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7/8 - 7/12

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Powell’s Semi-Annual Testimony

Powell spoke in front of the Senate, followed by his testimony to the House. While the prepared remarks will be the same, the Q&A session could invoke some new ​comments. Below are some highlights from yesterday, but overall, there was nothing groundbreaking…but he did acknowledge the weakness in the labor market and ​sounded a touch more dovish. In our opinion, he wants to cut rates in September.


  • More good data would strengthen our confidence that inflation is moving sustainably toward 2%
  • Elevated inflation is not the only risk we face
  • Job market has cooled considerably
  • If labor market weakens unexpectedly, could be case for a cut
  • Cutting interest rates too late or too little could unduly weaken economic activity and employment
  • Economy’s growth has moderated after a strong expansion in the second half of last year


To Powell’s last point on the economy beginning to slow, later today we will get a new Q2 GDP estimate from the Atlanta Fed. In their reading last week, they cut GDP ​estimates from 3% two weeks ago to 1.5%. That’s a big haircut on GDP in two weeks and we wouldn’t be surprised to see GDP get trimmed again.


Additionally, we are seeing a surge in Corporate Bankruptcies. There were 75 new filings in June, the highest monthly number since the start of the pandemic when a lot ​of companies were filing. So far this year there have been 346 bankruptcy filings, the highest figure in 13 years. Not only does this show that companies are struggling ​and the economy is slowing, but it flies in the face of the Birth/Death model within the BLS Jobs Report that has been responsible for most of the job gains we have ​been seeing and makes zero sense.


Remember, this is the part of the Jobs Report where the BLS tries to estimate how many businesses came online vs how many went offline or closed and how many jobs ​that accounts for. This is wildly inaccurate and has accounted for the majority of the job gains we have seen, even though we are seeing a lot of companies now filing ​for bankruptcies. Many of these companies may still be able to keep their doors open after filing, but they are certainly not hiring. When this catches up and is reflected, ​job growth should slow even further.


Active Inventory Increase is Misleading

There have been a ton of stories out there that inventory is significantly increasing, price cuts are at multi-year highs, and home values are declining. This is very ​misleading.


Active inventory has risen 6.7% in June and is up 37% from last year, but it’s from very low numbers and one third of the increase from two states alone – Florida and ​Texas. Everywhere else inventory is tight – Inventory in the Northeast is 57% below pre-pandemic levels while the Midwest is 49% below pre-pandemic levels.


On prices – The media has been citing that median home prices are down in the south and moderating everywhere else, but as always, this is skewed by the mix of ​sales. If you looked at the median price per square foot, which accounts for smaller lower priced homes selling more than bigger higher priced homes, prices are rising ​significantly.


Mortgage Applications

Purchase applications rose 1% last week and are now down 13% year over year. Refinance volume fell 2% and is now up 28% year over year. Refi’s made up almost 35% ​of total applications.


Interest rates fell slightly from 7.03% to 7% and are now 0.7% higher than they were this time last year.


Initial Jobless Claims

Initial Jobless Claims, which measures individuals filing for unemployment benefits for the first time, fell 17,000 to 222,000. This is the lowest reading we have seen in ​some time, but it is capturing the Fourth of July holiday week, which we know almost always results in a lower level of claims.


Continuing Claims, which measures Individuals continuing to receive benefits after their initial claims, fell 4,000 to 1.852M. This figure continues to remain at the ​highest level since November 2021 and shows that once you are laid off it’s becoming harder to find a new job. Remember that each week the initial claims are a new ​batch up people getting laid off, while continuing growing shows that they are still unemployed and continue to receive benefits. This report is another sign that the ​labor market is beginning to show some weakness.


Consumer Price Index

The June Consumer Price Index (CPI) report showed that overall inflation was down -0.1% for the month, which was cooler than estimates of 0.1%. Year over year, ​inflation decreased from 3.3% to 3.0%, which was softer than estimates of 3.1%. Helping the headline was a drop of 2% in energy prices, with gasoline falling 3.8%.

The Core rate, which strips out food and energy prices, increased by 0.1%, which was also one tenth below estimates. Year over year, Core CPI declined from 3.4% to ​3.3%, which was lower than the unchanged to 3.5% anticipated and the lowest reading since April 2021.


Let’s break down the internals:


Almost all of the inflation came from Shelter and Motor Vehicle Insurance, everything else only rose 0.19% from last year. But the big story of today is that shelter finally ​started to come down with a very modest 0.2% reading.


