Inflation numbers drop along with Mortgage Rates

Newsletter - 11/14/2022

Week of November 7, 2022 in Review

October brought cooler-than-expected consumer inflation, which gave a big boost to both Stocks and Bonds when the data was reported on Thursday.

Meanwhile, Jobless Claims continue to tick higher.

Read on for these key headlines and more.

-Consumer Inflation Cooler Than Estimated in October

-Inflation remained a Top Problem for Many Small Businesses Last Month

-Rising Continuing Jobless Claims Suggests Slower Pace of Hiring

-The Scoop on Key Auctions

Consumer Inflation Cooler Than Estimated in October

The Consumer Price Index (CPI), which measures inflation on the consumer level, showed that inflation increased by 0.4% in October, coming in lower than estimates. On an annual basis, inflation declined from 8.2% to 7.7%, which was much cooler than the 8% expected. This is good news and what Feds are hoping would happen.

The real story here was Core CPI, which strips out volatile food and energy prices. It also came in softer than forecast with a 0.3% rise.?As a result, year-over-year Core CPI decreased from 6.6% to 6.3%, which was also much lower than estimates. The tame inflation data helped both Stocks and Bonds move sharply higher on Thursday.

While prices fell for medical care services, used cars, and apparel, shelter costs saw their largest monthly increase in the history of the index. Shelter costs make up 39% of Core CPI, so they played a big role in the monthly gain. However, they have been lagging in the CPI report.?

Real shelter costs have been moderating in the current market. For example, Zumper’s National Rent Report showed that the national median rent for one-bedrooms fell 0.8% while two-bedrooms saw a 0.7% decline from September to October. In addition, after 12 consecutive months of double-digit annual increases, the national median rent rose by just 9.2% when compared to October of last year.?These moderating shelter costs should be reflected in the CPI data hopefully by January, which should add additional downside pressure to inflation.?

What’s the bottom line??Besides causing higher prices, inflation is the arch-enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond's fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to?rise as we’ve seen this year.

However, when we look at how inflation is calculated, there is hope that it may continue to move lower in the months ahead.

Inflation is calculated on a rolling 12-month basis, which means that the total of the past 12 monthly inflation readings will give us the year-over-year rate of inflation. For example, when the data for October 2022 was released last week, it replaced the data for October 2021 in the calculation of annual inflation.

Going forward, the inflation readings that will be replaced are much higher, so if we see lower monthly readings as we did in October’s report, the annual rate of inflation will continue to move lower. Again, lower inflation typically helps both Mortgage Bonds and mortgage rates improve.

Inflation remained a Top Problem for Many Small Businesses Last Month

The National Federation of Independent Business (NFIB) Small Business Optimism Index was reported at 91.3 for October, down from 92.1 in September. This is the tenth straight month the index has come in below the 49-year average of 98. Among the key takeaways, 33% of small business owners reported that inflation remained their biggest problem, so evidence of cooling inflation is certainly a welcome sign.

What’s the bottom line??Bill Dunkelberg, NFIB’s chief economist, noted that “Owners continue to show a dismal view about future sales growth and business conditions, but are still looking to hire new workers.” He added, “Inflation, supply chain disruptions, and labor shortages continue to limit the ability of many small businesses to meet the demand for their products and services.”??

Rising Continuing Jobless Claims Suggests Slower Pace of Hiring

The number of people filing for unemployment benefits for the first time rose by 7,000 in the latest week, as 225,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 6,000 to 1.493 million.

What’s the bottom line??Continuing Claims rose by 129,000 throughout October, which suggests it’s becoming harder for people to find a job once they’re let go. In addition, while Initial Jobless Claims remain low, they still reflect an additional 225,000 people filing for unemployment. With headlines of large companies issuing layoffs, it’s possible Continuing Claims could continue to rise and the labor market may not be as strong as reports have indicated.?

Many of the tech companies have announced lay offs- hopefully, the Feds see this in advance of raising rates before the bottom has to hit and it's too late for many, and the recession effects more people than needed. Even though we see lay offs, this is not a bad thing as the Feds have been trying to slow down the economy to tame inflation and this is exactly what will do it. At that point, they may need to even lower Feds rates and we see Mortgage rates drop as fast as they went up.

The Scoop on Key Auctions

Investors were closely watching Wednesday's 10-year Treasury Note auction and Thursday’s 30-year Bond auction to see the level of demand. High demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower.

Weak demand, on the other hand, can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

While Wednesday’s 10-year Note auction was met with weak demand, Thursday’s 30-year Bond auction at 1:00 p.m. ET was met with strong demand, the latter of which helped Bonds build on the boost they received from the tame CPI data released Thursday morning.

What to Look for This Week

More inflation news is ahead on Tuesday when the Producer Price Index for October is released. This report measures wholesale inflation.

Then, important housing reports will be released beginning Wednesday with the National Association of Home Builders Housing Market Index, which will give us a near real-time read on builder confidence for this month. Housing Starts and Building Permits for October will be reported on Thursday, while October’s Existing Home Sales follow on Friday.

Also of note, look for October’s Retail Sales data on Wednesday, while the latest Jobless Claims remain important to monitor when they are released as usual on Thursday. Plus, November’s manufacturing data for the New York and Philadelphia regions will provide an important update on that sector when it is reported on Tuesday and Thursday, respectively.?

Technical Picture

The Bond market was closed last Friday in honor of Veterans Day. On Thursday, Mortgage Bonds rose sharply in response to the softer-than-anticipated CPI report, ending the day battling a Fibonacci level of resistance at 100.534.?A break above this level could mean more room for Bonds to move higher before running into another ceiling at the 100-day Moving Average. The 10-year broke beneath support at its 25-day Moving Average and ended last week only around 4 basis points away from testing another floor at its 50-day Moving Average.?