Economic update for the week ending July 16, 2022

Stock markets ended a volatile week slightly lower – Stocks dropped and interest rates jumped after the June CPI report was released on Wednesday. The report shocked experts who had previously seen signs that inflation may have been moderating. To their surprise, the CPI report showed that consumer prices jumped from 8.6% in May to 9.1% in June, the highest reading since 1981. Mortgage interest rates, which had dropped about ½% from their peak on June 14, started to rise last Friday after the June jobs report showed that hiring had beat expectations by over 100,000 new jobs and continued to rise following the CPI report. The brisk rate of hiring, low unemployment, and soaring inflation disappointed investors who had hoped that interest rate hikes and other tightening measures would begin to cool the overheated economy and curb inflation. Due to inflation, the good news is bad news, as the stronger, the economy is the more people spend which causes inflation. On Friday, stocks surged on good news, which has not been the case lately, when it was announced that Retail Sales increased 1% month-over-month in June and rose 8.4% from one year ago. The report showed that consumers have not been swayed by negative economic predictions and are not cutting spending because they have a high amount of savings and their wages are rising. Early second quarter corporate profits have also beat expectations. The Fed reported that import prices fell slightly in June as the strong dollar and moderating oil prices may be helping inflationary pressures. Fed officials also made comments which dispelled investors’ fears of a full one percentage point interest rate hike at its next meeting. That does not seem to be their plan based on their comments.

  • The Dow Jones Industrial Average closed the week at 31,288.26, down 0.2% from 31,338.15 last week. It is down 13.9% year-to-date.

  • The S&P 500 closed the week at 3,863.19, down 1.1% from 3,899.38 last week. The S&P is down 19.0% year-to-date.

  • The NASDAQ closed the week at 11,452.42, down 1.6% from 11,635.31 last week. It is down 26.8% year-to-date.

U.S. Treasury bond yields higher this week - The 10-year treasury bond closed the week yielding 2.93%, down from 3.09% last week. The 30-year treasury bond yield ended the week at 3.10%, down from 3.27% last week. We watch bond yields because mortgage rates often follow treasury bond yields.

Mortgage rates – The Freddie Mac Primary Mortgage Survey reported that mortgage rates as of July 14, 2022, for the most popular loan products were as follows:

  • The 30-year fixed mortgage rate was 5.51%, up from 5.30% last week.

  • The 15-year fixed was 4.67%, up from 4.45% last week.

  • The 5-year ARM was 4.35%, up from 4.19% last week.

Weekly Mortgage Applications

The MBA weekly mortgage application index declined by -1.7% for the week ending July 8th. Purchase applications fell by -4.0% and were -18.0% lower than the same week last year. Refinance applications increased by +2.0% but were -80.0% lower vs. the same week a year ago. "Mortgage rates were mostly unchanged, but applications declined for the second straight week. Purchase applications for both conventional and government loans continue to be weaker due to the combination of much higher mortgage rates and the worsening economic outlook," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting. "After reaching a record $460,000 in March 2022, the average purchase loan size was $415,000 last week, pulled lower by the potential moderation of home-price growth and weaker purchase activity at the upper end of the market." Added Kan, "Refinance applications increased slightly last week, driven by an uptick in conventional and FHA refinances. The overall refinance index remained 5 percent below the average level reported in June. With the 30-year fixed rate 265 basis points higher than a year ago, refinance applications are expected to remain depressed."

Initial Jobless Claims

Initial Jobless Claims for the week ending July 9th came in at 244k, which is higher than market expectations of 235k. This is the highest since mid-November 2021. The four-week moving average moved up 3.3k to 235.8k. Continuing Claims came in at 1.331mm, which is a nice beat from the expectations of 1.38mm.

Producer Price Index

PPI for June came in +1.1% MoM, beating market expectations of +0.8%, and for YoY it is up +11.3%, beating expectations of +10.7%. PPI ex food and energy was up 0.4% MoM, slightly below expectations of +0.5%, while PPI ex food, energy and trade was up 0.3% MoM, which also missed expectations of +0.5%. Specifically, gasoline prices jumped 18.5% in June. The indices for diesel fuel, electric power, residential natural gas, motor vehicle equipment, and processed young chickens also increased. On the other hand, the indices for iron, steel scrap, and jet fuel decreased.

Consumer Price Index

CPI for June came in hotter than expected, rising +1.3% MoM on headline, with the core up +.7%. This is the largest monthly gain in the headline figure since September 2005 and the biggest gain in the core measure in a year. This resulted in the YoY headline rising +.5% to +9.1%, the new high since 1981, with the core's measure ticking down just modestly by -.1% to +5.9%. Among the highlights in the June report were a +7.5% rise in energy, a +1.0% increase in food prices, +.6% in shelter, a +1.6% rise in used cars/trucks, and a +.7% increase in medical care services. Worth noting, food now is at +10.0% YoY, setting another record since 1981, while the energy index is now at a whopping +41.5% YoY. Overall, this is not what the Fed had hoped to see today, and while a 75bp hike is all buy a foregone conclusion, the questions and conversations over the next two weeks will center around whether the Fed goes higher than 75.

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