The CPI Inflation Number Is Better Than Feared

By Michael Lebowitz and Lance Roberts | August 11, 2023

Year-over-year CPI increased to 3.2% in July from 3.0% in June, ending the streak of 12 consecutive declines. While that may sound like bad news, the increase is solely a function of last July’s monthly -0.03% CPI reading falling out of the 12-month calculation. July’s monthly CPI increased by 0.2%, in line with the previous month’s figure. The annual core CPI (excluding food and energy) decreased to 4.7%, the lowest reading since October 2021. It was also 0.1% below expectations. CPI, other inflation data, and employment are the most critical inputs to the Fed’s policy decision-making. So how does yesterday’s CPI data impact the Fed meeting on September 20?

Powell thinks Core CPI for the service sector, excluding shelter, is the best leading indicator of inflation trends. Fortunately, it continues to decline rapidly. In 2022, Powell’s CPI gauge peaked at 8%. It started this year at 5.3%. The July CPI report has it falling to 2.9% from 3.3% in June. Thus far, the data we have shared lead us to believe the Fed will not raise rates at the next meeting. The Fed Funds futures market agrees, implying a slim 9.5% chance they hike rates at the September meeting. However, there is a fly in the ointment. Implied inflation expectations derived from TIPS and nominal Treasury bonds are rising. Historically, the Fed has believed implied inflation is a good leading indicator of inflation. As we listen to Fed speakers to gauge their views, focus on whether they stress higher inflation expectations or lower trends in actual data.

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Correction Continues

Yesterday, the market opened over 1% higher in the morning to challenge the 20-DMA. However, that challenge was fleeting, and the market gave up all the gains to close at Wednesday’s lows. While the market is near-term oversold, and a bounce is likely, it appears that the 50-DMA is the next logical target for this correction process. A violation of the 50-DMA will put us in a bit more defensive position, with the 100-DMA as the next primary support level. Remain cautious about adding new exposure for now, and continue using rallies to rebalance risk as needed.

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Bonds Are Historically Oversold

Bespoke put out a short article quantifying how oversold long Treasury bonds are. The two graphs below show that TLT was -3.84 standard deviations below its 50-day moving average at its recent extremes. That is the most extreme oversold reading since 2002, when the ETF first started trading. While such an extreme level is tempting, Bespoke warns:

As shown below, across the prior seven instances in which TLT got 3+ standard deviations below its 50-DMA, the ETF was lower a year later four times.

iShares 20+ Year Treasury ETF (TLT) - Past Year with data from 8/22 to 8/23.

Is The Labor Market Starten To Weaken?

Despite much high-interest rates and inflation, the labor market has proven highly resilient. We believe the lag effects of higher interest rates will ultimately affect the economy and result in layoffs. The question is when. Traditional jobs data from the BLS has proven to be a poor leading indicator. More concerning, the data is often revised lower after the fact, especially around recessionary periods. To better assess labor from a real-time perspective, comments from industry leaders and those in the employment business can be helpful. In that vane, we share a tweet from Peter Boockvar:

Tweet by @pboockvar "From CEO of ZipRecruiter in last night's earnings call: Employers continue to respond to the enduring macroeconomic uncertainty with caution."

Realtor Jobs

While on the topic of jobs, let’s consider the prospects of 1.56 million real estate agents. As John Burns Research and Consulting shares below, for the first time in 40 years, there are more realtors than the inventory of single-family homes available for sale. Historically, there are two to four homes for sale for each realtor. While troubling, the graph is a little misleading. The average days a house is on the market is currently around 45 days versus about 70 in the pre-pandemic years. Therefore the quick turnover of homes helps offset to some degree the shortage of houses for sale.

Existing Home Inventory vs. Total Realtors with data from 1983 to 2023.
Housing Inventory: Median Days on Market in the United States with data from Jan 2017 to Jul 2023.

Tweet of the Day

Tweet by @TimmerFidelity "The trend for long-bond rates has gone from down to sideways."

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