Cooling Inflation Likely Ends Fed Rate Hikes
Consumer prices overall were flat last month and rose 3.2% from a year earlier, a slower pace than in September, the Labor Department said Tuesday. Overall inflation hit a recent peak of 9.1% in June 2022.
Increases in so-called core prices, which exclude volatile food and energy items, also showed underlying price pressures are abating. Core inflation for the five months ended in October was at an annual rate of 2.8%, down from 5.1% during the first five months of the year.
The easing reflected lower prices for cars and airfares and milder growth in the cost of housing and other services. (…)
“The hard part of the inflation fight now looks over,” said David Mericle, chief U.S. economist at Goldman Sachs. (…)
With the October report, core prices have increased for five straight months more slowly than in the previous two years. That string of lower readings is moving closer to what Fed officials have long said would be necessary to convince them they no longer needed to raise rates. (…)
The 12-month inflation rate is on track this year to have posted its largest annual slowdown during peacetime. (…)
Indeed, the October inflation report will cheer officials who had recently played down fears that robust consumer spending might sustain an interval of stubbornly high inflation. Those officials warned against overreacting to strong growth and have instead said the central bank policy decisions should be guided by how inflation behaves. “The primacy of inflation has to carry the day right now,” Goolsbee said.
Analysts said the latest data also reduces the prospect that the Fed will have to resume rate increases early next year. Rather than focus on whether to raise rates, the debate at officials’ next meeting could instead center on whether and how to modify the guidance in their postmeeting statement to reflect recent progress on inflation as well as the dimming prospect of further rate increases. (…)
Tuesday’s inflation report was greeted with relief by several private-sector forecasters who had braced for a larger increase in core prices last month because of a calculation in healthcare costs that is incorporated every October. “This was a report we and others had been dreading for a few months,” Mericle said.
Not only was the latest data friendlier than anticipated, but several sources of cooling prices, including cars and housing, could continue to slow the rate of price increases in the months ahead, Mericle added.
Ed Yardeni:
October’s headline and core CPI inflation rates were 3.2% and 4.0% y/y. Those are still above the Fed’s 2.0% target, but have declined significantly from last summer. These two rates excluding shelter plunged to 1.5% and 2.0% (chart)! We know that rent inflation is heading lower. So the Fed is likely to get to 2.0% for the overall inflation rate next year rather than in 2026. That’s well ahead of schedule, confirming that inflation is turning out to be transitory rather than persistent after all.
David Kelly:
“I’m willing to say we’re going to win this thing,” JPMorgan Asset Management chief global strategist David Kelly declared on Bloomberg television, referencing this morning’s cooler than expected reading of October CPI. “It looks very, very likely that we’re going to win this [and] get inflation down to 2% by the end of next year.” Following today’s reveal of a 4% annual uptick in core prices, the slowest such growth rate since fall 2021, interest rate futures now point to roughly 100 basis points of easing from the current 5.33% funds rate by the end of next year, compared to a 75-basis point guesstimate as of yesterday, spurring outsized gains in the major indices and a broad-based drop in yields.
The biggest component, owners’ equivalent rent, cooled to 0.4% MoM from 0.6% MoM, but we are hopeful of much more to come.
CPI ex food and energy MoM, 3M annualised & YoY%
The so called “supercore” measure of inflation – services excluding energy and housing costs – which the Fed keeps a close eye on due to wages and labour market tightness having a large influence, came in at a pretty benign 0.2% MoM rate, pulling the annual rate down to 3.75%.
The Federal Reserve has got to be pretty happy with this and unsurprisingly it has reinforced market expectations that the policy rate has peaked. Just 1.5bp of tightening is now priced by the January 2024 FOMC meeting with more than 90bp of rate cuts now anticipated by the end of next year.
Supercore inflation is making progress
Housing rents should slow a lot further based on observed rents. If the relationship holds between observed rents and the CPI housing components, the one-third weighting housing has in the headline inflation basket and 41.8% weighting for core will subtract around 1.3 percentage points of headline inflation and 1.7pp off core annual inflation rates.
