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Morning Report: More good news on inflation


Vital Statistics:

Stocks are higher this morning after a benign producer price index report. Bonds and MBS are up.

The Producer Price Index (a measure of inflation at the wholesale level) came in lower than expected; another sign that inflation continues to moderate. Final demand prices rose 0.1% month-over-month and 0.1% on a year-over-year basis. If you strip out food, energy and trade services the index rose 2.6% on a year-over-year basis. The flat YOY growth is due to commodity prices.

The index for final demand services rose 0.2% MOM and 2.3% YOY. Final demand services has a lot to do with wage inflation and that is what the Fed is most concerned about.

This report probably doesn’t move the needle for the Fed’s decision for the July meeting, but it is an indication that they have largely achieved their goal of reining in inflation.

The Fed released its Beige Book yesterday, which is a survey of all the regional Fed districts. Overall economic growth is increasing modestly, however consumer spending was mixed, with more being spent on travel and less on discretionary goods. Demand for real estate remains strong, albeit constrained with limited inventory. The Fed noted that the labor market is coming more in balance:

Employment increased modestly this period, with most Districts experiencing some job growth. Labor demand remained healthy, though some contacts reported that hiring was getting more targeted and selective. Employers continued to have difficulty finding workers, particularly in health care, transportation, and hospitality, and for high-skilled positions in general. However, many Districts reported that labor availability had improved and that some employers were having an easier time hiring than they were having previously. Employers also reported that the unusually high turnover rates in recent years appear to be returning to pre-pandemic norms. Wages continued to rise, but more moderately. Contacts in multiple Districts reported that wage increases were returning to or nearing pre-pandemic levels.

This is another good sign for the Fed. Separately, initial jobless claims remain low at 237,000.

Since the beginning of the week, we have seen a particularly robust rally in bonds, with the 10 year shedding 26 basis points in yield, while the 2 year has lost 30 basis points. Shares in mortgage banks have improved as well, with United Wholesale and Rocket up 16% since last Friday. The XHB homebuilder ETF is up 6.5% as well, while the S&P is up about 2% over the same period. The Fed Funds futures still see a 25 basis point hike at the June meeting, but are taking down the chance for any more hikes this year.

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