Stocks are setting new intraday all-time highs, while Mortgage Bonds are slightly higher, following the release of the highly anticipated Consumer Price Index inflation report.
Consumer Price Index
The September Consumer Price Index (CPI) report showed that overall inflation rose 0.3% for the month, which was one tenth cooler than expectations. Year over year, inflation rose from 2.9% to 3%, but the market was expecting it to rise to 3.1%. The main reason for the 0.3% reading was energy prices, which rose 1.5%...and that was all due to gasoline, which rose 4.1%.
The Core rate, which strips out food and energy prices, increased by 0.2%, which was one tenth lighter than market estimates. Year over year, Core inflation declined from 3.1% to 3%, which was also one tenth cooler.
Shelter makes up 44.4% of the core index and is always most important. It’s also the main reason that inflation was cooler than expected, as it only rose 0.2%.
Owners’ Equivalent Rent, which makes up 33% of Core and is the most important component, rose 0.1%...which was much cooler than the figures we have been seeing. This is where the BLS asks homeowners how much they could rent their home for, unfurnished, and without utilities. We thought this figure would come in lower and more in line with reality, which is why we forecasted core inflation to decline to 3%.
Rents rose at 0.2%, which would equate to 2.4% annualized, and is much more in line with other real-time rent readings. Lodging away from home did not help and rose 1.3%, but this should be a component that helps us in coming months, as there have been reports of cooling hotel prices and demand.
When stripping out shelter, everything else in Core CPI only rose 0.11% in September and 1.48% year over year, which is not bad. Goods prices are higher year over year, likely due to the temporary tariff impact. But if we continue to see OER and Shelter readings that are more real, it will be very likely that we continue to make progress on inflation.
News Next Week
Tuesday: Case-Shiller Home Price Index
Wednesday: Mortgage Applications, Pending Home Sales, Fed Meeting
Technical Analysis
Mortgage Bonds continue to trade in a range between support at the 25-day Moving Average and overhead resistance at 101.31. Bonds have tested 101.31 the last several days, but have been unable to break above it. Next week’s Fed meeting could be the catalyst, and the markets are pricing in a 100% chance of a 25bp cut.
The 10-year is testing 4% as resistance. This is an important ceiling that yields need to remain below, otherwise the next level of resistance is at the 25-day Moving Average at 4.085%. If yields can stay under 4%, a friendly Fed meeting will likely send yields to 3.92% and possibly below towards 3.80%.
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