Good Morning on the best day of the week Wednesday,

Inflation data out today. CPI came in hotter than expected, +1.3 percent overall, +.7 percent ex-food and energy, +9.1 percent year over year. For some crazy reason, the bond market is not reacting unfavorably. This keeps the Federal Reserve on path for another big interest-rate hike of 75bps later this month. Fortunately, fuel prices have started to ease, suggesting the CPI should begin to slow in the July data and we can say peak inflation is behind us. There already is some downward pressure on inflation as bloated retail inventories lead to discounts and used-car prices soften. While inflation was the headline today, don’t forget about recession fears and global turmoil, including Russia’s war on Ukraine. We do want to be careful because the market could decide to start focusing on CPI.

For now, the ten-year looks poised to come down and test 2.70%. Mortgage bonds are range bound and stuck in the middle.

I am a contrarian at heart. Some will say argumentative, I choose to think pensive. Below is a snapshot of inventory changes in the Las Vegas market. We are now at 2 months of inventory and while I would expect it to grow over the next, I believe this is a short window of opportunity to buy the dip. With the temporary surge in inventory, the pendulum will swing to where buyers have more (some) pricing power.

I see this as temporary, as the cost of financing has been the driver for weaker demand. Rates are poised to drop and the Fed will be forced to drop rates. I would expect by Q1 if not the end of the year. Markets will react to that expectation well before, and rates look to have a 4 handle in late q3. When rates drop, so will inventory which will then start the cycle of low inventory and bidding wars. I would buy the dip.  

Please remain safe and healthy, make today great.