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Morning Report: Inflation continues to moderate


Vital Statistics:

Stocks are lower this morning after the producer price index came in higher than expected. Bonds and MBS are down.

Bond yields lurched higher yesterday after a lousy 30-year bond auction. The bad results pushed the 10 year yield up about 10 basis points.

Inflation at the wholesale level increased 0.3% MOM in July. On a year-over-year basis wholesale prices rose 0.8%. If you strip out food and energy, prices rose 0.3% MOM and 2.4% YOY. Overall, it looks like commodity inflation is pretty much over.

Final demand services did increase 0.5% MOM and 2.5% YOY. Final demand services is largely wage growth, and it appears that wage inflation is moderating. This is good news for the Fed.

San Francisco Fed Chair Mary Daly said that it is too early to declare victory on the battle against inflation. “Whether we raise another time, or hold rates steady for a longer period — those things are yet to be determined,” Daly said in an interview with Yahoo Finance. “It would be premature to project what I think would happen because there’s a lot of information coming in between now and our next meeting….We do need to see that come back to prepandemic levels if we’re going to be confident that we can get to 2% on a sustainable basis,” Daly said. “I’m going to need to see some traction in getting there before I feel comfortable that we’ve done enough.”

Mortgage delinquencies fell to 3.37% in the second quarter, according to the MBA. This was down 19 basis points compared to the first quarter and 27 basis points from a year ago. The strong labor market is the big driver of this performance.

We have been in a nirvana market for mortgage servicing rights, with elevated short term rates providing interest on escrow accounts and low delinquencies keeping down servicing costs.

From the United Wholesale earnings conference call: Mat Ishbia is staffed up for a refi boom coming soon: “We know the [refi] (ph) boom, whether it’s a long sustained one or a mini refi boom is going to come soon. The opportunities are usually in the first three, six months, maybe nine months to really make money from a volume and margin perspective and it really grow your business. We are prepared for that now.”

Mortgage banking is the most cyclical business on the planet, and while good times don’t last forever, neither do bad times. This bad time has lasted 18 months, which is an eternity.

Consumer sentiment was flat in July, according to the University of Michigan Consumer Sentiment Index. Inflationary expectations ticked down from 3.4% to 3.3%. Long-term inflationary expectations remained at 2.9%, which is above the pre-pandemic range of 2.2% – 2.6%.

Hotels: Occupancy Rate Down 1.0% Year-over-year

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