Current position: Carefully Floating
Stocks are vacillating and mortgage bonds are slightly lower after the Consumer Price Index inflation report showed that inflation continued to move in the right direction, but not as much as expected.
CPI (Consumer Price Index)
The January Consumer Price Index (CPI) report showed that overall inflation increased 0.5%. Year over year, inflation declined from 6.5% to 6.4%. While the monthly reading was in line with expectations, the year over year figure was 0.2% hotter than expectations.
The main focus is the core rate, which strips out food and energy prices. It increased by 0.4%, while year over year, the index decreased from 5.7% to 5.6%. The year-over-year core rate was 0.1% higher than expectations.
Within the report, used car prices declined 1.9%, which helped inflation. But energy prices, which rose 1.9%, worked against us. The big one was shelter, which accounted for 60% of the overall gain in the Core CPI.
Shelter rose by 0.7% and is now up 7.9% year over year, which is an increase from the previous 7.5%. Rents rose 0.7% last month and are now up 8.6% year over year, which is up from 8.3%. Owner's equivalent rent, which tries to capture the rise in home prices but does a poor job, rose 0.7% and is up 7.8% year over year, up from 7.5%. While CPI shelter costs are still catching up and adding inflationary pressure, real shelter costs have been coming down.
Because shelter makes up 39% of Core CPI, it was the main cause of the 0.4% monthly gain, but imagine when this catches up and starts to add deflationary pressure. We think this may happen in the February reading, and we will get that report in March.
Technical Analysis
Mortgage bonds continue to test the 100-day moving average floor, which is holding. With bonds in oversold territory, a positive move over the next few days would likely result in a positive stochastic crossover, which could give us some relief and momentum to the upside.
The 10-year is trading at 3.72%, just beneath its 100-day moving average, which is keeping a lid on yields for now. Begin the day carefully floating.