Five and a half hours before the June FOMC decision (or maybe more, depending on whether the BLS accidentally releases the data early again), the US government will tell everyone what inflation wasn’t last month.
There are a lot of jokes packed into that sentence. Don’t miss them.
The CPI figures are supposed to be a proxy for inflation, but exactly nobody on Main Street thinks inflation’s properly measured. Even if it was (properly measured), monetary policy’s set based on an expanding list of narrower aggregates which strip out superfluous things like energy. And food. And shelter. You know, stuff people don’t need. We’re trying to get to the “core” of the issue, after all. How quickly is the price of a spa day for a suburban stay-at-home mom rising, inclusive of a salon trip and a stop at a handbag boutique?
This situation is so stupid by now that private citizen groups have banded together in an effort to develop better measures of how much it costs to live comfortably in America, the government having failed not only to keep those costs in check, but even to track them accurately. These days, the BLS can’t even successfully release the mis-measured data without stumbling into some kind of mini-scandal.
Anyway, when the Fed decides to keep the price of money unchanged this week, they’ll do so with the benefit of a fresh CPI release, which economists reckon will show core price growth ran 0.3% in May from the prior month.
Assuming a consensus print, May’s release would mark the second straight “benign” report, where “benign” counts as a misnomer: The Fed needs these MoM prints to average sub-0.2%. But who’s counting, right?
You can read my full June FOMC preview here, but suffice to say the big question is whether the dot plot will tip two cuts for 2024 or just one. Given that a number of officials will surely pencil in just a single reduction if they expect to cut at all, I’d be inclined to suggest one versus two will be distinction without a difference. But that’s not how it’ll be traded in the minutes around the unveil. The CPI release is obviously relevant to the deliberations around the new statement language and updated projections, but it’s not decisive.
“The Bloomberg survey of economists has shown a median core-CPI gain of +0.3% during each month this year — but it wasn’t until April that the realized figures fell in-line with the consensus after Q1 saw a string of above-trend +0.4% monthly gains,” BMO’s Ian Lyngen and Vail Hartman remarked. “Once again, the BBG consensus for core-CPI in May is +0.3%, a pace that, depending on the rounding, could either stall the YoY rate at 3.6%, or bring the annual change down by 0.1ppt to 3.5%.”
Any way you cut it (sorry), Fed rate cuts are a September story at the earliest. If there’s a parallel universe where my past is still the present (as I sometimes believe), then I suppose there’s a world in which consecutive 0.2% MoM core CPI prints and a negative June NFP headline prompt a July rate cut. But… well, that ain’t this world.
Also on deck this week in the US: PPI, NFIB, the New York Fed consumer survey for May and the preliminary read on University of Michigan sentiment for June.
Traders will contextualize the inflation expectations series in the NY Fed poll and the Michigan release by way of the CPI print(s) and the FOMC meeting. As the figure above shows, we’re converging on ~3% — too high, but some suspect the Fed’s actually decided to countenance an overshoot of that magnitude in perpetuity for a variety of reasons, not least of which is a desire to help the government inflate away America’s debt burden.
Elsewhere, China reports inflation data this week too. Consensus expects CPI picked up to 0.4% YoY in May. That’d be a welcome development. China’s grappling with deflation and moribund consumer prices are indicative of a pernicious domestic demand slump bedeviling the Party’s efforts to engineer a recovery.
Trade figures from Beijing out late last week showed export growth was healthy while imports were lackluster, another sign of a subdued domestic consumption impulse.
Economists reckon producer prices in China slipped 1.5% in May. That’d mark a 20th month of factory-gate deflation.
This is a little redundant with my last comment a few weeks ago but it seems like shelter prices are the big shoe that hasn’t dropped, the greatly mythologized “last mile,” and the fed is actually constraining market forces in that sector in a counterproductive manner. Why can’t they respond to that? Like people can decide not to buy overpriced granola at whole foods but they can’t decide not to live in a shelter just because the entire housing market is distorted by a bunch of boomers with multiple properties. Would starting to lower rates slightly really be so dangerous to the rest of the inflation landscape that it’s not worth trying to free up the housing market?
care to educate me how exactly lower rates will help with housing? in the short term supply is inelastic, so where would house prices be if mortgages were accessible for everyone ?
