With the labor market showing signs of softening and the Federal Reserve expressing concern, the first rate cut in 2024 is becoming more likely. However, despite progress in inflation control since 2022, the 10-year Treasury yield remains above 4%. The Federal Reserve has remained resolutely cautious, and there has been no significant change in that stance, leaving the decision to the Federal Reserve. However, today's result is a victory, and we await tomorrow's Producer Price Index (PPI) inflation report.
From the BLS: The U.S. Bureau of Labor Statistics announced today that the All Urban Consumer Price Index (CPI-U) fell 0.1% on a seasonally adjusted basis after being flat in May. Over the past 12 months, the all-item index increased 3.0% on a seasonally unadjusted basis.
As shown in the chart below, steady progress has been made in managing inflation. CPI inflation, including the 45% contribution of housing inflation, has been a key driver of this progress today. However, the housing index, which tends to lag, has been underperforming for the past six months prior to today's report. This has frustrated some Fed members who expected today's numbers to come in earlier this year, and they must be very pleased today.
This month's report showed monthly rent increases at their slowest rate in a long time, which is just what the Fed's doctor ordered.
Tomorrow, the PPI inflation report will be released. This is very important because the components of the PPI inflation report are reflected in the PCE inflation data, which is what the Fed prefers as its primary inflation indicator. The Fed would like to see the PCE inflation data approach 2%. We need to remember that housing doesn't affect the PCE inflation data that much, but the PCE inflation data has been holding at the 2% level for the last 12 months.
How far will mortgage rates fall?
We'll have more details when the Producer Price Index (PPI) inflation report is released tomorrow, but as has been frequently noted, inflation has improved significantly even without Fed rate cuts, and the 10-year Treasury yield remains above 4%. Breaking through the stubborn 4.20% 10-year Treasury yield is crucial if we want to get mortgage rates closer to 6.5%.
But one silver lining that hasn’t been discussed much this year is that the spread between 30-year and 10-year mortgage yields has been improving. This is a good sign, and we cover it in our weekly tracker article. If the spread returns to normal, mortgage rates will likely be closer to or below the current 6% yield for a 10-year loan. We’ll cover this issue and others in the next episode of the HousingWire Daily podcast.
For now, let's focus on the target, the labor data. Jobless claims certainly improved today. We all know by now that the Fed cares more about labor data than inflation. If inflation was the driving force behind their thinking, we would have already cut rates. But as they stated, they have kept rates high because the labor market allowed it.
Let's call this a win today as the 10-year Treasury yield is dropping and testing the key 4.20% level. We'll see what the PPI inflation data is tomorrow, but today's data should make the Fed feel good because lagged housing inflation data is starting to become real. There's a lot to work through in the second half of 2024, but progress is being made in the fight against inflation.
Hopefully the Fed will prove me wrong and reverse course before we see a jobless recession. Either way, stronger inflation and weaker labor data are more favorable trends for future mortgage rates.