Markets Brush Off Inflation Data

Mortgage Rates Near May Lows

This has been a great week for mortgage rates. Rates declined to levels near those in early May, and the 10-year Treasury also reached the same level. May’s Personal Consumption Expenditures (PCE) report was released, and even though it showed higher inflation, rates brushed it off and continued improving. As we have discussed, much of the improvement is due to a drop in energy costs following the perceived end of hostilities in the Middle East.

Alan Greenspan’s Legacy and AI

The week began with the news that former Fed Chair Alan Greenspan had passed away at the age of 100. He was the second-longest-serving Fed Chair ever and is one of the most respected. He helmed the Fed during several currency crises, including the Thai Baht and Mexican Peso crises and the 1998 hedge fund bailout. He helped stabilize the economy during the Dot-Com bubble, 9/11, the Iraq War, Black Monday, and other hard times.

One thing he was credited with was rejecting the pressure in September of 1996 to hike rates, as inflation was a concern. He had the foresight to see that the internet, which was just starting, would create productivity and help to lower inflation. This is similar to what current Fed Chair Kevin Warsh needs to do in assessing the impacts of AI on productivity and inflation.

PCE Report: Inflation Overlooked

The PCE for May showed a headline inflation rise of 0.4% and a yearly increase from 3.8 to 4.1%. Markets ignored this, looking to the $30+ decline in oil prices since last month as a major driver of lower inflation going forward. The Core reading, stripping out volatile food and energy prices, rose 0.3% in May and rose from 3.3% to 3.4% year over year. We discussed this previously, but a major culprit here was a 0.1% increase in portfolio management.

This increase was due to rising stock portfolio values, which led to more earned fee income for advisors, not an actual increase in the marginal cost of advisor fees. Money managers made more because their clients’ wealth increased.   

Core PCE: Underlying Inflation Tame

Without portfolio management, the core reading was 0.22%, which is tame. Shelter is still showing overstatement at 0.3% monthly. That annualized to 3.6%, which is much hotter than the real-time indicators, which are trending closer to 1%.

Dallas Fed Trimmed Mean Stable

As a reminder, Fed Chair Warsh has indicated a preference for the Dallas Fed Trimmed Mean Inflation report vs Core PCE. This showed annual inflation running at 2.4% in May. This was slightly up from 2.3% last month. What this shows us is that when you remove the pricing outliers, which is what the “Trimmed” part means, inflation is relatively stable.

Looking Ahead: Jobs Week is Already Next Week!

• Tuesday, June 30: Case-Shiller and FHFA Appreciation Reports, JOLTS
• Wednesday, July 1: ADP Employment Report, Job Cuts
• Thursday, July 2: BLS Jobs Report, Jobless Claims
• Friday, July 3: Markets closed for the July 4^th holiday