25 Years of Remembrance

Each year that goes by, fewer people can say, “I remember how it was before the towers fell.” A new generation of real estate professionals is entering our industry that has only known a post-9/11 world. They don’t remember being able to meet friends and loved ones at their airport gates when they arrived. Now, TSA has brought that back in select airports after 25 years.

After 25 years, we need to remember the good times, the laughs, the tears we have had, and the many men and women who lost their lives that day and didn’t get to see these years.

Volatile Week in Rate Markets

This shortened week was jammed with important economic data that roiled interest rate markets. On Thursday, we saw the largest daily drop in prices in over a year from the Mortgage-Backed Security (MBS), the security that mortgage rates are set by. It is not clear exactly what caused the sell-off. The Producer Price Index (PPI) for August was released with slightly mixed results.

The oil prices popped above $100/barrel on WTI again. Fresh destruction was reported out of Iran. The Treasury bought back $6 billion in longer-term treasuries, more than the $4 billion announced, but probably less than markets were hoping for. Despite a strong 30-year auction, the bears just slaughtered the bulls and rates suffered. It was a rough day.

August PPI: Energy Driving Costs

August’s PPI number shows how wholesale inflation changed during the month. As a reminder, this is the cost to producers and not to end-consumers. Some of the price changes in PPI get passed on to consumers, but not all. The headline inflation rose 0.4%, as expected. Year-over-year, it rose to 5.4% from 4.8%, one-tenth higher than expected because of a prior-month revision. Most of the rise was due to energy, which rose 4.2% during the month, the big culprit being diesel, which rose 24% in the month alone.

Core PPI: Slight Relief, Potential Help for PCE

Core PPI, stripping out volatile food and energy prices, rose by 0.2%, actually one-tenth less than expected. Year-over-year, Core PPI rose from 4.3% to 4.6%, as expected. As we have discussed, Portfolio Management has been a problem, causing core inflation rates to be higher than expectations due to the success of people’s portfolios. This month shows a decline of 1.6% in these fees. This can help the Fed’s favorite inflation gauge, PCE, at the end of the month.

CPI Headline is Hot, But Core Acceleration Worries Fed

The Consumer Price Index (CPI) for August showed that headline inflation rose 0.4%, in line with market estimates, but it was still a hot monthly reading. Year-over-year inflation remained at 3.4%, also in line with expectations.

The core rate, which strips out food and energy prices and is the main focus of the Fed, rose 0.3%, which is one-tenth hotter than estimates. Year-over-year, core inflation did decrease from 2.5% to 2.4% as expected, which is the lowest reading of the year. It is worth noting that Core CPI has now accelerated from 0.0% in June to 0.2% in July to 0.3% in August. While the annual trend is still improving, this three-month acceleration is exactly what gives the Fed the cover it needs to consider a rate hike.

Shelter, Travel, and Services Push Core Higher

The shelter reading was relatively calm aside from the lodging away from home figure, which, as we’ve discussed, is always a wild card. This caused a rise in total Shelter of 0.3%, which contributed to the hotter reading. Airline fares rose 2.68%, mainly due to higher oil prices, and not helping the reading was an increase in Education/Communication Services, which include things like daycare, tuition, etc., and rose 1.85%. This item alone added one-tenth to the core reading.

CPI and Jobs Data Set Up Fed Hike

This CPI data was especially important for the Federal Reserve’s (Fed’s) meeting next week. After the Bureau of Labor Statistics (BLS) Jobs report came out with an upside surprise (that we thoroughly analyzed last week and are very skeptical of the accuracy of the data), the Fed had plenty of ammunition to hike rates. They just needed this week’s inflation data.

Fed Outlook: Likely Hike but Possible Calm

Now that CPI shows that inflation still remains sticky in the headline number, the expectation is that the Fed will hike rates by 0.25% at next week’s meeting. Counterintuitively, this may be what calms the bond market and calms mortgage rates.

Looking Ahead: Key Reports Next Week

Next week’s market movers include:

• Tuesday, September 15: National Association of Home Builders Housing Index
• Wednesday, September 16: Fed Meeting Results
• Thursday, September 17: Housing Starts and Permits, Unemployment Claims, Pending Home Sales
• Friday, September 18: Industrial Production and Capacity Utilization