Current position: Carefully Floating
Stocks are lower, but Mortgage Bonds higher once again following up on a nice day yesterday, now that the debt ceiling deal appears to be a sure thing. With this now seemingly behind us, Bonds are starting to follow fundamentals, which of course includes inflation...and some big inflation indicators are pointing lower.
Inflation Indicators
With today being the last day of May, let's look at some of the key inflation components and what prices have done in order to get some ideas on how much progress we will make on June 13, when we get the May CPI inflation data.
Oil prices, which added inflationary pressure in the April CPI Inflation report, have moved significantly lower. In April they spiked to $83/barrel after OPEC announced production cuts, but they have been trading below $70/barrel this past week, which will provide us with some help in the next report.
Used Car prices were soaring higher in April, but according to CarGurus, they are up 0.8% in May, which is a much smaller pace than the previous month. Additionally, with seasonal adjustments during this time of the year, that number could actually come in negative. In either case, this will add less inflationary pressure than in April and help in May.
We have discussed how much rental costs have been coming down in real time, even though they have been lagging in the CPI report. But they have started to catch up as of the May 10 inflation report when we got the April numbers, where the new shelter costs coming in are below those from last year. We saw the year over year figure finally begin to crest from 8.2% to 8.1%, and we think that will not only continue but start to drop quicker.
Especially when you see current rents dropping fast - Apartment List reported their May Rental Report, showing that rents are only up 0.9% year over year, down from 1.7% in April and 2.6% in March. This will help rents to come down in the CPI report and should also help inflation come down.
With some of the key components likely helping in the next inflation report, let's look at some of the figures we will be replacing from last year in the year over year calculation.
Headline: 0.9%
Core: 0.6%
In April we saw monthly inflation readings of 0.4% for the both headline and core. We think we will see inflation come in at 0.3% for both, maybe even lower, based on the reasoning above.
If we got 0.3% for both, headline inflation would decline from 4.9% to 4.3%, and core would decline from 5.5% to 5.2%...this would be very helpful for interest rates.
Fed
Even though inflation is coming down and will continue to do so, the Fed is still looking in the rear view mirror, which is why they continue to make mistakes. We heard from Cleveland Fed President Loretta Mester this morning, who said she wants to continue to hike and take the Fed Funds rate to 6%. It's amazing to see, especially since less than 2-years ago she was saying inflation would not be a problem she wanted more inflation. Once again, it's because the Fed is not looking at real time indicators and they are looking at old data.
The next CPI report comes a day before the Fed's next rate hike decision, so we hope they take the drop into consideration. The other thing the Fed has been looking at is the stubborn BLS Jobs Data, but real time indicators are pointing to an inflection point.
JOLTS
Job Openings in April rose from 9.7M to 10.1M, but they have been trending lower and are down sharply from the peak around 12M not too long ago.
Job openings picked up in construction, likely due to demand from big builders. Leisure/hospitality continued to shrink, which is important because that is the sector that has been adding the most jobs over the last year. We are getting above pre-covid levels for workers in that sector, which means that there may not be much more in the way of job gains, which can help us to see weaker job creations numbers.
Tomorrow morning the ADP Employment Report will be released, followed by the BLS Jobs Report, which will be very important and will dictate where the Bond market goes in the near term.
Mortgage Apps
The MBA released their Mortgage Application data for last week, showing that purchases fell by 3% last week and are down 31% year over year.
Interest rates increased from 6.69% to 6.91%, with rates now about 1.5% higher than this time last year. Refinances decreased by 7% last week and are now down 45% year over year.
We hope with the movement in the Bond market this week that next week's figures are better.
Technical Analysis
Mortgage Bonds are continuing higher this morning and still have some room to improve until reaching the next ceiling at 99.845. The positive stochastic crossover continues to form, which would portend higher MBS prices ahead.
The 10-year is moving lower and is just above a floor of support at 3.644%. Just like MBS, the stochastics are pointing to lower yields. While the technicals are showing clear signs of a recovery, the Jobs data over the next two days will likely dictate market direction. Continue floating.
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