All Things in Moderation

Vital Statistics:

Stocks are flattish after another inflation gauge came in hot. Bonds and MBS are down.

Inflation at the wholesale level rose 0.2% in March and 2.1% YOY, according to the Producer Price Index. If you strip out food and energy, the index rose 0.2% month-over-month and 2.4% year-over-year. While not a disaster like the CPI report yesterday, it isn’t helping the cause, and the 10 year is getting smoked again.

The FOMC minutes from the March meeting did indicate rate cuts were in the near future. While they did note that there might be some seasonality involved with the inflation numbers, the message was steady as she goes.

In discussing the policy outlook, participants judged that the policy rate was likely at its peak for this tightening cycle, and almost all participants judged that it would be appropriate to move policy to a less restrictive stance at some point this year if the economy evolved broadly as they expected. In support of this view, they noted that the disinflation process was continuing along a path that was generally expected to be somewhat uneven. They also pointed to the Committee’s policy actions together with the ongoing improvements in supply conditions as factors working to move supply and demand into better balance. Participants noted indicators pointing to strong economic momentum and disappointing readings on inflation in recent months and commented that they did not expect it would be appropriate to reduce the target range for the federal funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent.

In addition to the hotter-than-expected CPI print, we also had a pretty lousy 10 year bond auction. The bid-to-cover ratio was an anemic 2.34x, and dealers were forced to buy 25% of the $39 billion issue, which pushed 10 year yields to 4.56%.

Needless to say, the mortgage banks got roughed up yesterday, with Rocket down 13%, UWM down 7%, and Loan Depot down 5%. Mr. Cooper held up reasonably well due to is heavy MSR exposure.

Between all three hawkish events, the Fed Funds futures moved decisively towards higher rates, with the June futures pricing in only a 17% chance of a rate cut, and the December futures pricing in only 1 cut this year. Check out the probabilities from a month ago – markets saw 100 basis points in cuts.

Asking rents rose 1% in March compared to a year ago, according to data from Redfin. They were little changed compared to February at $1,987. The Midwest and the Northeast saw the biggest increases.

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