The economic calendar roared to life as key inflation reports were released, two auctions made headlines and more stimulus is on the way!
Will Inflation Heat Up This Spring?
The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.4% in February while the year over year reading increased from 1.4% to 1.7%, as expected.
Core CPI, which strips out volatile food and energy prices, was up 0.1% in February but fell from 1.4% to 1.3% year over year, which was slightly cooler than expected.
The report also showed that rents are rising 2.0% across the country, which is down from 2.1% in the previous report. However, many markets are actually experiencing much higher rent gains, as the data is being weighed down by the pandemic's impact on rent in larger cities like New York and San Francisco.
While consumer inflation is tame at the moment, it's important to dig deeper and understand why inflation may rise in the coming months – and why that's significant.
Higher inflation typically drives home loan rates higher. That's because inflation is the arch enemy of interest rates, since it erodes the buying power of the fixed return that a mortgage holder receives.
As noted above, the current year over year rate of inflation, as measured by the Core Consumer Price Index, is at 1.3%. This inflation reading was just released for the period of March 2020 to February of 2021.
However, in the coming months, this rate is expected to rise significantly, as the readings for the more current months replace the older readings from 2020. It’s quite possible to see the rate of inflation rise towards 2.5%. It’s likely that this will influence higher interest rates.
Wholesale Inflation Jumps in February
This potential for higher inflation has already started at the wholesale level, as the Producer Price Index (PPI) rose by 0.5% in February and jumped from 1.7% to 2.8% year over year.
Core PPI, which again strips out volatile food and energy prices, was up 0.2% for the month and increased from 2.0% to 2.5% year over year.
Part of the increase in the headline reading was due to the monthly rise in energy prices (+6%) and food prices (+1.3%). Transportation costs rose significantly as well.
We may see further increases in wholesale inflation as the readings for the more current months replace the readings from 2020.
Looking Past the Headlines on Jobless Claims
The number of people filing for unemployment for the first time declined by 42,000 in the latest week, as Initial Jobless Claims were reported at 712,000. However, there were revisions to the previous week that made this decline look bigger than it really was. Ohio (+127K), California (+106K) and Illinois (+62K) reported the largest number of claims.
Continuing Claims, which measure people who continue to receive benefits, also decreased by 193,000 to 4.144 million.
While this decline seems like good news on the surface, it's important to dig deeper into the data. Pandemic Unemployment Assistance Claims, which provide benefits to people who would not usually qualify, increased by 1.1 million, while Pandemic Emergency Claims, which extends claims by 13 weeks after regular benefits expire, also increased by 1 million. Both of these numbers are at pandemic highs.
The total number of continued benefits in all programs is now at 20.1 million, an increase of 2.1 million from the previous week. There were just 2.1 million weekly claims filed for benefits in all programs in the comparable week in 2020.
The bottom line is that while the headline figures appear better and are near pandemic lows, much of the decline in Continuing Claims is due to the expiration of benefits and people moving into Pandemic Unemployment and Emergency Claims.
Auctions in the News
Investors were closely watching the 10-year Treasury and 30-year Bond Auctions that were held last week on Wednesday and Thursday, respectively. Demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower. Weak demand can signal that investors think yields will continue to move higher, which can cause turbulence in the Bond market and have a negative effect on rates.
While the 10-year auction on Wednesday was mediocre, the market did not react negatively, probably due to some relief that it was not as bad as the 7-year auction that was held a few weeks ago. Thursday's 30-year Bond auction was soft with a yield of 2.295%, a touch above the when-issued yield. However, one positive was that direct and indirect bidders bought 81% of the auction versus the 12-month average of 79%.
Update on Stimulus
President Biden signed the $1.9 trillion relief package into law, which includes direct payments of $1,400 to individuals who meet the income requirements. The additional $300 per week in unemployment benefits has also been extended until September 6.
Pandemic Unemployment and Emergency Claims that were set to expire March 14 have also been extended to September 6.
In addition, the package also waives federal taxes on an individual’s first $10,200 of unemployment benefits collected last year. Married couples who file a joint tax return wouldn’t be taxed on the first $20,400 of unemployment income. However, note that states may not waive the tax, as more than half currently levy a state income tax on unemployment benefits.