Happy Valentine’s Day on this terrific Tuesday,

Love is in the air all around other than in the markets.

CPI came in as expected with the core level reading .04. Although this number is higher than we hoped for, it is not higher than the market expected. This is way the DOW has swung from over 200 points down, to positive and now back down 200. The market is trying to process what this new CPI is telling us and how will the Fed interpret the number. The fact is that the month over month increase is still considerably lower than the annual run rate. This is good! At this point I think bonds will get a bit worse before they get better. The ten-year is testing 3.80. Amazing that just two weeks ago we were at 3.40. Things do change fast. We still have a lot of big news coming this week so be prepared for higher volatility.

So how does CPI (since it is the news of the day) get calculated?

How much does each component matter and does that ever change? As to the last part, yes, it changes and did with this report. According to the BLS, new weighting is meant to better reflect consumer spending patterns, though the latest weights capture trends from now-distant 2021. (Labor Department used to update weights every two years but now plan to revise them annually.) Beginning with January’s release, housing–already the single biggest component of CPI–will account for even more of the index. Transportation, another big expense, will account for less in part because of a de-emphasis on used car and truck prices. If you would really like more of the detail on how the BLS weights CPI components, here it is.. Fair warning in advance, it is a bit of a dry read (like the desert, dry).

Speaking on car prices, the average monthly payment for a new car has soared to a record $777, nearly doubling from late 2019, according to Cox Automotive. That’s almost a sixth of the median after-tax income.

And last, here is a good piece from Bloomberg as it focuses on housing.

BUY THE DIP as the dip is going to be over.

Hello and Happy CPI Day.

One of the surprises of the last year is that the rapid rate hikes put such a small dent in the labor market. There has definitely been some cooling going on, as seen in job openings and wages. Still if you had been told at the start of 2022 where the Fed was going to go, you probably wouldn’t have guessed that the unemployment rate would fall to its lowest level in over 50 years.

A popular explanation for all this is that a lot of the biggest drivers of employment are in industries that aren’t particularly sensitive to rates. One sector that is sensitive, however, to rates is housing, and there we’ve seen a very sharp fall in activity as measured by housing starts and other measures of overall transactions. So to some extent, the idea of cooling the economy through rate hikes works like a bank shot through housing. Gotta depress that sector enough so that you create negative spillovers elsewhere and you get that broader slowdown.

If this is the case, then it’s worth being watchful for signs of housing stabilization and recovery. Yesterday, Mike Simonsen, CEO of Altos Research, noted that per his data homebuyers are already “defying expectations” and already-tight inventory is already dropping yet again.

Meanwhile, the number of listed properties seeing price reductions has already fallen markedly since the beginning of the year. It’s hard to know exactly what this means for inflation. But if the one sector of the economy that’s most clearly linked to Fed policy (via mortgages) is already showing signs of stabilization, then that makes it harder to see where that recessionary impulse comes from.

Please remain safe and stay healthy, make today great!