Morning Report: Markets breathe a sigh of relief on benign inflation report

Vital Statistics:

Stocks are higher this morning after the Consumer Price Index came in weaker than expected. Bonds and MBS are up on the benign CPI print and the fact that China cut interest rates overnight.

The consumer price index rose 0.2% MOM in June, according to the BLS. On an annual basis, prices rose 3%. If you strip out food and energy, prices rose 0.2% MOM and 4.8% YOY. Shelter was the biggest contributor to the index, accounting for 70% of the increase, while energy was the biggest drag. Shelter rose 7.8% year-over-year. Home prices peaked in June of 2022, so the YOY increases will go flat starting with next month’s report.

The report didn’t have much of an impact on the July Fed Funds futures, which still see a 92% chance of another 25 basis points. All of the Fed-speak seems to indicate that the central bank will hike rates next week.

We are still elevated compared to the past 10 years, but are returning to normal

Mortgage Applications increased 0.9% last week as purchases increased 2% and refis fell 1%. “Incoming economic data continue to send mixed signals about the economy, with the overall impact leaving Treasury yields higher last week as markets expect that the Federal Reserve will need to hold rates higher for longer to slow inflation. All mortgage rates in our survey followed suit, with the 30-year fixed rate increasing to 7.07 percent, the highest level since November 2022,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The jumbo rate also increased to 7.04 percent, a record high for the jumbo series, which dates back to 2011. Purchase applications increased, but remained at a very low level and are 26 percent lower than the same week last year. The rise in purchase activity was driven by increases in both FHA and VA purchase applications. The refinance index dropped to its lowest level since early June, as demand for rate/term and cash-out refinances remains extremely low with mortgage rates over 7 percent.”

Mortgage credit availability increased in June, according to the MBA. “Mortgage credit availability was essentially unchanged in June, remaining close to the lowest level since early 2013, as the industry continues to operate at reduced capacity,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Lenders are streamlining their operations by offering fewer loan programs, with some exiting certain channels. Data from our Weekly Applications Survey indicated that June mortgage applications were more than 30 percent lower than a year ago and at the slowest pace since December 2022.”