Trending News and Market Wrap-Up for the Week Ending 5/17/2024
Hotly Anticipated Inflation Data Keeps Hope Alive ???
Inflation remains a top concern for financial markets, making the Consumer Price Index (CPI) the most crucial economic report each month. This week, both stocks and bonds saw significant improvement, even though the CPI results merely matched forecasts.
The market's relationship with inflation is such that the absence of negative news is now considered positive. The latest CPI report was slightly better than the last, with the core month-over-month metric hitting its 0.3% forecast. This figure matches the average reading over the past 12 months, explaining why the annual rate of core inflation remains well above its 2.0% target.
For core inflation to hit the 2.0% annual target, the month-over-month figures need to drop to the 0.1%-0.2% range. The Fed may cut rates before officially reaching 2.0%, provided the monthly data suggests a strong likelihood of achieving this target.
Both the Fed and financial markets closely monitor other inflation data components for signs of cooling. Among these, the metric measuring home payment inflation, known as Owners' Equivalent Rent (OER), is crucial. OER is significant as it accounts for the largest portion of the most problematic inflation category. Moreover, it tends to follow gradual trends and is well-correlated with timely rental data from private market sources, increasing confidence in its future direction.
OER had been trending positively before stalling at elevated levels, causing confusion among market participants and Fed officials. Theories about what it will take for OER to progress further vary, but most include the factor of time.
Another critical factor is the housing supply, especially multi-family housing, which directly impacts rent price trends. According to new data from the Census Bureau, multi-family residences were completed at one of the fastest paces in decades, despite a slight dip from recent highs. However, new multi-family construction projects are starting at a much slower pace than a year ago. With annual starts just over 300k, it’s only a matter of time before completions can no longer remain in the 500k+ territory.
The slower pace of new construction isn’t limited to the multifamily sector. Overall building permits and housing starts have been in a holding pattern while completions continue to add up. Analyzing housing supply to anticipate improvements in inflation data is highly forward-looking.
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Mortgage Rates and Market Movement ????
In the present, mortgage rates ended the week significantly lower than last week, despite some pushback on Thursday and Friday. Rates have pulled back slightly after a solid winning streak. While it's true that rates only managed the winning streak because they were at their highest levels in over five months by the end of April, the current trend is still positive.
To see meaningful improvement, big-ticket inflation data needs to move closer to the Fed's 2% target. The next significant data won't be available until the first week of June, so market movement might remain relatively stable until then.
Next week, the Fed could influence market volatility despite no new Fed announcements. Multiple Fed speakers are scheduled, and the minutes from the most recent Fed meeting will be released. While the market is likely well aware of the Fed's current stance, it's always wise to consider potential market reactions to any major Fed communication.
Key Takeaways:
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