Inflation

Recent economic discussions have been dominated by the topic of inflation, particularly the discrepancy between reported Consumer Price Index (CPI) figures and the reality of rental market trends. Despite a slight uptick in inflation, both in the CPI and Producer Price Index (PPI), the root cause of concern lies within the realm of rental inflation, specifically the Owners’ Equivalent Rent (OER). The latest data from CoreLogic indicates a year-over-year increase in blended rental rates of 2.8%, starkly contrasting the 6% surge reported in CPI. This disparity underscores the intricate dynamics at play in inflation measurement and its implications on monetary policy.

Unpacking the CPI: The Role of Owners’ Equivalent Rent

The methodological approach to calculating the CPI, particularly the OER, raises questions about the index’s reflection of actual market conditions. The OER, which poses a hypothetical question to homeowners about the potential rental price of their property, constitutes a significant 33.5% of the core CPI. This reliance on subjective estimations introduces an inherent bias, potentially skewing inflation figures upward. This discrepancy is further highlighted when comparing CPI figures to more tangible data sources like Trueflation, which offers a more grounded perspective on inflation rates.

Trueflation vs. CPI: A Comparative Analysis

Trueflation’s methodology, which leverages over 10 million data points versus the CPI’s 80,000, reveals a more subdued inflation landscape, with an overall figure of 1.64% year-over-year, in sharp contrast to the CPI’s 3.4%. This divergence emphasizes the importance of data quality and quantity in accurately capturing economic trends, suggesting a potential overestimation of inflation within the CPI framework.

Consumer Sentiment and Economic Outlook

The University of Michigan’s Consumer Sentiment Index for February indicates a positive shift in consumer outlook, likely influenced by recent stock market performances. While short-term inflation expectations have ticked upward, long-term projections remain stable, hinting at a balanced view of future inflationary pressures. This sentiment, coupled with anticipating the Federal Reserve’s meeting minutes, offers valuable insights into the central bank’s perspective and potential policy adjustments.

Housing Market and Bond Auctions: What Lies Ahead

The housing market remains a focal point, with existing home sales data poised to shed light on the sector’s health. Additionally, the upcoming 20-year bond auction and the release of Fed minutes will clarify market dynamics and interest rate expectations further. These events underscore the interconnectedness of various economic indicators and their collective impact on market sentiments and policy decisions.

Market Movements and Strategic Implications

The resilience of mortgage bonds, as evidenced by a 17-basis point increase, reflects a cautiously optimistic stance among investors, driven by expectations of future rate adjustments. The adherence of mortgage-backed securities to the 200-day moving average suggests a forming base with potential for upside movements contingent on breaking through critical resistance levels.

Navigating Economic Uncertainties

As we dissect the complexities of inflation measurement and its broader economic implications, the importance of nuanced analysis and strategic foresight becomes increasingly apparent. The divergence between CPI and alternative data sources like Trueflation highlights the need for a comprehensive approach to understanding inflation’s real impact. With pivotal data releases on the horizon, stakeholders must remain vigilant, adapting to evolving market conditions with informed decision-making and strategic positioning.

As we brace for upcoming economic releases and market reactions, the quest for clarity and precision in economic analysis remains a guiding principle for stakeholders across the spectrum.

Good morning, everyone! Today, we see mortgage-backed securities (MBS) climbing by 20 basis points, a promising lift off the support level. Conversely, the 10-year Treasury yield has slightly decreased, setting the stage for a closer look at inflation, particularly the shelter component.

Shelter Inflation’s Role in the Big Picture

Inflation remains a focal point, especially in the shelter sector, which comprises rent and owners’ equivalent rent. Government figures suggest a 6.7% year-over-year increase in shelter costs, a figure fraught with data collection issues and expected catch-up in the coming months. This could have significant implications for overall inflation trends.

The CPI vs. Trueflation

The Consumer Price Index (CPI) currently stands at 3.4%, but a broader data analysis by Trueflation cuts this nearly in half to 1.87%. This discrepancy highlights the complexities in measuring inflation, especially in the shelter category, where Trueflation estimates a much lower 0.9% increase.

Looking Ahead: Key Inflation Data and Auctions

Friday’s Personal Consumption Expenditures (PCE) data release is eagerly anticipated. Market estimates hover around 0.25%, which could bring the year-over-year figure down to around 3%. Positive shelter data could potentially push this below 3%, a desirable outcome for the markets.