Housing slowdown will increasingly depress core inflation
Source: Macrobond, ING
Services inflation continues to ease as well, although progress remains slower than in the goods sector. Core services rose 0.3% in October, bringing the one-year change down to 5.5% from 6.7% this time last year. After a surprise 0.6% leap in September, owners’ equivalent rent growth slowed in October (+0.4%), while the monthly change in rent of primary residences was little changed at 0.5%. We expect to see shelter inflation to continue to moderate in the months ahead, although the steady rate of primary rent inflation cautions that the slowdown might not be as sharp as private sector measures have implied.
With the con of throwing yet another measure of “core” inflation into the mix, core services less primary shelter and health insurance, i.e., the CPI “super core” with the additional exclusion of health insurance, rose 0.2% in October after a 0.6% rise the prior month. Declines in both airfare (-0.9%) and hotel prices (-2.9%), two of the most volatile components of services, take some of the shine off the services slowdown, as they will be hard to repeat on a consistent basis. Through the large swings in travel-related services, the trend in CPI super core less health insurance is little improved over the past year, underscoring that despite the improvement for goods and housing, the fight against inflation is far from over.
Today’s CPI report further reinforces our view that the last rate hike of this tightening cycle is behind us. We will not receive the October data for the Fed’s preferred measure of inflation, the PCE deflator, until November 30. That said, today’s CPI data signal that inflation took another step forward on its long road back to 2%.
The FOMC’s job is not finished. Inflation is not yet back to 2%, and the Committee likely will need to feel confident that 2% inflation can be sustained before it begins to loosen its restrictive stance of monetary policy. Furthermore, the Committee will remain diligently on the lookout for any shocks that could disrupt the disinflationary trends that are currently in place.
That said, as 2023 draws to a close and 2024 comes into view, we suspect the debate next year will focus squarely on when rate cuts and the end of quantitative tightening will occur.
Sorry to have bored you with all these stats and comments. In truth, I have been involved in financial markets for 50 years and I have never seen the CPI reports so meticulously and minutely dissected as in the past few months.
And here I am, again, with rent data. At least I am discussing 33% of the CPI and 42% of Core CPI.
This first chart shows CPI-Rent and Zillow-Rent indexed at Jan 2015 = 100. If the past relationship resumes, there is a 10.1% gap that needs to close one way or the other. Note that Zillow-Rent has not declined (yet) and actually keeps rising while the BLS measure is gradually catching up.
The second chart plots the YoY change in the two series, a chart used by most everybody to “prove” that CPI-Rent needs to fall much more. But Zillow-Rent has turned up YoY, now at 3.2%.
Lastly, this chart shows MoM changes, to highlight that Zillow-Rent, seasonally adjusted, has reversed course since June while CPI-Rent growth has stabilized in the 6-6.5% range.
Recall that Zillow-Rent only measures new leases, less than 10% of all leases, while the BLS is focused on renewals.
The WSJ Nick Timiraos today:
Mid-America Apartment Communities, which has ownership in more than 100,000 apartment homes in 16 states and Washington, D.C., last month said it has been lowering rents to attract new tenants. A pandemic-era building boom is leading more apartments to hit the market when their developers are being squeezed by higher debt-financing costs than they anticipated.
While rents for existing tenants rose 5% in July through September, rents for new tenants fell 2.2% from a year earlier. One year ago, rents for new tenants were up 13.7% while renewals rose 14%.
“We knew in a high-supply environment that lease-up pressures exist, but I think it’s just been a little bit more intense because of what’s going on with the interest-rate environment,” Mid-America Chief Executive Eric Bolton said on an earnings call last month.
From the horse’s mouth (i.e. MAA’s press release for the quarterly results):
Eric Bolton, Chairman and Chief Executive Officer, said, “Third quarter results were ahead of our expectations supported by the continued solid demand for apartment housing. Stable employment conditions along with continued positive migration trends to our markets and historically low resident move-outs are combining to drive solid demand.
