Dow slid back 105 after recent strength, advancers over decliner 4-3 & NAZ went up 39. The MLP index hardly budged in the 225s & the REIT index rose 2+ to the 373s. Junk bond funds inched higher & Treasuries were being purchased, which reduced yields (more below). Oil stayed about even in the 69s after a strong advance yesterday & gold rebounded 11 to 1970.
AMJ (Alerian MLP Index tracking fund)
The Labor Dept said its producer price index, which measures inflation at the wholesale level before it reaches consumers, tumbled 0.3% in May from the previous month. On an annual basis, prices are up 1.1%, the lowest rate since Dec 2020. Those figures are both lower than the 1.5% headline figure & 0.1% monthly decline forecast. There are still signs of inflationary pressures in the economy, however. Excluding the more volatile measurements of food & energy, so-called core inflation is still running far hotter than the pre-pandemic average. Core prices are up 2.8% from the same time last year, although they were flat in the period from Apr to May. And the services index climbed 0.2% in May following a 0.3% gain the previous month. Most of that increase can be traced to a 1% rise in prices for trade services, which measures the changes in margins received by wholesalers & retailers. The data comes a day after the Labor Dept reported that the consumer price index, which measures the prices paid directly by consumers, rose just 0.1% in May. The annual inflation rate came in slightly lower than expected at 4%, the slowest pace since Mar 2021. Both releases are considered to be important measurements of inflation, with the PPI believed to be a leading indicator of inflationary pressures as costs work their way down to consumers. The different gauges point to inflation that is rapidly declining, although the CPI is still running well above the Fed's preferred 2% target. The slowdown in inflation likely gives policymakers additional fodder to forgo another interest rate increase at the conclusion of their 2-day meeting later today. An overwhelming percentage of traders, more than 90%, now anticipate the Fed will pause the tightening cycle, a notable shift from the beginning of the week, according to the CME Group's FedWatch tool.
New inflation data suggests higher prices could be a thing of the past
Mortgage rates pulled back for the 2nd straight week last week, & it was enough to get both current & potential homeowners on the phone with their lenders. Mortgage application volume rose 7.2% last week, compared with the previous week, according to the Mortgage Bankers Association's seasonally adjusted index. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($726K or less) decreased to 6.77% from 6.81% in the prior week, with points falling to 0.65 from 0.66 (including the origination fee) for loans with a 20% down payment. Applications to refinance a home loan rose 6% for the week but were 41% lower than the same week one year ago. While rates pulled back, they are still more than a full percentage point higher than they were a year ago & more than twice what they were in the first 2 years of the Covid pandemic, when there was a refinance boom. Most borrowers today have lower rates than what is currently available & therefore do not want to lose those rates even for a cash-out refinance. Applications for a mortgage to purchase a home increased 8% for the week but were 27% lower than the same week one year ago. “Some say the Fed will use those forecasts to telegraph another rate hike or two in 2023. Although the Fed Funds Rate doesn’t directly dictate mortgage rates, such a move would still put quite a bit of upward pressure on interest rates of all shapes and sizes,” wrote Matthew Graham, COO of Mortgage News Daily. “Rates that are still more than a percentage point higher than a year ago, and low for-sale inventory continue to constrain homebuying activity in many markets,” said Joel Kan, an MBA economist. “The average loan size on a purchase loan decreased for the third straight week, as we continue to see more first-time homebuyer activity in the purchase market.”
Mortgage demand surges as interest rates ease off recent highs
Treasury yields were lower as investors braced themselves for both the Federal Reserve's latest decision on interest rate hikes & comments from Chair Jerome Powell on the central bank's thinking. The 10-year Treasury yield was lower by 5 basis points at 3.794%, while the 2-year Treasury yield dipped 7.2 basis points to 4.626%. Yields & prices have an inverted relationship & one basis point equals 0.01%. Following the May consumer price index showing annual growth of 4.0%, the lowest since 2021, traders have upped bets to 95% that the Fed will hold its benchmark rate steady at 5.00%-5.25%, according to CME Group's FedWatch tool. They are more divided on the chance of a return to hikes in Jul, with a 63% chance of a 25 basis point rise priced in. CPI reported yesterday was up 0.1% month over month in May, while core inflation, excluding food & energy, was 0.4% higher on the month.
Treasury yields dip ahead of Fed announcement
Dow Jones Industrials
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