Stocks and Mortgage Bonds are rallying after a cooler than expected Consumer Price Index inflation report. Yesterday, there was a strong 10-year Auction – it appears that traders took the right side of the bet ahead of today’s report. Later this afternoon at 1:00pm ET there will be a 30-year Bond Auction – While this is more institutional, the lower inflation readings and recent weakness in the economy may draw some demand in and help Bonds later today.
Consumer Price Index
The June Consumer Price Index (CPI) report showed that overall inflation was down -0.1% for the month, which was cooler than estimates of 0.1%. Year over year, inflation decreased from 3.3% to 3.0%, which was softer than estimates of 3.1%. Helping the headline was a drop of 2% in energy prices, with gasoline falling 3.8%.
The Core rate, which strips out food and energy prices, increased by 0.1%, which was also one tenth below estimates. Year over year, Core CPI declined from 3.4% to 3.3%, which was lower than the unchanged to 3.5% anticipated and the lowest reading since April 2021.
Let’s break down the internals:
Almost all of the inflation came from Shelter and Motor Vehicle Insurance, everything else only rose 0.19% from last year. But the big story of today is that shelter finally started to come down with a very modest 0.2% reading.
Shelter costs, which makes up 45.5% of the core index, finally moderated and was the reason inflation came in below estimates. Overall shelter rose 0.2%, causing the year over year reading to decline from 5.4% to 5.2% year over year. Rents rose 0.3% last month and are up 5.1% year over year, down from 5.3% in the previous report. Owner’s equivalent rent, which tries to capture the increase in homeownership costs, also rose 0.3% and is up 5.4% year over year, down from 5.7%. If this trend continues, it will be much easier to make progress on inflation.
Remember, real-time blended rents are rising at 3% year over year. The reason Inflation has remained elevated is the lag and way the BLS calculates shelter. It is currently overstating inflation by about 1%...but if we continue to see readings around 0.25%, that would eventually bring year over year shelter within these reports much closer to real-time figures at 3% and will help inflation continue to moderate.
The other area responsible for most of the inflation we are seeing is Motor Vehicle Insurance. And this component has been pesky – After many high readings, it finally fell last month, but then rose again by 0.9% in today’s report. While it’s a high monthly reading, it’s lower than the figure from last year, causing year over year MV insurance to fall from 20% to 19.5%. Even if we continued to see 0.9% readings, that would equate to a 11% year over year pace, almost half the current year over year reading.
Bottom line – Today’s inflation reading was very encouraging. So long as today’s shelter reading was not an anomaly, this is what we have been waiting for. If shelter is finally starting to catch up and reflect more realistic numbers, we can continue to see inflation come down, the Fed have more confidence to cut, and mortgage rates start to cooperate. Yields have fallen to their lowest level since early March, which is a welcome sign.
Initial Jobless Claims
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 17,000 to 222,000. This is the lowest reading we have seen in some time, but it is capturing the Fourth of July holiday week, which we know almost always results in a lower level of claims.
Continuing Claims, which measures Individuals continuing to receive benefits after their initial claims, fell 4,000 to 1.852M. This figure continues to remain at the highest level since November 2021 and shows that once you are laid off it’s becoming harder to find a new job. Remember that each week the initial claims are a new batch up people getting laid off, while continuing growing shows that they are still unemployed and continue to receive benefits. This report is another sign that the labor market is beginning to show some weakness.
Technical Analysis
Mortgage Bonds are off to the races and have broken above resistance at 100.911 and are now testing an important overhead ceiling at 101.088. If this level is broken, there is a ton of room to the upside. The 10-year has fallen to 4.175%, finally breaking beneath the 4.19% floor for now. If yields can maintain this drop, and maybe get some help from the 30-year auction this afternoon, the next stop is 4.07%!
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