Inflation Remains Elevated; Jobless Claims Decline

Inflation remains elevated at both the consumer and wholesale levels, while Initial, Continuing and Pandemic Jobless Claims all showed nice declines.

Consumer Inflation Remains Elevated

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.5% in July, which was in line with expectations. The year over year reading remained at 5.4%, which is still the highest year over year increase in almost 13 years.

Core CPI, which strips out volatile food and energy prices, was up 0.3% though this was slightly lower than the 0.4% increase expected. On a year over year basis, Core CPI decreased from 4.5% to 4.3%, coming off the hottest level in 29 years.

Within the report, rents rose 0.2% in July, increasing by only 1.9% on a year over year basis. However, it’s important to note that the CPI report is not, at least for now, capturing the increases we are seeing in rents that are being reported elsewhere.

For reference, Apartment List showed that rents rose 2.5% in July and are up 11% just from January of this year. Plus, Zumper reported that rents rose 7% year over year in July for a one-bedroom and 9% for a two-bedroom, while single-family rental homes were up nearly 7% as well. We may see some catch up in future months from CPI regarding rents but remember their reporting of this data is dragged down by their methodology.

Rising inflation is always important to note since inflation erodes a Bond's fixed rate of return. In other words, rising inflation can cause Bonds to worsen or lose value. This includes Mortgage Bonds, to which home loan rates are inversely tied. When Mortgage Bonds move lower, be it due to rising inflation or other reasons, home loan rates can move higher. Though many factors influence the markets, inflation remains crucial to monitor in the months ahead.

Wholesale Inflation Hotter Than Expectations

The Producer Price Index, which measures inflation on the wholesale level, rose 1% in July and 7.8% on a year over year basis. The annual reading was up from 7.3% and much hotter than expectations.

Core PPI, which again strips out volatile food and energy prices, rose 1% in July and 6.2% on a year over year basis. This was also much hotter than expectations and up from the 5.6% annual reading in the previous report.

Though the PPI report is important, it can sometimes be overlooked because it measures wholesale inflation, which isn’t always passed down to consumers. But with the latest numbers coming in so hot, will the Fed be inclined to more quickly taper its purchases of Mortgage Backed Securities and Treasures, which have been ongoing to help stabilize the markets?

Currently, 10 of the Federal Open Market Committee’s 18 members have now come out in favor of tapering, seven of whom are voting members. Whether this translates to actual votes in favor of tapering remains to be seen. We may get more clarity regarding what the Fed thinks about tapering and the timing for it at their Jackson Hole meeting on August 26-28.

Jobless Claims Continue to Decline

The number of people filing for unemployment for the first time fell by 12,000, as Initial Jobless Claims were reported at 375,000 in the latest week. California (+68K), Texas (+30K) and Illinois (+21K) reported the largest number of claims.

The number of people continuing to receive regular benefits was down 114,000, with Continuing Claims totaling 2.87 million and remaining under 3 million for the second week in a row.

Pandemic Unemployment Assistance Claims (which provide benefits to people who would not usually qualify) and Pandemic Emergency Claims (which extend benefits after regular benefits expire) also decreased by 730,000 combined.

All told, 12 million individuals are still receiving benefits throughout all programs. This is a decrease of 920,000 from the previous report. It’s likely these figures will continue to improve once September comes and all of the extended benefits expire.

On a related note, the JOLTS (Job Openings and Labor Turnover Survey) report showed that job openings were at a record high of 10 million in June. Though the JOLTS report is for June while weekly claims are more real-time, it will be important to see if the number of job openings and jobless claims both decline in the coming months and especially come September once all states will be removing extra benefits. This could potentially alleviate some of the compensation pressures noted above that businesses are facing if so.

Auctions Have Mixed Results

Investors were closely watching Wednesday's 10-year Treasury Note Auction and Thursday’s 30-year Bond Auction to see the level of demand. High demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower.

Weak demand, on the other hand, can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

Wednesday’s 10-year Treasury Note Auction was met with above average demand. The bid to cover of 2.65 was higher than the one-year average of 2.40. Direct and indirect bidders took 90.3% of the auction compared to 77.5% in the previous 12.

However, Thursday’s 30-year Bond Auction was met with below average demand. The bid to cover of 2.21 was below the one-year average of 2.30. Direct and indirect bidders took 81.7% of the auction compared to 79.6% in the previous 12.

And of Note

July’s National Federation of Independent Business (NFIB) Small Business Optimism survey showed that optimism moved lower due in part to the new COVID Delta variant, difficulty in filling positions, and higher prices.

However according to the NFIB data, compensation plans, which can help affordability in housing, are near record highs. Businesses have been passing those costs on to the consumer, with sales price expectations just off a 40-year high. This type of inflation may be stickier and not transitory.

The New York Fed also released its Survey of Consumer Expectations for July, showing that inflation expectations were unchanged at 4.8%. Participants also expect home prices to rise by 6% in the upcoming year, while rents are expected to increase by nearly 10%. A key takeaway is that while both rents and home values are increasing, rents can continue to rise each year while a mortgage payment will remain the same unless you have an Adjustable Rate Mortgage. And while taxes and insurance can rise modestly, this is typically miniscule compared to rental increases.