Inflation Read Appears Stagnant But Future Looks Better

Stocks are higher and Mortgage Bonds are a bit lower so far this morning.

Yesterday, Trump backed off the tariffs threats on the EU because he said there was a concept of a deal with Greenland. Bottom line – Stocks rebounded and are following through today, while the Bond market benefited yesterday, but is a little lower this morning.

Personal Consumption Expenditures (PCE)

The Fed’s preferred inflation gauge, PCE, was finally released for October and November. On a year-over-year basis, the Headline and Core readings fell from 2.8% in September to 2.7% in October, but then rose back to 2.8% in November. The reason for the rise in November was a very low comparison in November 2024, but those replacements get much higher in January and February 2025, so we expect to see nice progress on year-over-year inflation, which will make it easier for the Fed to cut rates.

The monthly readings, however, were low and a big positive for future inflation. Focusing on the most important core, which strips out food and energy prices, October was 0.21% and November was 0.16%. Over a two-month period, it’s averaging around 0.2% or 2.4% year over year if you were to annualize the two months. A three-month run rate is at 2.2%, which is a very good three-month trend.

One of the main reasons for the lower monthly figures was lower shelter readings. Shelter came in at 0.12% in November and is up 3.3% year over year. That’s still overstating inflation vs real time figures by 0.4%, but we are making progress.

GDP Q3 Final

The final Q3 GDP reading was released, showing 4.4% annualized growth in the quarter. This was stronger than the previous read and estimates of 4.3%. Something that could have contributed to a bit of a stronger Q3 was the expiration of the EV tax credit, where consumers got in ahead of it.

Looking at the first three quarters, where Q1 was -0.6%, Q2 was 3.8%, and Q3 now 4.4%, the current annualized GDP growth rate through the first three quarters is 2.5%, which is pretty good. This will improve if Q4 is also strong.

Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, remained stable at 200,000. This was lower than the 212,000 expected and still a very low figure, showing a low fire environment. This does not capture those that cannot make ends meet on unemployment benefits and have to go into the gig economy, however.

Continuing claims, or those that continue to receive benefits after their initial claim, fell 26,000 to 1.849M.

Pending Home Sales

Pending Home Sales, which measures signed contracts on existing homes, fell 9.3% in December, which was much weaker than the 0.3% decline expected. Sales are now down 3% year over year.

This breaks a nice streak of increases, with November being the highest sales pace in almost three years. It’s important to note that this is for December, which is typically a slower period. Additionally, there was the Christmas and New Year’s holiday, which both fell on Thursday. That means there were 12 days that many were not doing much, like shopping for homes. Lastly, there was a ton of inclement weather, especially in the Northeast.

We feel this is more of a blip in sales than a trend, and expect a rebound in January.

Technical Analysis

Mortgage Bonds were able to close above the 25-day Moving Average yesterday, but are now testing it as support this morning. If Bonds can close above this level it will be a positive sign.

The 10-year moved lower yesterday and almost tested the 200-day Moving Average as support, but is climbing a little again this morning. Yields are in a very wide range between the 200-day and 4.33%, so they are susceptible to whipsaws.