HousingWire
Even this slight miss on estimates has the bond market on edge
By Logan Mohtashami
Mortgage rates shot up, as the CPI data came in just a bit hotter — 0.1% more than estimates on a month-to-month basis. That’s not much, but it’s high enough to take away one of the rate cuts we expected in 2024. I view rate-cut pricing being tied more to the 2-year yield than the 10-year yield. Today, we saw a noticeable bounce in the 2-year yield. If you’re talking about three rate cuts, you need to see the 2-year yield below 4.74%, in my view. As I write this, we are currently at 4.95%, a 20 basis point jump today.
So far, we have held the line on the market pricing in three rate cuts, but today was a clear break from that. Earlier in the year, the market got well ahead of itself with saying we would have six rate cuts, but I believe, just like last year, the bond market was too bearish on the economy to price in six rate cuts. We have a lot of time left in 2024, and as you can see in the chart below, the 2-year yield has been on a roller coaster since last November.
From BLS: The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in March on a seasonally adjusted basis, the same increase as in February, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all-items index increased 3.5 percent before seasonal adjustment.
One note: this report isn’t 100% a result of shelter inflation being hotter than estimates; car insurance and energy have picked up recently, too. However, the giant monster in the CPI world is shelter, as it’s 44.4% of the index.
Shelter inflation
In this report, shelter inflation damaged the month-to-month inflation growth because the owner’s equivalent rent of residences (OER) was the primary driver of monthly inflation.
Regarding shelter inflation, as we can see below, the slow-moving monster is just not dropping fast enough to lower the core inflation data. With CPI inflation, rents are the biggest deal for core inflation. If we have stronger month-to-month inflation, it will slow down the year-over-year data enough to keep CPI elevated.
Rent data
The OER is becoming a more significant issue for the CPI data this year. We must also be mindful that while we see disinflation in apartments, single-family rents are holding up well. However, the slowdown on this index keeps the data elevated. A more real-time shelter model would change the story very quickly, but that’s not going to happen.
Core CPI
We have made some progress on Core CPI, but remember; the Fed doesn’t track CPI inflation for their 2% target; it’s PCE inflation, and the gap between CPI and PCE inflation is massive. Historically, we would see a gap of 0.47%. Currently, it’s double that. However, with shelter inflation slowly moving lower year over year, core CPI is stalling out until this data line breaks it much lower.
The 0.1% miss on estimates on CPI has taken one Fed rate cut off the table, and mortgage rates have gone higher. I don’t believe the Fed will pivot until the labor market breaks. We do see some wage-growth trends that the Fed will find suitable to get more dovish, but the labor data isn’t breaking until jobless claims break.
Logan Mohtashami is a renowned expert in the mortgage and housing ecosystem, recognized for his insightful analysis and commentary on the U.S. economy and real estate market. Mohtashami is a lead analyst for HousingWire and is a regular contributor on the HousingWire Daily podcast. With a background spanning over two decades in the mortgage industry, Mohtashami — nicknamed “The Chart Guy” — has the remarkable ability to decipher complex economic data and translate it into understandable, actionable insights. This knowledge has made Mohtashami a sought-after commentator and his expertise has been featured extensively in news outlets, including CNBC, where he is a frequent guest.