Rents Rip Inflation Expectations
Sticky shelter costs lead to a kinetic retest of recent market lows.
(This week’s post is a day early with a modified format for logistical reasons.)
Higher shelter, food, and service costs pushed the unadjusted August CPI to 8.3%, a bit above expectations (actual +0.1%; expected -0.1%). However, the reading was below its recent peak.
Rents are sticky (as we discussed last week and in June). The increase in rents over the past year is now affecting renters whose long-term rental contracts are up for renewal, and experts don’t expect that trend to peak until early next year.
Producer prices, i.e., inflation at the wholesale level, fell 0.1 percent in August, so relief is on the way.
The FOMC will probably increase the Fed Funds rate by 0.75% next week, but their options will then narrow since they are ratcheting rates higher even as inflation decelerates. Since the lag between their actions and the economy’s response can vary, they must now wait to see how the data evolve. The Eurodollar futures, always sensitive to traders’ twitchy reactions, presently imply a peak in interest rates sometime over the next six months.
The CPI print resulted in a kinetic retest of recent areas of support.
The short-term trend is bearish since the price action is below the lower band. However, if the support zone holds, an upward trending channel could form on the chart. Otherwise, the two lower support zones could be critical next week.
The 2-year Treasury note yield rose sharply (nearing 3.88%), as did the 10-year yield (though it held below 3.5%). As the difference turns more negative (10-year yield - 2-year yield), some managers raise the specter of a recession once the spread declines below -0.5%. However, as the chart below shows, the recession rule (since 1990) seems to be that the difference must turn negative and then turn positive and exceed +0.5% or so. Since the first part of the rule has been satisfied, we await a turn upward before expecting a recession. (The NBER formally identifies a recession's starting and ending dates.)
The recent gains by Ukraine’s army against the Russian invaders have critical implications for their next year’s crop plantings and harvest and, therefore, on the energy and grain complexes and their effects on inflation. Note also that Australia reported a record wheat crop, which, unfortunately, could be offset by unfavorable weather elsewhere around the globe.
Next week we have the FOMC meeting Tuesday and Wednesday. The Powell news conference on Wednesday now becomes the next fulcrum for a trend change. In the past, the market has rallied after Powell but reversed over the following three days. Hence, the following Friday’s close is the one to watch. Many analysts expect a tradeable low over the next three to four weeks, but there is no consensus on whether it will be above or below the June low. For now, the net bull/bear balance is a decidedly bearish -71.
Wrap-up
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