Week of April 8, 2024 in Review

Inflation Progress Stalls

What’s the bottom line? March’s hotter than expected consumer inflation report continues a trend we’ve seen in recent months, as rising energy and shelter costs have added to pricing pressure.

Price stability is part of the Fed’s dual mandate. When inflation became rampant a few years ago, the Fed began aggressively hiking their benchmark Fed Funds Rate (the overnight borrowing rate for banks) to slow the economy and rein in inflation. While inflation has fallen considerably after peaking in 2022, the progress lower has slowed, which could delay the Fed’s timing for rate cuts this year.

Given that maximum employment is the other part of the Fed’s dual mandate, a cooling job market with rising unemployment could pressure them to cut the Fed Funds Rate sooner rather than later. However, the overall strength of March’s Jobs Report, including the falling unemployment rate, will likely not add any pressure to their timeline.

Wholesale Inflation Better Than Feared

The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 0.2% in March, just below estimates. On an annual basis, PPI rose from 1.6% to 2.1%, but this was better than the 2.2% estimate. Core PPI, which strips out volatile food and energy prices, was in line with forecasts at a 0.2% rise. The year-over-year reading rose from 2% to 2.4%, just above forecasts.

What’s the bottom line? Overall, the monthly PPI readings were tame and better than feared, which was a relief after the hot CPI readings that were reported the previous day. Plus, some of the PPI components are factored into another important consumer inflation measure called Personal Consumption Expenditures (PCE), which is the Fed’s favored measure, and this could potentially lead to a slightly better PCE report when that data is released on April 26.

Continuing Unemployment Claims Top 1.8 Million

Initial Jobless Claims fell by 11,000 in the latest week, retreating from a two-month high, as 211,000 people filed for unemployment benefits for the first time. However, Continuing Claims surged higher by 28,000, with 1.817 million people still receiving benefits after filing their initial claim.

What’s the bottom line? Initial Jobless Claims can be volatile from week to week, but their relatively low level suggests that employers are still trying to hold on to their workers.

Yet, Continuing Claims are still trending higher near some of the hottest levels we’ve seen since November 2021, as it’s become harder for some people to find new employment once they are let go. This coincides with the New York Fed’s latest Survey of Consumer Expectations. Respondents noted that the mean probability of finding a job within three months of losing one is now at the lowest level in almost three years.

Latest on Small Business Optimism…or Lack Thereof

The National Federation of Independent Business (NFIB) Small Business Optimism Index fell to 88.5 in March. This is the weakest reading since December 2012 as “owners continue to manage numerous economic headwinds,” per Chief Economist Bill Dunkelberg.

What’s the bottom line? The NFIB noted that inflation is back on top as the biggest problem small businesses are facing, as owners are likely feeling the impact of higher oil prices and the stalling progress on reducing pricing pressure. Plans to hire also fell for the fourth straight month. Despite talk of a strong economy, small businesses are still feeling pessimistic.

Technical Picture

After last Wednesday’s sharp decline due to the higher-than-expected CPI numbers, Mortgage Bonds were able to bounce higher off support at 99.647 on Friday. The 10-year ended last week trading at around 4.52%. While this is still high, it’s an improvement from highs hit earlier in the week.