Trending News and Market Wrap-Up for the Week Ending on 5/17/2024 ????

Hotly Anticipated Inflation Data Keeps Hope Alive

As inflation remains the primary concern for financial markets, the Consumer Price Index (CPI) continues to be the most significant economic report each month. This week, both stocks and bonds showed sharp improvement despite the CPI results merely matching forecasts.

This highlights the market's current relationship with inflation: the extended period of high inflation means that the lack of additional negative news is viewed positively. While the latest report was slightly better than the previous one, with the core CPI (month-over-month) hitting its 0.3% forecast, the annual rate of core inflation remains well above the 2.0% target.

For core inflation to reach the 2.0% annual target, monthly figures need to drop to the 0.1-0.2% range. However, the Federal Reserve may consider cutting rates before achieving the 2.0% mark if monthly data suggests a likely downward trend.

Key Points:

• Inflation Monitoring: Both the Fed and financial markets closely watch various inflation metrics, particularly the Owners' Equivalent Rent (OER), which accounts for a significant portion of problematic inflation.
• OER Trends: OER is prone to gradual trends and correlates well with rental data from private sources. Despite earlier progress, OER has stalled, causing concern among market participants and Fed officials.
• Housing Supply: The supply of multi-family housing directly impacts rent prices. New data shows a rapid pace of multi-family completions, but new construction projects have slowed significantly compared to last year.
• Market Implications: The slower pace of new construction across all housing sectors may affect future completions, potentially impacting inflation data.

Current Market Situation

Mortgage rates ended the week significantly lower than the previous week, despite some resistance on Thursday and Friday. This pullback follows a solid winning streak for rates, which had reached their highest levels in over five months by the end of April.

For meaningful improvement in rates, big-ticket inflation data needs to align more closely with the Fed's 2% target. The next major data release is expected in the first week of June, and until then, market movements are likely to be limited.

Anticipated Events

Next week, the Fed will not announce new policies, but multiple Fed speakers and the release of the minutes from the most recent Fed meeting could introduce some market volatility. While the market seems well aware of the Fed's current stance, it's always wise to consider potential impacts from major Fed communications.

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