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THE HEAT IS ON: PPI SURGES, MORTGAGE RATES TICK HIGHER

Investors began their hump day with a rude jolt from the Labor Department.

April Producer prices (PPI) USPPFD=ECI, which track the prices U.S. companies get for their goods and services at the figurative factory door, came in red-hot.

The report showed PPI jumped by 1.4% last month, barging past the 0.5% consensus and adding to March's upwardly revised 0.7% increase.

That marks the largest monthly increase since March 2022.

Year-over-year, the producer prices surged by 6.0%, an acceleration from the previous month's 4.3% annual rate and much warmer than the 4.9% analysts expected.

Stripping away volatile food and energy prices, PPI jumped on monthly and annual bases by 1.0% and 5.2%, respectively. Both landed well north of economist projections.

Core PPI, which excludes food, energy and trade services, accelerated to 0.6% on the month, triple March's 0.2% rate, and accelerated by 0.7 percentage points to land at 4.4% year-on-year.

"April producer inflation came in higher than expected, and the spike in costs is really the first evidence of higher fuel costs hitting other sectors of the economy," writes Scott Helfstein, head of investment strategy at Global X ETFs. "The cost increases are tied to energy and that is bleeding into other industries."

"This is really beyond control of the Fed," Helfstein adds. "This is a supply side disruption, and interest rates have little ability to control price change in those circumstances."

Even so, as the third major take on April price growth, PPI remains the hottest inflation indicator of the bunch, hovering well above the Fed's average annual 2% target.

The report effectively snuffs out any lingering hopes that the central bank will cut its key Fed funds target rate any time soon. In fact, the likelihood of a rate hike by the end of the year is growing on nearly a daily basis.

Following the report, financial markets were pricing in a 32.0% probability of a rate hike as soon as December, more the double the odds as they stood a week ago, according to CME's FedWatch tool.

Pivoting to the housing market: last week, while it got a tad more expensive to finance home loans, mortgage demand ticked higher.

The average 30-year fixed contract rate USMG=ECI climbed exactly one basis point to 6.46%.

Even so, applications for loans to purchase homes USMGPI=ECI - among the housing market's most forward-looking indicators - increased by 3.9%. On the other hand, refi demand USMGR=ECI shrank by 0.8%.

Combined, home loan demand strengthened by 1.7% last week.

The 30-year fixed rate currently sits 40 basis points below where it was during the same week a year ago.

Over that same period, purchase applications have grown by 6.7%, while refi demand has increased 28.3%.

(Stephen Culp)

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