Shelter costs, which makes up 45.5% of the core index, finally moderated and was the reason inflation came in below estimates. Overall shelter rose 0.2%, causing the ​year over year reading to decline from 5.4% to 5.2% year over year. Rents rose 0.3% last month and are up 5.1% year over year, down from 5.3% in the previous report. ​Owner’s equivalent rent, which tries to capture the increase in homeownership costs, also rose 0.3% and is up 5.4% year over year, down from 5.7%. If this trend ​continues, it will be much easier to make progress on inflation.


Remember, real-time blended rents are rising at 3% year over year. The reason Inflation has remained elevated is the lag and way the BLS calculates shelter. It is ​currently overstating inflation by about 1%...but if we continue to see readings around 0.25%, that would eventually bring year over year shelter within these reports ​much closer to real-time figures at 3% and will help inflation continue to moderate.


The other area responsible for most of the inflation we are seeing is Motor Vehicle Insurance. And this component has been pesky – After many high readings, it finally ​fell last month, but then rose again by 0.9% in today’s report. While it’s a high monthly reading, it’s lower than the figure from last year, causing year over year MV ​insurance to fall from 20% to 19.5%. Even if we continued to see 0.9% readings, that would equate to a 11% year over year pace, almost half the current year over year ​reading.


Bottom line – Today’s inflation reading was very encouraging. So long as today’s shelter reading was not an anomaly, this is what we have been waiting for. If shelter is ​finally starting to catch up and reflect more realistic numbers, we can continue to see inflation come down, the Fed have more confidence to cut, and mortgage rates ​start to cooperate. Yields have fallen to their lowest level since early March, which is a welcome sign.


Fed Comments Post Cooler CPI Data

Following yesterday’s softer than expected Consumer Price Index inflation report, we heard from several Fed members, who seem even more in favor of a cut.


Chicago Fed President, Austan Goolsbee, is not a voting member this year, but will be voting in July because of Cleveland Fed President Mester’s retirement. Goolsbee gets ​it and has been calling for a rate cut. After yesterday’s CPI, Goolsbee said, “The committee put out a statement saying, we would not anticipate cutting rates until we were ​more convinced we’re on a path to 2%. My view is this is what the path to 2% looks like.”


He went on to say that the shelter reading was “profoundly encouraging,” and that by leaving rates where they are, we are tightening further as inflation falls. He explained ​that we would only want to tighten further if the economy was at risk of overheating, and this is not what an overheating economy looks like. Of course he is referencing the ​higher unemployment rate, progress on inflation, and weaker economic growth readings like GDP.


We also heard from San Francisco Fed President Mary Daly, who said that given the recent data on employment and inflation, some adjustment to interest rates will likely ​be warranted. She too seems in favor of a cut soon.


One of the newer Fed members, St. Louis Fed President Alberto Musalem, said that while the recent progress on inflation was encouraging, he needs more evidence before ​cutting. This gives us our first indication from him that he leans more hawkish.


Bottom Line – The next Fed meeting is July 31. While the market is not pricing in a cut, there are two key data points that will be released ahead of that meeting that could ​pressure the Fed. On July 21, the QCEW will release their figures for 2023 Q4 Job growth. The BLS themselves have overstated job growth substantially and have revised ​their figures much lower. But the QCEW is the actual data, and early estimates from the Philly Fed show that they believe the BLS overstated job growth by 521,000 jobs in ​Q4 alone…so we will see the actual numbers, which the Fed will likely not be able to ignore, even though it's older data.


Additionally, on July 26, the Fed’s favorite measure of inflation, PCE (Personal Consumption Expenditures), will be released. After the CPI report, the estimates have been ​moved lower to a 0% reading on the core, which would bring the year over year figure from 2.6% to 2.4%. That would be pretty close to the Fed’s target. If we see huge ​revisions to Q4 job growth and a 2.4% core reading, there is a chance that the Fed could cut as early as July 31, although not likely.


The market is almost 100% pricing in a September 18 rate cut, however, which is something to look forward to.


Producer Price Index

The Producer Price Index (PPI) report, which measures wholesale or producer inflation, rose 0.2% in June, which was hotter than the 0.1% expected. Additionally, May was ​revised higher from -0.2% to 0%.


Year over year, Producer Inflation rose from an upwardly revised 2.4% to 2.6%, hotter than estimates of 2.3%. Originally, year over year PPI was 2.2% in the previous report.

The Core rate, which strips out food and energy prices, rose 0.4% last month, which was hotter than the 0.2% expected. Last month’s figure was revised higher from 0% to ​0.3%.


Year over year, Core PPI rose from an upwardly revised 2.6% to 3%, much hotter than estimates of 2.5%. Originally, year over year Core PPI was 2.3% in the previous report.

This report did not move the markets today, but is important because several of the components get plugged into the PCE inflation report. We need to see if this causes ​PCE to come in hotter than expected as a result, but thus far the expectations are for a low PCE reading later this month.