5/17/24 – All Ahead Standard
The April consumer price index and the various subcomponents came in as expected offering relief to investors fearful of an upside surprise. The year-over-year headline measure showed that inflation cooled to 3.4% from the 3.5% reported in March. The change in direction was welcome news to the capital markets but the incremental improvement is hardly enough for the Fed to claim victory. There’s an old saying in the capital market “that one number does not make a trend” and that clearly applies to last month’s CPI. We’ll be watching the index through the summer to identify any potential trend.
Simultaneous with CPI, the Census Bureau released the April retail sales tally, which was 0.0%, unchanged from the previous month. That follows outsized gains in February and March and, as with the CPI release, was welcome news to investors. Through April the narrative had developed that economic growth was reaccelerating and the possibility of another rate hike began to be bantered about. This week’s economic data quelled that speculation. At least for now.
With that assumption, bond prices staged a meaningful move to the upside, further depressing yield levels across the curve, with the 2-year note 7 basis points lower and the 30-year bond 10 basis points lower on the week. Moreover, the long bond is now more than 30 basis points lower than the 4.80% touched late last month, cheering those industries most sensitive interest rate move. The SPDR homebuilders’ ETF (XHB), has rallied 10% as interest rates have fallen from the April peak. Investors seem to be concluding that with the downtick in inflation, albeit just 0.1%, and the decline in the 30-year yield, home buying affordability is not too far behind. We’re not so sure we agree with that logic. The average 30-year mortgage rate is still 7%.
We’ll get a glimpse of home buying behavior next week with the release of existing home sales on Wednesday and new home sales on Thursday. The slight downtick in mortgage rates is not expected to have a positive impact on the data as existing home sales are expected to be the same as the previous month and new home sales are expected to fall -2.6% from the prior month.
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