Morning Report: Consumers see elevated inflation over the next 12 months

Vital Statistics:

S&P futures4,033 31.50
Oil (WTI)74.070.87
10 year government bond yield 3.59%
30 year fixed rate mortgage 6.44%

Stocks are higher this morning as banking fears recede. Bonds and MBS are down.

Mortgage applications rose 2.9% last week as purchases rose 2% and refis rose 5%. “Application activity increased as mortgage rates declined for the third straight week. The 30-year fixed rate declined to 6.45 percent, the lowest level in over a month,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “While the 30-year fixed rate remained 1.65 percentage points higher than a year ago, homebuyers responded, leading to a fourth straight increase in purchase applications. Home-price growth has slowed markedly in many parts of the country, which has helped to improve buyers’ purchasing power. Purchase applications remain over 30 percent behind last year’s pace, but recent increases, along with data from other sources showing an uptick in home sales, is a welcome development.”

Consumer confidence improved slightly in March, according to the Conference Board. Surprisingly, the bank failures didn’t have much of an impact and the survey was conducted about 10 days after the failure of Silicon Valley Bank. “While consumers feel a bit more confident about what’s ahead, they are slightly less optimistic about the current landscape. The share of consumers saying jobs are ‘plentiful’ fell, while the share of those saying jobs are ‘not so plentiful’ rose. The latest results also reveal that their expectations of inflation over the next 12 months remains elevated—at 6.3 percent. Overall purchasing plans for appliances continued to soften while automobile purchases saw a slight increase.”

That inflationary expectations number for the next 12 months is not good. We know the Fed pays close attention to inflationary expectations in these consumer confidence surveys because this gets baked into the cake with wage negotiations. The 6.3% number does seem pretty far from the 3.8% number we saw in the University of Michigan survey earlier this month.

The New York Fed puts out its own survey of consumer expectations regarding the real estate market. Needless to say, consumers see mortgage rates rising further, although they see rental inflation falling back. Expectations for rental inflation are still elevated compared to historical numbers, but they are better than last year. As Jerome Powell has said numerous times, one of the legs in our 3-legged inflationary stool is real estate and that component of inflation will return to normal by the summer. For a more granular look at rents by MSA, check this study out by

Rising rates have pushed down people’s plans to move to a series low (which started in 2014). This is case of “hate the house, love the mortgage.” This might be driven by pessimism over mortgage rates. The respondents see mortgage rates pushing 9% in the next 3 years and hitting 8.4% this year.

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