Mid-Week Market Minute 05.11.22

Stocks in the U.S. traded sharply lower this week as inflationary pressures continued to mount. Overseas, international stocks fared slightly better, with China’s Shanghai index flat for the week. Investor sentiment appears to be improving in China, fueled by positive developments on the mainland’s COVID situation. On Wednesday, Shanghai’s government announced eight districts have “contained the virus at a community level,” while Beijing also saw daily new cases cut in half.

On the inflation front, April’s consumer price index (CPI), a key measure of inflation, rose 0.3% month over month and 8.3% year over year. While an improvement from last month’s 8.5% reading, the headline number was above the consensus estimate of 8.1% and remains well above the Federal Reserve’s long-term target. The composition of the report was generally firm as well, with a surprisingly sharp rebound in the rent measure, a pickup in restaurant inflation, and strength in core goods prices in part related to supply-chain disruptions in Ukraine and China. In addition to CPI, investors will be focused on Thursday’s producer prices report (PPI). Headline PPI is expected to fall from 11.2% to 10.7% annualized, with the core PPI expected to drop from 9.2% to 8.9%. The PPI measures prices at the producer level before they are passed along to final consumers. By tracking price pressures in the pipeline, investors can anticipate inflationary consequences in the coming months. The inflation reading is important given this data influences the Fed’s timing and amount they will raise short-term rates. Ongoing pricing pressures and more impending rate hikes have fueled concerns about a slowdown in economic growth, something investors will be forced to grapple with over the coming months.

In bonds, interest rates continued to gyrate with the yield on the 10-year Treasury note settling around 3% mid-week ahead of Wednesday’s $36 billion 10-year Treasury auction. Higher interest rates this year have had an outsized impact on the mortgage market, with new 30-year mortgage rates currently around 5.5%. Despite higher rates, new mortgage applications rose 5% last week, compared with the prior week, according to the Mortgage Bankers Association’s seasonally adjusted index. The report also indicated homebuyers are starting to look toward adjustable-rate mortgages (ARMs) as interest rates continue to climb. ARMs offer lower rates which can be fixed for terms like five, seven, or 10 years. ARMs are fully underwritten like fixed-rate mortgages, and they require a down payment. This was not the case in the early 2000s when poorly underwritten, interest-only ARMs with short teaser periods were blamed for the epic housing crash.

Source: GSAM, CNBC, JPMorgan

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