Mortgage Application Trends

The Mortgage Bankers Association reports a continued rise in purchase applications, up 8% last week, reaching the highest levels since April 2023. Despite being down 18% year-over-year, this trend aligns with expectations for increased activity as we approach the spring home-buying season.

Refinance Activity and Interest Rates

Refinance applications have dipped by 7% from the previous week and 8% year-over-year. Interest rates remain stable at around 6.75%, a slight increase compared to last year.

Upcoming Economic Releases

– Tomorrow, we anticipate the GDP and durable goods data, which could be market-moving.

– New home sales data will also be released, followed by the PCE and pending home sales data on Friday, warranting later updates on these days.

Treasury Auctions

Following an average outcome from the recent $62 billion two-year Treasury auction, attention now turns to the upcoming $60 billion five-year Treasury note auction. These auctions are critical to gauge market absorption and potential impacts.

Technical Analysis: MBS and the 10-Year Yield

MBS have rebounded from the support level, with the 25-day moving average as the next resistance point. There’s room for growth, approximately 14-16 basis points, before encountering this ceiling. The 10-year Treasury, showing a slight rise, is also under scrutiny for potential yield movements.

As we dissect the complexities of shelter inflation and prepare for significant economic data, the market holds a cautiously optimistic outlook. Technical indicators and auction results will be key in shaping our strategies in the days ahead.

As we enter 2024, the financial markets remain in a state of anticipation, closely monitoring the evolving thought process of Federal Reserve officials on inflation and interest rates. Recent comments from Fed members, particularly Raphael Bostic and Michelle Bowman, indicate a shift in perspective, hinting at a potentially more dovish stance in the near future. 

The Fed’s Changing Tone

Michelle Bowman’s Evolving Thoughts

Michelle Bowman, known for her hawkish views, recently surprised the markets with her statement that her thought process on inflation has “evolved.” Previously an advocate for multiple rate hikes, Bowman’s new stance suggests a possibility that further rate hikes may not be necessary to bring inflation down to the Fed’s 2% target. This shift is significant, signaling a potential easing in the Fed’s aggressive monetary policy approach.

Raphael Bostic Echoes Similar Sentiments

Raphael Bostic, the Atlanta Fed President, echoed Bowman’s sentiments, indicating a similar shift in thinking. However, both officials cautiously noted that additional rate hikes are partially off the table, a common stance expected from Fed officials. 

Market Anticipation and Inflation Data

Currently, the market anticipates two scenarios for 2024: a continuation of the current interest rate policy or the possibility of five quarter-point rate cuts. This forecast largely depends on upcoming key inflation data, particularly the Consumer Price Index (CPI) numbers due for release.

Our December CPI analysis suggests a potential easing of inflationary pressures. We predict a rise of about 2/10 of a percent in the headline CPI, slightly better than the market consensus. However, the core CPI, which excludes food and energy, is expected to drop to 3.8%, thanks to a significant component – shelter, which accounts for 44% of the index.

Factors Influencing the Inflation Outlook

With its high replacement from last year, the shelter component is expected to show progress, contributing to a drop in the year-over-year inflation number. 

Additionally, declining oil prices and used car values, as reported by Mannheim and CarGurus, are likely to aid in curbing inflation further.

Housing Market and Small Business Optimism

The housing market, a critical sector of the economy, is showing signs of recovery. The overall index has seen a significant increase, especially in buyer activity, which signals a turnaround and potential expansion in the housing market.

The NFIB Small Business Optimism Index, despite being below the 50-year average, has shown an increase. However, the decline in plans to hire and increase inventory might indicate a softening labor market and consumer weakness, potentially impacting future GDP numbers.

The reliability of employment data remains a key factor in assessing the economic outlook. Accurate employment figures are crucial for understanding labor market dynamics and their impact on the broader economy.

Mortgage-Backed Securities and Treasury Yields

As we observe in the financial markets, mortgage-backed securities are relatively flat, while the 10-year Treasury yield hovers around 4%. The technical analysis shows a triple layer of resistance, suggesting a potential cap on rising yields.

If upcoming inflation numbers are favorable, we might see a downward trend in yields and an upward movement in bond prices, offering a respite to the markets.

As we navigate through 2024, the evolving stance of the Federal Reserve and upcoming economic data will play pivotal roles in shaping market dynamics. The cautious optimism expressed by Fed members like Michelle Bowman and Raphael Bostic, coupled with our analysis of inflation and housing data, suggests a potential easing of inflationary pressures, which could lead to a more favorable economic environment in the near future.