Inflation has not been a problem in the United States for decades – but it is still a concern for bond investors. Owning a security paying 2% while inflation is 3% is a problem. But recent summer inflation data has been muted on a monthly basis but continued to larger gains on a year-over-year basis. The Consumer Price Index increased 0.2 percent in July after a 0.1 percent increase in June. The core measure of the index, which excludes food and fuel, was also up 0.2 percent in July. It was, however, up 2.84 percent over the previous twelve months, the largest increase since September 2018. Given the lower readings over the last couple months, the expectation is that the headline annual number may level out or ease slightly in the upcoming months. The Producer Price Index was unchanged in July and, like the CPI, saw a larger year-over-year gain at 3.3 percent.
Conversely the job market is on fire. Recall that initial unemployment claims remain exceptionally low and labor market conditions remain strong. The Job Opening and Labor Turnover Survey (JOLTS) showed the job opening rate remained at 4.3 percent, just below all-time highs and the quit rate was an elevated 2.3 percent. A higher quit rate is viewed as sign of confidence from workers about job prospects.
Turning to rates, a flood of Fed speakers indicate the following for rates: Boston Fed President Rosengren (gradually raising rates over the course of this year makes sense and still have a ways to go); New York Fed President Williams (currently seeing a Goldilocks economy and does not need to raise rates more quickly than signaled); Atlanta Fed President Bostic (economy is very solid, outlook is balanced and policy should move to neutral); St. Louis Fed President Bullard (rate hike plan is too hawkish for the current environment).
Rates crept back up Tuesday, including the U.S. 10-year real yield hitting its highest level since 2011. Any movement will be rendered inconsequential after the release of the FOMC decision and accompanying press conference. Though the rate increase is essentially a formality, the median 2018 and 2019 growth projections are likely to be revised higher to 3.0% and 2.6% from 2.8% and 2.4%. Internationally, Germany’s economic institutes are expected to lower Germany’s GDP growth forecast for 2018 (by 0.5%) and 2019.
Ahead of the Fed, markets will have a couple other data points to digest. We have had the weekly mortgage applications from the MBA for the week ending September 21 (+2.9%). August new home sales are due for release at 10:00am and are expected to tick up slightly.
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