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Morning Report: Inflationary expectations fall


Vital Statistics:

Stocks are higher this morning as we round out September. Bonds and MBS are up after an awful month for the asset class.

It is looking more and more like we might get a government shutdown over the weekend. These things generally are more symbolic than anything because the vast majority of government spending is on autopilot and immune to a shutdown. For most people the only impact is that the Park Service closes down the monuments in DC.

Personal Incomes rose 0.4% MOM in August, according to the BEA. Personal incomes were driven upward by increased compensation and investment income. Personal spending rose 0.4%, which was a big deceleration from the July number of 0.9%.

The PCE Price Index rose 0.4% MOM and 3.5% YOY. If you exclude food and energy the PCE Price Index rose 0.1% MOM and 3.9% YOY. The annual increase in the core PCE was the lowest since June of 2021.

The inflation numbers were a touch below expectations, although we will get plenty of additional data before the November FOMC meeting.

Delinquencies on consumer loans are ticking up. 30-60 day DQs rose to 0.84%, an increase from 0.65% a year ago. We are seeing DQs rise across the board, with credit cards and auto loans leading the way.

Mortgage delinquencies are still near record lows, however. “Overall U.S. mortgage delinquencies remained near a record low in July, with the share of homes entering that status or progressing to later stages either unchanged or lower. Since most borrowers have substantial amounts of home equity, those who have locked in low mortgage rates that do enter later stages of delinquency will most likely not experience foreclosures. And while home equity gains have slowed from their former rapid pace, CoreLogic projects that home price growth will pick up over the next year. Borrowers should continue to build equity over the coming months, even if at a more moderate rate.”

Consumer sentiment decreased in September, according to the University of Michigan Consumer Sentiment Survey. Importantly, inflationary expectations continue to moderate, with year-ahead inflation declining to 3.2% from 3.5% and long-run inflation declining to 2.8%. The long-run rate had been stuck in a 2.9% – 3.1% range ever since the pandemic, so this is a good sign.

We are still above pre-pandemic levels with inflationary expectations. Prior to the pandemic, the two-year average for 2.3% – 3% for the year-ahead number and 2.2% – 2.6% for the long-run number. This is good news, however rising energy prices are going to support the headline number for a while.

Personal Income increased 0.4% in August; Spending increased 0.4%

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