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What’s Going Down at the BLS

March 01, 2024
Last month the hotter Consumer Price Index inflation report pressured Bonds lower and Rates higher. The main reason was shelter costs, which make up 45% of the Core index. Specifically, Owners’ Equivalent Rent (OER) was the main culprit and makes up 1/3 of CPI and 1/6 of PCE.

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Stocks are mixed and Mortgage Bonds are slightly higher to start the day.  Helping Bonds reverse their earlier losses was a weaker Consumer Confidence report and weaker ISM Manufacturing data.  Within the ISM report, the prices and employment were both lower, signaling lower inflation and weaker manufacturing job growth ahead of next week’s Jobs Report. 

Deeper Look at Hotter CPI

Last month the hotter Consumer Price Index inflation report pressured Bonds lower and Rates higher.  The main reason was shelter costs, which make up 45% of the Core index. 

Specifically, Owners’ Equivalent Rent (OER) was the main culprit and makes up 1/3 of CPI and 1/6 of PCE.  The data for OER is imputed, meaning they ask a question to those partaking in the survey –

“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished, and without utilities.”

Even those of us in the industry may have a hard time answering that question accurately, and many have an upside bias.

But the last CPI report showed a huge divergence between Rent and OER – Normally the two track very closely, but in this report Rent decelerated while OER rose, with a significant two tenth difference between the two. 

Bloomberg reported that the BLS emailed a group of “super users” and explained that the reason for the difference was a substantial increase in the weightings for single family OER vs multi-family.  This doesn’t make a lot of sense, especially since most of the inventory is on multi family.  This puzzled many analysts and is another reason that some of the data cannot be taken at face value.  Because of this change in the weightings, CPI was higher than it should have been.

When comparing the CPI data to Truflation, which looks at many more data points, it could not be more of an opposite story.  Truflation is reporting 3% shelter increases over the last year, while CPI is at 6%.

Unfortunately it is unclear if the BLS is going to address or correct the weightings change, and inflation data may remain higher for longer because it makes up such a big portion of the report.

That means that the Jobs data is going to be even more important and it may take a hotter unemployment rate for the Fed to cut rates.

The latest SEP (summary of economic projections) from the Fed shows that 9 out of 12 Fed members believe the unemployment rate will be under 4.2%...so a rise above it could force the Fed to act.  And the CBO (Congressional Budget Office) believes the UR will rise to 4.4% this year.

All eyes will be on next week’s BLS Jobs Report!

Next Week

Wednesday: ADP Employment Report, JOLTS, Mortgage Apps, Powell Commentary

Thursday: Initial Jobless Claims

Friday: BLS Jobs Report

Technical Analysis

Mortgage Bonds are breaking out to the upside above the formidable 100.428 Fibonacci ceiling that has kept a lid on prices since mid-February.  Bonds now have more room to the upside until reaching the next ceiling of resistance at the 25-day Moving Average, roughly 13bp above present levels.

The 10-year yield is moving lower and has broken beneath support at 4.25% - The next floor is at the 25-day Moving Average at 4.18%.  Continue Floating.

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