INFLATION NOTHING BURGER
Inflation is measured as a rate of change.
It is also a lagging economic indicator because it uses backward looking data from the month before.
I was suggesting the last two months that inflation had likely peaked, especially when we consider month-to-month trends, which had already been slowing.
Today’s July CPI report confirmed a more dramatic monthly slow down as the rate of change was flat.
The year-over-year number was still high at 8.5%, but also down from the June CPI (reported in July).
Future inflation data will likely reinforce the point of view that peak inflation is in the rearview mirror.
As a result, future inflation reports will likely be a nothing burger to investors.
Softer inflation data is comforting the bond market, particularly as overall economic activity continues to slow – also bond bullish.
Because mortgage rates are derived from mortgage bonds (not by The Fed) the latest bond friendly data will add fuel to the ongoing mortgage rate decline – also something I have discussing for months.
The Fed isn’t off the hook yet, they are still failing the “price stability” requirement of their dual mandate.
You can read about the Fed “Dual Mandate” HERE.
Therefore, the dip to 8.5% YoY inflation is not going to stop the central bank from continuing to raise the Fed Funds Rate.
This policy response is still a market expectation, as a result short-term rates continue to climb, while the yield on long-duration bonds continues to decline.
The resulting yield curve inversion is screaming “recession” (or worse) and is the most inverted since the last two major economic crisis’.
The Fed wants to bring “real” inflation down to their target level of 2%.
To achieve that there are plenty more rate hikes ahead.
Unless…we see a market crash beforehand that kills demand.
The Fed has stated they are willing to take that chance, and declining mortgage rates (higher bond price) says investors are taking the threat seriously.
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