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.