The delivery of new apartment supply is currently impacting rent growth performance associated with new move-in residents, and we expect this pressure to persist for another few quarters. The volume of new apartment starts has begun to decline, and we expect that leasing conditions will be supportive of higher rent growth in late 2024 as markets absorb the current development pipeline. (…)”
- During the third quarter of 2023, MAA’s Same Store Portfolio produced growth in revenues of 4.1%, as compared to the same period in the prior year, with Average Effective Rent per Unit up 4.5% while capturing strong Average Physical Occupancy of 95.7%.
- As of September 30, 2023, resident turnover remained low at 45.2% on a trailing 12 month basis driven by historically low levels of move-outs associated with buying single family-homes.
- MAA completed the redevelopment of 2,258 apartment homes during the third quarter of 2023, capturing average rental rate increases of approximately 7% above non-renovated units.
Same Store Portfolio lease pricing for both new and renewing leases effective during the third quarter of 2023, on a blended basis, increased 1.6% as compared to the prior lease, driven by a 5.0% increase for renewing leases and a 2.2% decrease for leases to new move-in residents.
Same Store Portfolio lease pricing for both new and renewing leases effective during the nine months ended September 30, 2023, on a blended basis, increased 2.9% as compared to the prior lease, driven by a 6.4% increase for renewing leases and a 0.8% decrease for leases to new move-in residents.
Yesterday, MAA presented at a REIT conference and showed this table. Renewal growth is indeed slowing but rather slowly:
Finally, note that Jay Powell’s so-called supercore CPI (core service ex-rent) is still rising at an annualized rate of 4.9% over the last three months.
China’s Retail Spending Picks Up, as Housing Slump Deepens Consumption is strengthening, but economists called for policy makers to do more to support the momentum.
Retail sales rose 7.6% compared with the same period last year, when stringent Covid lockdowns kept a tight lid on spending activities, according to data released Wednesday by China’s National Bureau of Statistics. October’s sales accelerated from September’s 5.5% year-over-year growth and topped the 7% expected by economists. (…)
There have been other indications in recent days that spending is still weak. Chinese e-commerce platforms recorded just 2% growth over the previous year on Singles Day, the annual shopping festival that culminates on Nov. 11, with companies offering discounts on everything from handbags and furniture to electronics. The growth was the slowest since Alibaba first launched the festival in 2009. (…)
Wednesday’s data showed only deepening trouble for the country’s beleaguered property sector. China’s home sales fell in the first 10 months of the year, despite sustained efforts from Beijing and local governments across the country to reduce both the threshold and costs to purchase homes.
Home sales by value dropped 3.7% from a year earlier in the first 10 months of the year, Wednesday’s data showed, compared with a 3.2% fall in the January-to-September period. September and October are traditionally considered the golden season for home sales, as developers often offer discounts and other incentives. (…)
Other data released Wednesday offered mixed signs for the economy. Industrial production rose 4.6% from a year earlier, up from 4.5% in September. Fixed-asset investment increased 2.9% over the January-to-October period, down from the 3.1% rise recorded in the first three quarters of the year.
One surprise in the fixed-asset investment numbers was a decline in infrastructure spending, said Michelle Lam, a China economist at Société Générale. The growth for China’s infrastructure investment slowed to 5.9% in the year through October, down from 9% in the January-February period. The drop came even though the government has issued special bonds to boost infrastructure investments, but financially strained local governments “are not really putting the money into use,” she said.
Japan’s Economy Shrinks for First Time in Three Quarters The economy contracted 0.5% in the three months to September from the previous quarter
The Japanese economy contracted 0.5% in the three months to September from the previous quarter after 1.1% growth in the April-June quarter. The economy shrank 2.1% on an annualized basis, which reflects what would happen if the third-quarter pace continued for a full year. (…)
Private consumption was flat from the previous quarter. Price increases made consumers hesitant to spend, offsetting a post-pandemic recovery in services sectors, including travel and dining. (…)
In the third quarter, capital expenditures fell 0.6% amid uncertainty over the global economic outlook. External demand, or exports minus imports, subtracted 0.1 percentage point from Japan’s gross domestic product. (…)