Inflation Saves Interest Rates

After last week’s strong Bureau of Labor Statistics (BLS) Jobs report caused rates to jump, we had a rocky start to the week.

The Producer Price Index (PPI) showed us the first favorable inflation report of the week. The University of Michigan published a report that gave some interesting context to the jobs numbers that bears considering.

Thankfully, mortgage rates and bond markets rallied significantly after some more good inflation data from the Consumer Price Index (CPI). Retail sales numbers rose better than expected but didn’t stop the continued market improvement from the CPI. 

Understanding December’s Producer Price Index and Its Implications for Consumer Prices

The PPI measures the changes in selling price that producers of goods and services experience. These price changes don’t always materialize into price changes that consumers experience. Continued price changes to producers will eventually be felt by consumers. 

The December PPI rose 0.2% vs 0.4% expected. The Core rate (strips out volatile food and energy prices) rose 0% when a 0.2% increase was expected. 

The Federal Reserve’s (Fed) favorite measure for inflation is Personal Consumption Expenditures (PCE) and it will be released on January 31. The PPI and PCE share some common elements. Hopefully, this positive report will foreshadow a positive PCE report later this month. That would be great news for rates!

Consumer Expectations Survey Signals Rising Concerns Amid Stellar Jobs Report

The University of Michigan’s Survey of Consumer Expectations was interesting this month, especially considering the stellar jobs report from last week. 

Two months ago (November) 32% of respondents felt that unemployment would be rising this year. December was 40% and now the report showed 50% of respondents felt we would see rising unemployment. We last saw this number in April of 2020.

One particularly interesting fact in the report was the margin (gap between) the respondents that believed unemployment was going up vs going down this year grew to 34%. The last 2 times we saw this large of a margin was in December 2007 and January 2001. Both preceded large recessions. While this may not indicate we are entering a recession, it is interesting to see the correlation.

December CPI: Energy-Driven Inflation Spike Masks Encouraging Core Data

CPI for December rose 0.4%, above estimates of .3% and yearly inflation rose from 2.7% to 2.9%. Normally, this would appear to be bad news but the reason for this increase was that 40% of the increase was caused by higher energy. 

When we strip away the food and energy and look at the Core CPI results, we saw an increase of 0.2% vs 0.3% expected.  In this result we saw one of the lowest Shelter cost components.  As we have been saying for months, Shelter is a lagging indicator. 

Since rents typically change at-most annually, it can take months for the real cost to catch up in the numbers. Shelter in CPI is still higher than real-time reports like CoreLogic’s Market Rent analysis, but it is coming down finally. If Shelter were reflecting the same numbers as we see in current reporting, in the CPI, Core CPI would be 1.9%, below the Fed’s target. This hidden piece of good news caused rates to improve.

December Retail Sales Deliver Mixed Results

Retail sales rose 0.4% in December, which was weaker than the 0.6% expected. Core Retail Sales, however rose by 0.7%, which beat expectations.  Core Retails Sales gets factored into Gross Domestic Product (GDP) and is a very important number.

Housing Starts Surged in December, but Permit Decline Highlights Supply Challenges

Housing starts for December were reported at a 1.499 million annual unit pace, up 205,000 from last month’s revised report of 1.294 million and above estimates of 1.32 million.

Housing permits, which are a good indicator of future starts, decreased to 1.483 million units, down 10,000 from last month’s figure of 1.493 million. Family formations are at 1.9 million, therefore, this shows a clear imbalance in the supply and demand in housing which bodes well for home values and price appreciation. 

Looking Ahead

Monday, January 20:

• Markets are closed in observation of Martin Luther King, Jr. Day

Thursday, January 23:

• Initial Jobless Claims Report

Friday, January 24:

• Existing home sales
• University of Michigan consumer sentiment survey