Stocks are slightly lower and Mortgage Bonds are miraculously trading near unchanged levels after a piping hot Producer Price Index inflation report.
Later this afternoon at 1:00pm ET there will be a 30-year Treasury Bond Auction, which could impact the markets, depending on the level of demand. Yesterday’s 10-year Auction was a little weak and did not help the selloff in the Bond market.
Kevin Warsh was confirmed by the Senate to the Fed Governor Board, and later today there will be a vote for his nomination to the Fed Chair position. It's fully expected that he will be confirmed.
Producer Price Index
The April Producer Price Index showed that headline inflation rose 1.4%, which was much hotter than estimates of 0.5%. Year over year, Headline Producer Inflation rose from 4.3% to 6%, also much hotter than estimates of 4.9%. Most of the rise in headline inflation was due to a near 16% rise in gasoline prices.
The Core rate, which strips out food and energy prices, rose 1%, more than three times estimates of 0.3%. Year over year, Core Producer Inflation rose from 4% to 5.2%, significantly hotter than estimates of 4.3%.
Services rose 1.2%, but 2/3 of that increase was due to a jump in margins for trade services, a lot from machinery and equipment wholesaling. While this still contributed to inflation, margin expansion is not as bad as other types.
Something else that has not helped inflation has been the Fed’s buying of short-term Treasury Bills, which started in December. While the Fed had good intentions and wanted to help liquidity concerns at banks, this credits their accounts with new reserves that they can then lend and it increases the money supply. And if the money supply grows more than economic output, it creates inflation and is the definition of “too many dollars chasing too few goods.”
On that note, ODL, which is a great measure of the money supply, has risen by roughly 7% on an annualized basis, while output has grown by about 4%.
Mortgage Applications
The MBA released their Mortgage Application data for last week, showing that interest rates were unchanged at 6.46%. Rates are still about 40bp lower than this time last year.
Purchases rose 4% last week and are up 7% year over year. Refinances fell 1% and are up 28% year over year.
Technical Analysis
Mortgage Bonds are hanging in there considering the hot PPI report, but are in the middle of a very wide range between support at 99.99 and overhead resistance at 100.47.
The 10-year is near some of the highest yields since last July, but they are holding at resistance at 4.48%, with the psychological 4.50% just above. If 4.48% is broken to the upside, yields could rise as high as 4.588%, so it needs to be monitored closely.
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