Inflation

The PCE (Personal Consumption Expenditure) report for March showed positive results, with a significant drop in the headline year-over-year number from 5.1% to 4.2%. While the core rate of inflation is still above the Fed’s comfort zone, it has decreased to 4.6% from the revised 4.7% last month. The trend suggests that we should see the PCE numbers gradually move closer to the Fed’s comfort zone.

Housing, a significant factor in inflation, saw a month-over-month increase of 1% and a year-over-year increase of 10%. However, this was mainly driven by a spike in utility costs, such as natural gas and electricity. If we exclude these components, housing inflation is moving in the right direction, with month-over-month growth at 0.6%. Real-time data on rents from Apartment List also shows a decline, with a year-over-year increase of 1.7%, down from the previous 2.6%.

The bond market reacted positively to the PCE numbers today. However, consumer sentiment and the employment cost index somewhat held back further progress in the bond market. The employment cost index for the quarter came in at 1.2%, slightly above the estimate of 1 to 1.1%. While these numbers have leveled off, it is hoped that they will ease further over time.

Next week will bring more data on jobs, with the ADP report on Wednesday, which estimates 135,000 job creations, and the BLS jobs report on Friday, which estimates 178,000 job creations. The Fed will also hold a meeting next week and is expected to raise the Fed funds rate by 25 basis points.

Mortgage bonds are currently up 20 basis points, while the 10-year Treasury is down 6 basis points. However, both face resistance levels, making it challenging to predict whether they will break through. It is recommended to begin the day floating carefully, but be mindful of the resistance levels.

Cracking into the latest financial trends, the U.S. inflation rate has slowed to its lowest level in nearly two years. However, core inflation remains as stubborn as an overcooked omelet, hinting that the Federal Reserve might whisk another interest-rate hike into the mix come May. 

Humpty Dumpty Had a Great Fall: Unscrambling the March Inflation Rates

The U.S. Department of Labor’s latest report reveals that the consumer price index, the everyday shopper’s basket tallying the costs of goods and services, experienced a modest 5% increase compared to last year – marking the tiniest climb since May 2021. From cheaper grocery and gasoline prices to more affordable medical care and utilities, the consumer’s wallet had a halt. Still, high costs for shelter, airline fares, and insurance refused to come down from their high roost.

The Hard-Boiled Reality of Core Inflation

Despite the drop, inflation remains well over the Fed’s 2% target, rising to a persistent high compared to the pre-pandemic average of 2.1%. Core inflation, a more reliable sous-chef predicting future inflation trends, continues to simmer at high heat, primarily driven by escalating shelter costs. 

Fed’s Rate Hike: A Sunny Side Up or Scrambled Outcome?

Fed officials might scramble to raise interest rates at their next meeting due to the still too-hot-to-handle inflation and a tight labor market. As the potential risk of a recession looms later this year, all eyes will be on economic indicators, including lending conditions, as Fed officials decide on their May move.

With the first drop in grocery prices since September 2020, March brought some relief, led by egg prices seeing the most significant single-month reduction since 1987. However, with the labor market cooling off and uncertainties around the economy’s trajectory, the real question is, will the Fed serve up another rate hike in May? As we poach into these uncertain times, the yolk’s on us to monitor these market trends closely.