Inflation continues to soar on the consumer and wholesale levels while there are more signs that our economy is slowing. Here are last week’s key stories:
-Consumer Inflation Remains Blistering Hot
-Producer Inflation Also Higher Than Expectations
-Are Jobless Claims the “Canary in the Coal Mine?”
-More Economic Slowdown Signals
-Housing Market Remains Strong
Consumer Inflation Remains Blistering Hot
The Consumer Price Index (CPI), which measures inflation on the consumer level, rose 1.3% in June. This was even higher than the 1.1% increase that was expected. On an annual basis, inflation rose to a new cycle high from 8.6% to 9.1%, which is the largest 12-month increase since November 1981. Core CPI, which strips out volatile food and energy prices, rose 0.7%, just above the 0.6% gain anticipated. Year over year, Core CPI fell from 6% to 5.9%.
Of note within the report, rents rose 0.8% in June and are now up 5.8% year over year. Energy prices rose 7.5% in June, bringing the annual gain to almost 42%. Gasoline prices rose 11.2% last month and are up nearly 60% year over year. Food costs climbed another 1% in June, bringing the year-over-year gain to 10.4%. Used cars were up 1.6% last month and 7.1% for the year.
What’s the bottom line? To help cool inflation the Fed has been hiking its benchmark Fed Funds Rate, which is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. So far this year, we have seen 25, 50 and 75 basis point hikes at their March, May and June meetings, respectively.
The Fed was expected to hike the Fed Funds Rate by 75 basis points at its meeting next week, but last week’s higher than expected inflation readings have added speculation that the Fed may even hike by 100 basis points. This remains a crucial meeting to monitor as we continue to deal with the soaring costs of goods.
Producer Inflation Also Higher Than Expectations
The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 1.1% in June, coming in hotter than expectations of 0.8%. On a year over year basis, PPI rose from 10.9% to 11.3%. Core PPI, which strips out food and energy prices, came in just below estimates with a 0.4% increase. The year over year figure declined from 8.3% to 8.2%.
What’s the bottom line? After a red-hot Consumer Price Index report, wholesale inflation was also extremely hot. Producers have two options: reduce margins or pass along higher costs to consumers, which leads to even more consumer inflation.
Are Jobless Claims the “Canary in the Coal Mine?”
Initial Jobless Claims increased by 9,000 in the latest week, as 244,000 people filed for unemployment benefits for the first time. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell by 41,000 to 1.331 million.
What’s the bottom line? While Initial Jobless Claims remain low, the 4-week average is at the highest level since December and it has been consistently moving higher. This trajectory higher is likely to continue, given the announcements of significant layoffs from several public companies, which means we will eventually see a higher unemployment rate. This report can be the “canary in the coal mine” to show that the job market is starting to soften.
More Economic Slowdown Signals
We are seeing more inversions on the yield curve, including 1-year and 2-year yields moving higher than 10-year yields last week. This is unusual as typically you would expect to receive a higher rate of return if you put your money away for 10 years when compared to lesser timeframes. An upside-down yield curve has been a historically accurate recession indicator, as it is a symptom that the economy is slowing.
Speaking of slowdowns, the National Federation of Independent Business Small Business Optimism Index fell from 93.1 to 89.5 in June, which is the weakest reading since January 2013. Among the takeaways, owners expecting better business conditions over the next six months fell seven points to a net negative 61%, which is a new low in the 48-year history of the index. Only 3% of small business owners said now was a good time to expand their business, while 34% reported that inflation remained their top problem.
Another sign that things are slowing has come via the Cass Freight Index, which shows shipments of goods across the US. It contracted by 4.1% in June and 2.3% year over year and this is starting to show recession like conditions in shipping. Freight volume is also an extremely reliable early-recession indicator, so it’s important to closely monitor future reports.
Housing Market Remains Strong
Recent data regarding housing contract cancellations does reflect some slowdown in the housing sector. While there are always some degree of contract cancellations, Redfin reported that 14.9% of agreements on existing home sales were cancelled in June versus 11.2% a year ago. On the new construction front, John Burns reported that there were 9.3% cancellations in May versus 6.6% last year.
However, Redfin also released a report that covered the June 5 to July 3 period, which factors in all of the rise in interest rates we’ve seen this year. Some notable statistics include:
-52% of homes sold above list price, down from 53% last year.
-Homes that sold were on the market for a median of 18 days, flat from last year.
-45% of homes that went under contract had an accepted an offer within the first two weeks, while 32% of homes had an accepted offer within the first week.
-The average sale-to-list price ratio, which measures how close homes are selling to their asking prices, declined from 102.2% to 101.9%. In other words, the average home sold for 1.9% above its asking price.
What’s the bottom line? While buyers are seeing some relief, overall we are not yet seeing big changes from the blistering hot housing market last year. More than half of the homes out there are still selling above asking price and quickly. And while there are some listing price reductions, as on average 7% of homes for sale each week had a price drop, this shows that there is less demand and sellers who are not listing their homes realistically are having to make adjustments. Homes that are listed competitively are still selling quickly.
Family Hack of the Week
Grill season is in full swing and you can make the most of your grill by using it for dessert as well as dinner. These easy tips from Spruce Eats for grilling bananas are a great place to start. Note that this recipe is best with bananas that are firm and yellow, rather than ones overly ripe.
Preheat grill for medium-low. Without removing the peel, cut bananas in half lengthwise. Sprinkle each banana half with lemon juice. Mix 2 teaspoons sugar with 1 1/4 cups brown sugar. Coat the exposed surface of bananas in the cinnamon-sugar mixture.
Place banana halves on a hot, oiled grate, peel side up. Cook for 2 to 3 minutes. Turn bananas over and cook for another 3 minutes. Remove bananas from grill and remove the peel.
Enjoy with additional grilled fruit or with your favorite ice cream and sundae toppings.
What to Look for This Week
Housing reports highlight this week’s headlines, beginning Monday with the National Association of Home Builders Housing Market Index, which will give us a near real-time read on builder confidence for this month. On Tuesday, Housing Starts and Building Permits for June will be reported, while June’s Existing Home Sales follows on Wednesday.
Also of note, the latest Jobless Claims will be reported as usual on Thursday along with regional manufacturing news for July via the Philadelphia Fed Index.
Mortgage Bonds were sharply higher on Friday, breaking above overhead resistance at the 25-day Moving Average. The 10-year ended last week trading at around 2.93% in a wide range between the ceiling at the 50-day morving average.