Current position: Carefully Floating
Stocks and Mortgage Bonds are both sharply lower after a hotter-than-expected September Consumer Price Index report. The Dow did a more than 700 - point reversal, while Mortgage Bonds are down roughly 130bp.
CPI
The September Consumer Price Index (CPI) report showed that overall inflation increased by 0.4%, which was double the 0.2% expected. Year over year, inflation declined from 8.3% to 8.2%, but it was expected to decline to 8.1%.
The real story here is the Core rate, which strips out food and energy prices. It increased by 0.6%, which was hotter than the 0.5% anticipated. As a result, year-over-year core inflation increased from 6.3% to 6.6%, which was hotter than the 6.5% expected.
Shelter rose by 0.7%, which matches the highest increase since 1991 - Rents rose 0.8% last month and are now up 7.2% year over year, which is up from 6.7%. Owner's equivalent rent, which tries to capture the rise in home prices but does a poor job, also rose 0.8% and is up 6.7% year over year, up from 6.3%. While the CPI rental costs are still catching up, real rental costs have started to come off their peak and slightly decline.
Looking at more of the internals - Energy prices fell 2% from a month ago, bringing the annual gain to 20%. Gasoline prices fell 5 % and are up 18% year over year.
Food prices, which make up 14% of the CPI, climbed 0.8% in September, bringing the year - over - year gain to 11%. Medical care costs were the main factor too as they rose 0.8% last month and 6% year over year.
While this report is a negative for the Bond market, the worst is now behind us. We have talked about this September reading for months now, explaining that it was the last low figure from 2021 that needed to be replaced. Going forward, the comparisons get much tougher, and we expect inflation to start dropping, which will help Mortgage Rates.
Realtor.com Rental Report
Unlike the CPI report, which is still catching up, Realtor.com released its September Rental Report, showing that rental growth slowed to 7.8% year over year. While this is the lowest growth rate in 16 months, it is still more than two times faster than the growth rate seen just before the pandemic hit in March 2020.
Fed Minutes
The minutes were mostly hawkish - Many said the Fed needs to continue tightening even as the labor market slowed. The cost of taking too little action outweighed the cost of doing too much. Once a restrictive level of the Fed Funds Rate is reached, need to keep it there for some time. Inflation declining more slowly than they had anticipated.
On the slightly dovish side - Several said the Fed needs to calibrate the pace of tightening with the risk of an adverse effect on the economy and that it would be appropriate at some point to slow the pace of increases.
Claims
Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, increased by 9,000 to 228,000. This comes after a 29,000 increase in the previous week. The trend appears to be higher, and if it continues, can start to impact the unemployment figures. Continuing Claims were essentially unchanged at 1.368M.
Technical Analysis
Mortgage Bonds have busted through support and are now once again searching for a bottom. The 10 - year has broken above 4% and is now trading at 4.07%. While this is not good news for rates, as previously mentioned, we think that things will get better on inflation once we get the October reading in November. After locking every day since last Thursday in anticipation of this hot inflation reading, we can begin the day carefully floating, as some of the moves lower could be an overreaction and things may begin to settle throughout the day.