Current position: Carefully Floating
Stocks are higher and mortgage bonds are lower after inflation data continued to move lower, but apparently not as much as the market had hoped for.
Consumer Price Index Inflation Data
The February Consumer Price Index (CPI) report showed that overall inflation increased by 0.4 percent. Year over year, inflation declined from 6.4% to 6.0%. Both of these figures were in line with expectations. Inflation has declined by about 1/3 from its high of 9% but still remains too high.
The main focus is the core rate, which strips out food and energy prices and increased by 0.5%, which was one tenth hotter than expectations. Year over year, core CPI decreased from 5.6% to 5.5%. The year-over-year rate was in line with estimates.
Looking deeper at the report, we see that goods prices were unchanged and all the inflation came from services.
Shelter costs accounted for more than 60% of the total increase in the CPI, which is still lagging behind.
Shelter spending rose by 0.8% and is now up 8.1% year over year, which is an increase from the previous 7.9%. Rents rose 0.8% last month and are now up 8.8% year over year, which is up from 8.6%. Owner's equivalent rent, which tries to capture the rise in home prices but does a poor job, rose 0.7% and is up 8% year over year, up from 7.8%. While the CPI shelter costs are still catching up and adding inflationary pressure, real shelter costs have been coming down. Because shelter makes up 43% of core CPI, it was the main cause of the 0.5% monthly gain...but imagine when this catches up and starts to add deflationary pressure.
We know that real shelter costs are up roughly 3% year over year compared to the 8.1% reflected in the CPI. If this were caught up, and because shelter makes up 43% of the core index, the core CPI would be 2.2% or 3.3% lower, not 5.5%. The point being, this is coming and disinflation is in the pipeline; the question is when this gets caught up. We think this may start to happen in the April reading, which we will get on May 10.
MBS Highway Housing Survey
MBS Highway's March 2023 Housing Survey showed resilient levels of buying activity and an improved pricing environment — despite a +100 bps rise in average 30-year mortgage rates during February 2023. The nascent recovery in demand, coupled with low inventory levels, is driving a resurgence of competition. Nearly one-third of respondents indicated that homes were now 'selling quickly with multiple offers'.
Tomorrow's Producer Inflation
Tomorrow morning, the February PPI will be released. The previous headline reading was 6% year over year and is expected to make a big decline to 5.4%. The Core reading, last released at 5.4%, is expected to move lower to 5.2%. These are significant moves that are expected, and even though the PPI does not get as much respect as the CPI, this could be Bond-friendly.
Retail sales will also be released, which can be important. Last month's stronger-than-expected figure applied pressure to the bond market .
Mortgage bonds have been extremely volatile as of late and opened much lower this morning. They broke beneath the 100-day moving average and are now finding support at the 25-day. So long as this level holds, after locking yesterday, we can continue floating into tomorrow, where we expect some bond-friendly news with producer inflation.