I don’t have time to go back over this in its entirety in a comment, but there’s no question that high rates are keeping supply locked up in the US. No question at all. As in, it’s not a debate. Whether marginally lower rates would change that is an open question, and it’s also entirely possible that the rush of demand from sharply lower rates would offset the supply increase, thereby pushing up prices further. But between the golden handcuff effect on existing inventory and the sentiment drag on builders from the persistence of high rates (which, among other things, erodes margins by forcing builders to cut prices, offer incentives and pay points for buyers), it’s entirely likely that high rates are doing at least as much to support prices as suppress them in the US.
Regarding the “golden handcuffs” effect of interest rates on real estate supply, it seems reasonable to assume that this primarily impacts individuals who own more than one property. If someone owns only a single property, their decision not to sell doesn’t alter the market’s overall net supply as they will be equally a buyer on the other end.
For those with multiple properties, their motivation to sell is more likely influenced by their outlook on future prices. They might only decide to sell if they believe prices are going to decline, rather than being influenced by current interest rates.
As for developers, the net effect of supply reduction and demand reduction may balance each other out. The decrease in new supply due to high interest rates could be offset by a corresponding drop in demand, leading to a relatively stable market equilibrium.
No. Your “models” are oversimplified to the point of being entirely useless. For example, inventory varies by price bucket. Some parts of the market need supply more than others, and if there’s a lot of locked-up supply in the affordable range (e.g., $400k-$600k) where the current owners/would-be sellers would be trading up to a range where the supply picture’s not as onerous (e.g., the $1 million+ range) in the presence of lower rates, then the net effect of those prospective sales would be to loosen the market where’s it’s too tight with the trade-up purchases occurring in a sector that’s better able to absorb the demand without impacting the price.
Your comments on builders/developers are at odds with — and I don’t know a polite way to put this — developers, or at least those polled by the NAHB.
Now, look, I don’t know. Maybe you’re a real estate agent. Or maybe you’re a developer/builder. In which case maybe you know more about this than I do. But it sounds to me like you’re a guy who’s made some 30,000-foot level assumptions that seem reasonable until they’re juxtaposed with what’s actually going on, at which point they fail to hold up.
Also, it’s not really clear what you’re trying to say. There’s a structural supply shortage. Of that much there can be absolutely no doubt. We can debate the cause of it, and also the best solutions, all day, but you seem to be implying that the current situation is somehow balanced, when it plainly (self-evidently) isn’t.
Demographics suggest otherwise? Newly formed households are getting priced out.
Lower [higher] rates also reduce [increase] new housing supply, both SFR and MFD, all things equal.
Has anyone seen a good take on the math for “inflate away America’s debt burden”? Something like if inflation averages 3.5% how long until debt to GDP becomes “acceptable”?
Long ago and in a far away time, just as the Fed was raising rates from near zero to combat inflation. They said the last time this type of thing happened (inflation shock, last by oil prices, this time by 25% tariff on goods bought by the poor from China) the theory that raising interest rates was not settled to know that inflation could be killed by this method. It seems to me all these debates about what would happen if the fed is to lower interest rates is flying in the face of those statements.
If you were a FED governer, would you risk your reputation on unsettled ad hoc generate theory? Or would you go with settled theory? My bet is they will go with settled theory then parse the data for the next 20 years to determine what actually happened. Last time we also had a lull, but inflation was not killed during the lull. The lull was the the calm before the storm.
Some good points, but in the words of one of the greatest Sage’s of our time, Mike Tyson: “Everyone has a plan until they get punched in the mouth.”
Everything the Fed is doing right now is during economic boom times. Economic booms as a rule do not last forever. There will be a recession at some point (meaning the Fed will get “punched in the mouth”), that will materially change the decision making paradigm. I guess my point is, I’m not so sure the Fed is on autopilot as seems to be the common thought these days.