Stocks are flattish this morning as the inflation situation isn’t improving. Bonds and MBS down small
Personal incomes rose 0.4% MOM in July, which was above the 0.2% expectation. Spending rose 0.2%, higher than the 0.1% estimate.
The all-important PCE Price Index rose 0.2% MOM and 3.7% annually. If you strip out food and energy, the index rose 0.2% MOM and 3.3% YOY. The headline number was 0.1% above expectations on a monthly and annual basis. The core rate was in line.
The acceleration in inflation from earlier this year is over, but it isn’t moving down.
This report won’t change the narrative for the Fed regarding inflation. Inflation remains too high, and I think the performance of the economy (especially the labor market) is hinting that monetary policy is not as tight as the Fed thinks it is, which means that r-star (the non-inflationary rate of interest) might be higher than the 3% level it has been in the past.
The Sep Fed Funds futures still see a roughly 2/3 chance of no move and a 1/3 chance of a rate hike.
Home prices rose 1.5% on a YOY basis in June according to the Case-Shiller Home Price Index. For the 13th consecutive month, home prices fell on an inflation-adjusted basis. The hip to be square trade continues, with Chicago leading the pack and Seattle bringing up the rear. “Homeowners and renters alike breathed a sigh of relief in June as inflation cooled to 3.5%, while the S&P Cotality Case-Shiller National Home Price Index posted a 1.5% annual gain, up from a 1.2% annual gain in May,” said Rebecca Kaufman, Associate Director of Commodities at S&P Dow Jones Indices. “While home prices continue to decline in real terms, lower inflation and firmer nominal home price growth in June helped slow that pace of erosion. The housing market remains under pressure, with 30-year mortgage rates holding near 6.5% in June,” Kaufman concluded. “As financing costs are kept high for prospective buyers, current homeowners remain reluctant to give up the low mortgage rates secured in prior years.”
Some notable gainers: Chicago (+6.9%), New York (+4.9%), Cleveland (+4.1%). The laggards include Seattle (-2%), Denver (-1.2%) and Tampa (-1.2%).
Consumer confidence fell in August according to the Conference Board. The present situation improved while expectations fell. High gasoline prices have an outsized effect on these sentiment indices, with makes sense as the Iranian war drags on.
“Consumer confidence moderated slightly in August for a second consecutive month,” said Dana M Peterson, Chief Economist, The Conference Board. “The Expectations Index slipped further into negative territory, which was offset by a moderate rise in the Present Situation Index after declining in the past three months. Consumer appraisals of current business conditions were mildly positive. Perceptions of the current labor market improved, reversing three months of moderate decline. Looking ahead, consumers were more pessimistic about business conditions and the labor market over the next six months. Expectations for household incomes moderated but remained optimistic overall.”
Inflation expectations rose with 61% expecting higher inflation going forward.
New home sales fell 10.5% MOM and 6.3% YOY to a seasonally adjusted annual rate of 607,000 units. There were 488,000 units for sale at the end of July, which represents a 9.6 month supply. The median sale price was $393,800, which was down monthly and annually.
