Good Tuesday AM,
Bonds are improving a bit on some Fedspeak.
It is indicating the Fed tightening cycle may be over and a recent report from Federal Reserve Bank of San Francisco showing that shelter inflation, the biggest component of the consumer price index, is set to slow significantly and may even turn into deflation next year. There is not much other than impacting markets but that is good enough news to have the 10yr teetering with 4.00% 😊 and mortgage bonds bouncing up 10-25bps. 😊😊
Interesting piece from Bloomberg today…
The next Fed meeting is on September 20th. And presumably anything can happen before then, but increasingly markets appear to be expecting a pause. Per the WIRP function on Bloomberg, the current odds of a hike are just 14%. On the prediction market site Kalshi, the odds of the Fed Funds target rate going higher are less than 20%.
Yesterday there were two interesting nuggets that contribute to a more benign inflation story.
Augustus Kmetz, Schuyler Louie, and John Mondragon of the SF Fed published a note suggesting that shelter could see significant disinflation or deflation in the months ahead.
They write: “Our baseline forecast suggests that year-over-year shelter inflation will continue to slow through late 2024 and may even turn negative by mid-2024. This would represent a sharp turnaround in shelter inflation, with important implications for the behavior of overall inflation. The deflationary component of this forecast would be the most severe contraction in shelter inflation since the Global Financial Crisis of 2007-09.”
The model incorporates data from Zillow, Apartment List, Case-Shiller, and CoreLogic, and it looks like this.
The whole thing is worth reading and there are all kinds of caveats and scenarios where the downturn is not that severe. Still, the fact that it’s flagging such a notable, potential drop is encouraging.
Meanwhile we got the latest used car data from Manheim, and it showed another 1.6% sequential drop.
Neither of these two datapoints is definitive overall. And there are still upward impulses, perhaps coming from energy and the labor market. Still, the lines seem to be going in the direction the Fed wants to see.
Please remain safe and stay healthy, make today great!