Ahead of the Fed’s press conference, we got a lower-than-expected CPI report, which first sent 10-year Treasury yields (and mortgage rates) lower. Later, the Fed announced its policy, and bond yields moved higher as Powell spoke. However, the 10-year Treasury yield ended the day lower. We’ve had some wild moves on key data lines lately, but we’ve also been itchy with crowded trades, as shown below in the 10-year Treasury yield.
The ten-year yield, which is key to mortgage rates, closed at a key technical level today. However, we must remain vigilant as we will need to see weaker economic data tomorrow morning or weaker PPI inflation data to confirm this trend.
The PPI inflation report is crucial as it will filter more into the PCE inflation report later this month, which is the Fed’s preferred inflation number to track. As you can see below, we are once again at a key level for the 10-year yield, so we will see if that level breaks below.
We’ll discuss Fed Day in more detail tomorrow morning on the HousingWire Daily Podcast, but let’s take a look at today’s inflation report first because today’s CPI inflation report was a surprise.
from Bureau of Labor Statistics: The U.S. Bureau of Labor Statistics reported today that the seasonally adjusted Consumer Price Index for All Urban Consumers (CPI-U) was flat in May after rising 0.3% in April. Over the past 12 months, the all-items index grew 3.3% before seasonally adjusted.
The monthly inflation data shocked bond traders, sending 10-year Treasury yields sharply following the report. Rent inflation also didn’t contribute to the drop – housing inflation has been rising every month, but other inflation figures were lower than expected. As the chart below shows, we’ve made some good progress on the year-over-year decline in inflation data.
But from the second half of the year, the base effect of CPI data means that these year-on-year increases will be more difficult to show progress. This is one thing that Jay Powell discusses, and it’s a big deal. That means the Fed will focus more on monthly data reports, as they should, for the rest of the year.
One of the takeaways from the Fed meeting is that while they talked about good inflation data, the key issue wasn’t inflation at all, but the labor market.
The Fed believes that labor market data has returned to balance enough to publicly say that we are at pre-COVID-19 levels. This is very big, because I worry that Powell will wait until the job openings return to 7 million or the wage growth return to 3% before saying this. The fact that he went public about it is significant.
So what are we to make of today’s double event? Inflation data was lower than expected, but this will not prompt the Fed to cut interest rates. However, Powell’s labor talking points are significant. I talked about this recently on my podcast covering all the reports from Jobs Week.
The fact that the Fed is willing to talk about balanced labor supply data means they know the labor market is softening. If we see a breakout in labor data, they will find the cover they need to cut rates without worrying too much about inflation as they will return to the Fed’s dual mandate. On the mortgage rate side, that means mortgage rates are likely to move lower and stay lower when labor data weakens.
I think this is a big change because I’m concerned that the Fed is waiting too long to acknowledge that the labor market is back to pre-COVID-19 trend data. It’s been at this level for months, so better late than never! As Powell said today: The best thing we can do on housing is lower inflation so we can lower interest rates. My view is that labor data will determine that, and today we finally get to see the path the Fed turns to, but it does require a softening of the labor market.
