Stocks are higher and Mortgage Bonds are trading near unchanged levels after the Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed mild month over month inflation.
PCE (Personal Consumption Expenditures)
Personal Consumption Expenditures (PCE) showed that Headline or all-in inflation rose 0.155% in July, which was rounded in the media to 0.2%, which was slightly below the 0.2% expected. Year over year inflation remained at 2.5%, which was a little better than the 2.6% anticipated.
The core rate, which strips out food and energy costs and is the main focus of the Fed, rose 0.161%, which was also rounded to 0.2%, which was slightly cooler than the 0.2% expected. Year over year, core inflation remained at 2.6% (2.62% precisely), but some estimates were looking for this to rise to 2.7%.
The monthly core reading was very good at 0.161%, and when annualized, is under the Fed’s 2% target at 1.93%. The last three monthly readings were also all very tame, and when annualizing the last three month pace, it’s under the Fed’s target at 1.7%.
Bottom line – Inflation is moderating and is heading to the Fed’s target. Despite good monthly progress, year over year progress has been difficult because of the low replacement values from last year. August from last year is very low, but we should be able to make good progress when we get the data for September, as the replacement is a bit higher. The fourth quarter will be tough, but Q1 of 2025 things get easier and we feel there is a good chance the Fed hits the 2% inflation target by then.
Looking at the components, Shelter is still the largest contributor to the inflation readings, however, the lag from this reading is keeping Core PCE artificially high. Shelter rose 0.39% in July and contributed 0.07% to the monthly reading of 0.161%, which was 43% of the rise. Year over year shelter is up 5.27% within this report, and it’s contributing 0.93%, which is 35% of the total. But shelter is still lagging and overstated. Using real-time readings around 3% shows that Core PCE is being overstated by 0.4%, and when caught up, Core PCE would be at 2.22%.
The other component that added about 26% of the monthly reading was Financial Services. Looking at all of the components, many were negative. Overall, a lot of components are moderating or near the flatline, especially the goods sector.
Also within the report were figures on consumer incomes, spending, and their savings rate. Incomes rose by 0.3%, which was in line with estimates. Consumer spending rose 0.5%, which was also in line with estimates. Consumers continue to spend more than they take in, which is causing the savings rate to fall significantly.
The savings rate was around 8% pre-pandemic, was cut in half to 4% in January of this year, but has since plummeted to 2.9% in July. This shows that consumers are under duress and there is only so much savings that consumers have to deplete, so this should eventually lead to lower spending and a slowdown in the economy.
News Next Week
Monday: Markets closed for Labor Day Holiday
Tuesday: ISM Manufacturing
Wednesday: Mortgage Applications, JOLTS, Fed Beige Book
Thursday: ADP Employment Report, Initial Jobless Claims
Friday: BLS Jobs Report
Technical Analysis
Mortgage Bonds continue to trade in their new range between support at 100.79 and overhead resistance at 101.18. Bonds are sitting on support at the moment, and it will be important to remain above this level, because if broken, there is room to fall almost 30bp until reaching the 25-day Moving Average.
The 10-year yield is in a wide range between support at 3.80% and overhead resistance at the 25-day Moving Average and 3.92% Fibonacci ceiling. Yields have a lot of room to move in either direction, so we must remain on guard for yield swings.
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