The Market Today

Hottest PPI Inflation on Record, Mortgage Rates Keep Rising

by Craig Dismuke, Dudley Carter


Mortgage Rates up to 5.13%, Nearing Highest Level Since 2009: Mortgage applications for the week ending April 8 fell another 1.3% as mortgage rates continued to rise.  The average 30-year mortgage rate rose another 23 bps to 5.13%, the highest level since 2018 and 5 bps from being at its highest since 2009.  Purchase apps did tick up 1.4% but refi apps fell another 4.9%.


Firm March PPI Tells Different Story Than CPI Report: Producer prices rose more than expected in March on large gains in food and energy items and a larger increase in services prices.  Headline PPI rose 1.4% MoM versus expectations for a 1.1% gain.  This brought the YoY rate up from 10.3% to 11.2%, the largest gain on record.  Food prices rose 2.4% MoM, including a 13.5% increase in the price of crude food items.  Energy prices rose another 5.7% MoM bringing the three-month growth to up 18.3%.  Excluding food and energy items, goods PPI rose 1.2% MoM, the largest gain in records back to 2010.    On the services side, price gains were firmer than the past two months, up 0.9% MoM.  The breadth of gains across the PPI report is likely to offset some of the optimism created by yesterday’s CPI report that, perhaps, goods inflation was beginning to slow.


Brainard Believes Fed Can Pull Off Soft Landing: Fed Governor Brainard moved markets last week in a discernibly hawkish speech that stole the limelight from the Fed’s March meeting minutes. She repeated a similar message Tuesday, saying the Fed is planning to “expeditiously” move against strong inflationary pressures “by tightening monetary policy methodically, …through a series of interest rate increases as well as beginning…balance sheet runoff.” She said that officials could announce their balance sheet plans at the May meeting, which would allow runoff to begin as early as June. “In terms of exactly what the right pace of…increases in the policy rate from meeting to meeting, I don’t really want to focus on that,” Brainard said, adding, “But I would just say the combined effect will bring the policy stance to a more neutral posture expeditiously later this year.” Brainard gave a nod to the “notable” slowdown in core inflation in the March CPI data released before her remarks, but said it will take more than one report to alter the narrative. She believes Fed communications have already tightened financial conditions and sees room for tighter policy to bring inflation down over time and reduce demand for new workers (i.e. job openings) without disrupting the level of existing employment.


Treasury Yields Slid after CPI Data Provided a Whisper of Inflation Relief: It only took a bit of good news in another unusually strong inflation report to pull Treasury yields down sharply from their highest levels in several years and send equity index futures convincingly into positive territory. Headline prices in the CPI report jumped 1.2% in March, the strongest monthly gain since 2005, as food prices rose 1.0% and energy prices surged 11.0%. Core prices, however, rose just 0.3% for the month, less than the 0.5% gain expected and the slowest increase in six months. Core goods prices fell 0.4%, the first decline in 13 months, offsetting a 0.6% increase in core services prices, the strongest since 1990. Although the annual rates for both headline and core inflation were the fastest since 1982 and despite the continued firming in services inflations, Treasury yields quickly erased overnight increases amid nascent signs that historically strong goods inflation may have peaked. After climbing as high as 2.83% overnight, its highest level since December 2018, the 10-year Treasury yield ended 5.9 bps lower at 2.72%. The 5-year yield fell 9.9 bps to 2.69% while the 2-year yield dropped 9.2 bps to 2.41%. Fed funds futures flattened across the horizon, knocking the anticipated effective rate at the end of the year down roughly 10 bps to 2.45%. While the gravitational pull on yields from the softer core inflation persisted through to the close, stocks gradually and steadily erased their post-CPI gains. The S&P 500 rose as much as 1.3% in early trading before drifting back to close 0.3% lower on the day.

Inflation and central bank activity continued to pervade market sentiment Wednesday as investors’ focus widened to take in the earliest reports from the quarterly corporate earnings season. New Zealand’s central bank, facing the fastest inflation since 1990, hiked rates at a fourth consecutive meeting. Although activity in New Zealand is not necessarily significant or meaningful to the U.S. economy, the developments served as a reminder that the current inflationary dynamics are widespread around the world and carried with it a flavor of the current Fed debate. Central bankers on the island country surprised markets with a 50-bp hike, larger than the previously used 25-bp increment. U.K. yields were upside outliers around 7 a.m. CT on gains of at least 4 bps across the curve following a batch of hotter-than-expected inflation data. Headline CPI rose 1.1% in March, above expectation for a 0.8% gain, and 7.0% from a year ago, faster than the expected 6.7% increase and the strongest since 1992. Core inflation accelerated from 5.2% to 5.7%, above expectations of 5.3% and also the fastest since 1992. Other reports showed retail prices, producer prices, and home prices all rose at a faster rate than expected. The Treasury curve was steepening in front of this morning’s PPI report, as the 2-year yield dropped 1.4 bps to 2.39% while the 10-year yield added 2.7 bps to 2.75%. The spread between the two jumped for the seventh time in eight sessions to more than 35 bps, its widest since March 2. The 2-year 10-year spread closed inverted by 8 bps just nine days ago, its deepest inversion since 2007. U.S. equity futures were trading near session lows at 7:30 a.m. CT, reversing and tracking losses of JPMorgan after the company’s earnings release.

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