental Exchange. The antitrust regulators were almost certain to prohibit Encompass and Empower from being under the same roof. Encompass and Empower are the #1 and #2 loan origination systems in what is a pretty concentrated industry. No mention of who would be the buyer.

Rate lock volumes rose 23% in January according to the Black Knight Mortgage Monitor. Some of this is seasonality, however lower rates are playing a part as well. “Mortgage rates declined in January, continuing a trend that began in early November 2022,” said Kevin McMahon, president of Optimal Blue, a division of Black Knight. “Conforming rates dropped 36 basis points from where they were at the start of the year, and we saw that rates associated with those FHA/VA/jumbo locks all came down in kind. Triggered by this pullback, rate lock volumes rose for the first time since March 2022, driven by declining interest rates and seasonal tailwinds, snapping a nine-month streak of declines.”

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