Morning Report: Inflation continues to moderate

Vital Statistics:

Stocks are higher as earnings continue to come in. Bonds and MBS are down.

Global bond yields shot higher overnight after the Bank of Japan tweaked the language in its policy statement which hinted at policy normalization. This caused the yield on the Japanese Government Bond to shoot higher by 11 basis points (from 0.44% to 0.55%) which caused global bond yields to spike higher. As a general rule, global government bonds do correlate with each other, so this pushed yields higher.

Personal Incomes rose 0.3% month-over-month in June, according to BEA. Personal consumption rose 0.5%. The PCE Price Index, which is the Fed’s preferred measure of inflation, rose 0.2% month-over-month and 3% year-over-year. Excluding food and energy, it rose 0.2% MOM and 4.1% YOY.

Here is the long-term chart of the annual change in the PCE Price Index excluding food and energy, which is the focus for the Fed:

Lower energy prices (they fell 19% YOY) pushed down the headline number to 3%, but the ex-food and energy number is still elevated. June 2022 was the peak of the housing market, and that will help to push down the monthly numbers going forward. The next Fed meeting in September 19-20, so we will have a lot of data to chew through before that meeting.

The employment cost index rose 1% in the quarter ending June 30, and 4.5% for the past 12 months. It rose at 5.1% for the year ending in June 2022, so we are seeing wage growth decelerate.

Pennymac reported that volumes rose 9% to $24.9 billion in Q2. This was down 7% on a YOY basis. Overall margins improved, but elevated interest rate volatility pushed up hedging costs.

Consumer sentiment improved markedly in July, according to the University of Michigan. “Consumer sentiment rose for the second straight month, soaring 11% above June and reaching its most favorable reading since October 2021. All components of the index improved considerably, led by a 18% surge in long-term business conditions and 14% increase in short-run business conditions. Overall, the sharp rise in sentiment was largely attributable to the continued slowdown in inflation along with stability in labor markets.”

Year-ahead inflationary expectations increased from 3.3% to 3.4%. Long-term inflationary expectations were stuck at 3%.