Morning Report: Inflation comes in as expected.

Vital Statistics:

Stocks are higher this morning after good numbers from Amazon. Bonds and MBS are down small.

Personal Incomes rose 0.3% in September, while spending rose 0.7%. The PCE Price Index rose 0.4% MOM which was 0.1% above expectations. On an annual basis, the PCE Price Index rose 3.4%, which was in line with expectations. If you strip out food and energy, the PCE Price Index rose 0.3% month-over-month and 3.7% year-over-year. The savings rate declined again.

Consumer sentiment fell in October, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment confirmed its early-month reading, falling back about 6% this October following two consecutive months of very little change. This decline was driven in large part by higher-income consumers and those with sizable stock holdings, consistent with recent weakness in equity markets. Across all consumers, one-year expected business conditions plunged 16% and expectations over consumers’ own personal finances in the year ahead fell 8%, reflecting ongoing concerns about inflation and, to a lesser degree, uncertainty over the implications of negative news both domestically and abroad.” Inflationary expectations increased substantially, rising from 3.2% in September to 4.2% in October.

So consumption is strong, but the consumer is depressed. What is going on? Yesterday’s GDP report provides a bit of a clue. Much of the increase in consumption was accounted for by housing, insurance, and health care. These are necessities, not discretionary goods, and no one gets a dopamine hit from writing a bigger check to the landlord or flood insurance company.

After the data this week the Fed Funds futures are predicting the Fed does nothing at its meeting next week, and is handicapping a 16% chance of a hike in December.

The number of seriously delinquent mortgages dropped to an all-time low in August, according to CoreLogic. “U.S. mortgage performance remained strong in August, supported by a robust job market and a healthy economy,” said Molly Boesel, principal economist at CoreLogic. “However, this thriving job market comes at a time when interest rates are quickly rising, which is keeping many potential homebuyers from being able to secure a mortgage.”

This partially explains why servicing valuations remain so high. Prepayment assumptions assume that people will only pay off their mortgage if they move or die, delinquencies are low, and short term rates are high enough that you can earn interest on escrow. PennyMac Mortgage Trust said in its earnings release that it is valuing its MSR portfolio at 6.3x.

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