Shelter Costs Accelerate on Slipping Mortgage Rates: Aug. 14, 2024

Market participants are confounded following this morning’s CPI report, which has produced a morning reversal in equities and fixed-income after yesterday’s strong gains. On the one hand, inflationary pressures are well contained near 3%, but on the other, shelter costs accelerated fiercely on the back of lighter mortgage rates and an underbuilt housing market. Reduced borrowing costs for prospective homeowners and landlords alike are serving to lower debt service expenses but are supporting property valuations and price pressures at levels above the Fed’s 2% target. Against the backdrop, odds in both the IBKR Forecast Trader and fed funds futures are favoring a 25-bp trim next month, with participants in the former market carrying more conviction.  

Inflation Picks up After Easing in June

Inflationary pressures picked up steam last month with July’s Consumer Price Index (CPI) accelerating to its fastest monthly rate since April. Still, however, charges arrived in-line with estimates, rising just 0.2% month over month (m/m) and 2.9% year over year (y/y), which compares to -0.1% and 3% in June. The core CPI, which excludes food and energy due to their volatile characteristics, increased 0.2% m/m and 3.2% y/y, matching expectations and near the previous month’s 0.1% and 3.3%.

Cost trends were mixed across categories, with increases concentrated in the shelter and transportation services components, which saw prices move north by 0.4% m/m. For housing, the greatest weighting in the CPI, price momentum quickened from a mere 0.2% in June, pointing to significant inflationary risks associated with interest rate declines. Meanwhile, dining establishments, medical care commodities, food at markets and energy commodities experienced modest m/m upticks between 0.1% and 0.2%. Countering the price hikes were deflationary developments occurring in used automobiles, apparel, medical care services, new vehicles and energy services (heating & electricity), which saw discounts of 2.3%, 0.4%, 0.3%, 0.2% and 0.1%.

Financial Firms Ride Investment Banking Wave

Investment banking and wealth management continue to experience strong demand while consumers in the US appear to be maintaining levels of fresh fruit purchases. Also in the US, ecommerce is still expanding. Consider the following earnings highlights:

• UBS’ (UBS) profits and revenue exceeded analyst consensus expectations with the company’s cost-cutting, wealth management, investment banking and synergy from the Credit Suisse acquisition supporting results. The company’s net profit fell dramatically from the year-ago period; however, the 2023 second quarter included a multi-billion accounting gain resulting from the Credit Suisse deal. The bank’s revenue grew across all of its business areas, but its wealth management segment captured $27 billion in new assets with inflows coming from all regions. The company’s investment banking segment also grew. Regarding cost cutting, the bank eliminated 3,500 workers during the quarter, bringing its total workforce reduction since the end of 2022 to 23,000. In a CNBC interview, UBS CEO Sergio Ermotti said he thinks a US economic slowdown is likely, but it’s too soon to expect a recession. Recent market volatility, he added, points to fragility of some elements of the system. He believes volatility is likely to continue. The bank also believes the Fed will lower interest rates by 50 bps by the end of the year. UBS shares climbed more than 5% following the earnings release.
• Dole plc (DOLE) reported second-quarter earnings and revenue that exceeded analyst consensus expectations. Additionally, after accounting for currency exchange rates, acquisitions and divestitures, revenue climbed 4.3% y/y with the company’s fresh fruit division generating the strongest growth across regions. While fresh produce revenue increased in Europe, emerging market and Asia, it declined 14.7% in the Americas, but on a like-for-like basis, which excludes one-time events, it increased 11.3%. Dole raised its full-year guidance, resulting in its stock climbing 3%.
• PublicSquare (PSQH), which provides a commerce and payment platform, generated $6 million in second-quarter revenue, up 1,030% from the year-ago period. Last year, it produced $5.7 million in revenue. The company says it anticipates increasing the total gross merchandise value of products distributed through its system on behalf of clients to $1 billion by year-end, up from the $200 million currently on its platform. It also anticipates launching its own brand of soaps and lotions during this quarter. Shares of the company are up 1.50% this morning.

Markets Move Sideways as Investors Analyze Data

Asset prices are mixed with stocks and bonds alike already trading red to green several times today. For equities, the Russell 2000 and Nasdaq Composite benchmarks are lagging with losses of 0.8% and 0.2%, while the Dow Jones Industrial and S&P 500 indices sport gains of 0.2% and 0.1%. Similarly, sector breadth is mixed, with 7 out of 11 sectors higher, being led by financials, real estate and consumer staples; they’re gaining 0.7%, 0.6% and 0.4%. Communication services, consumer discretionary and materials are leading to the downside with losses of 0.7%, 0.5% and 0.3%. Treasurys are near the flatline and changing hands at 3.93% and 3.83% across the 2- and 10-year maturities. The dollar gauge (DXY) is lower by 17 bps as the greenback depreciates versus the euro, franc, yen and yuan but gains against the pound sterling and Aussie and Canadian dollars. Commodity majors are weaker across the board except for lumber, which is up 0.7% and benefitting from this morning’s acceleration in shelter costs that may embolden builders to add more supply. Crude oil, silver, gold and copper are traveling south by 1.7%, 1.2%, 0.6% and 0.3%. WTI is trading at $77.38 per barrel as an inventory build stateside contends with a reduced conflict premium fueled by lighter expectations of a Middle Eastern escalation. 

Fed Policy Expectations Become Less Clear

While this morning’s CPI figures dented the path toward a 50-bp reduction next month, tomorrow’s numbers on shopping patterns and layoffs may offer some optimism for monetary policy doves. Indeed, ForecastEx players are carefully selecting contracts for tomorrow morning’s retail sales and unemployment claim prints. For retail sales, investors are favoring the No contract for a figure exceeding 0.4% m/m, with the highest bids for Yes and No at $0.43 and $0.55. Turning to the labor market, ForecastEx participants are also preferring the under on initial claims exceeding 246,000, with the tallest bids for Yes and No at $0.43 and $0.56. A strong showing of these two reports pointing to robust transaction volumes and contained layoffs will likely weigh on asset prices, sending stocks south and yields north, as the data may block what market bulls want: the start of an aggressive Fed easing cycle. The bears, meanwhile, are preferring a tempered glide down to the terminal rate, rather than a swift elevator ride to the basement.   

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