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Inflation Not Heating Up But Not Cooling Off

May 31, 2024
Personal Consumption Expenditures (PCE), showed that Headline or all-in inflation rose 0.3% for the month, which was in line with estimates. Year over year inflation remained stable at 2.7%. Energy costs rose 1.2% during the month, which contributed to the headline reading.

Stocks and Mortgage Bonds are both higher after the Fed’s favorite measure of inflation, PCE (Personal Consumption Expenditures) showed a bit cooler of a monthly core reading. 

Personal Consumption Expenditures (PCE)

Personal Consumption Expenditures (PCE), showed that Headline or all-in inflation rose 0.3% for the month, which was in line with estimates. Year over year inflation remained stable at 2.7%. Energy costs rose 1.2% during the month, which contributed to the headline reading.

The core rate, which strips out food and energy costs and is the main focus of the Fed, rose 0.2% last month, which was one tenth beneath expectations. When looking at the decimals, the actual reading was 0.249%, which when rounded reads 0.2%. But because of the decimals, the year over year Core inflation reading remained at 2.8%, while it was expected to decline to 2.7%. That is also rounded – the actual year over year figure was 2.75%...so there was some improvement from the previous 2.813% figure, but not much.

The market seems to be liking the cooler monthly reading, as well as the lower consumer spending figures, only showing a 0.2% increase in April, which was beneath estimates and a big moderation from 0.8% in the prior month. The savings rate remained at 3.6%, the lowest level since November 2022.This is more evidence that the consumer is feeling pressure. Recently, Core Retail Sales were negative and Durable Goods Orders flatlined. If we continue to see this trend, it could lead to a slowdown in the economy. 

Bottom line – We are seeing very little inflation progress, but it’s not heating up and moving higher. Modeling out where inflation may go the rest of the year, using modest 0.2% readings, Core inflation will actually move higher to 3% because the replacement figures from 2023 become quite low. Of course, there is a chance that the readings come in under 0.2%, which would change things, but we are not seeing evidence of that yet…And there is also a chance that the readings come in hotter that 0.2%, which would make the picture look even worse. As we have been saying, inflation progress is not going to give the Fed the confidence they need to cut rates and it will have to come from the unemployment rate rising.

CoreLogic Loan Performance Insights

CoreLogic reported that loan performance in January and those 30-days or more declined from 2.8% to 2.6% in March.

Those 90+ days delinquent rose from 0.9% to 1.1%, while those in foreclosure stayed just off the lowest level on record at 0.3%. While the 90+ day reading rose, it’s still at a good level, but it’s something to keep an eye on.

Technical Analysis

Mortgage Bonds are moving higher and have broken above the 200, 25, and 50-day Moving Averages so far this morning. If Bonds can close above these levels, they will act as support and there is room for further improvement until reaching the 100.427 Fibonacci level, which is a little over 20bp above present levels. 

The 10-year is back under 2.50% and has broken beneath its 25-day Moving Average. The next test is the 50-day, which has been a tough level to get underneath. 

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