Week of November 8, 2021 in Review
Fall has ushered in cooler temperatures and hotter inflation, which is having an impact on households around the country and confidence among small business owners.
Consumer inflation as measured by the Consumer Price Index (CPI) rose by 0.9% in October while the year over year reading shot up from 5.4% to 6.2%. Core CPI, which strips out volatile food and energy prices, also rose on a monthly and annual basis. In addition, the report showed that rents are on the rise, but there is an important caveat to this data, as explained below.
Wholesale inflation remains at record high levels per the Producer Price Index (PPI), which rose 0.6% in October and 8.6% on a year over year basis. The annual reading ties the record level that was set in September. Core PPI, which again strips out volatile food and energy prices, rose 0.4% in October and 6.8% on a year over year basis. Wholesale inflation continues to move higher, which can lead to hotter consumer inflation levels if producers pass those higher costs on to consumers.
On a related note, confidence among small business owners fell to the lowest level since February, as the National Federation of Independent Business Small Business Optimism Index dropped to 98.2 in October. Particularly noteworthy was that those expecting higher selling prices jumped 7 points to 53%, which is the highest in the 40-year history of this survey. This reading reflects a growing belief among those surveyed that the rise we’ve seen in inflation is not temporary, especially as supply chain issues persist.
Read on for more details about why rising inflation matters when it comes to Mortgage Bonds and the home loan rates tied to them.
The Jobless Claims picture continues to improve, with the number of Initial Jobless Claims falling 4,000 to 267,000. This is the lowest level of first-time filers since before the pandemic began. While the number of Continuing Claims did increase by 59,000 to 2.16 million, claims declined overall. There are now 2.57 million people in total receiving benefits, which is 107,000 fewer than the previous week. These numbers are beginning to resemble those that were reported before the pandemic began.
Lastly, investors were closely watching Tuesday’s 10-year Treasury Note auction and Wednesday’s 30-year Bond auction to see the level of demand. Find out the results below.
Consumer Inflation Hotter Than Anticipated
The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.9% in October, which was much higher than expectations of 0.6%. The year over year reading increased from 5.4% to 6.2%.
Core CPI, which strips out volatile food and energy prices, rose by 0.6%, which was also much higher than expectations. On a year over year basis, Core CPI jumped from 4% to 4.6%.
Within the report, rents rose 0.4% in October and 2.7% on a year over year basis, up from 2.4% in September. However, the CPI report is still not capturing the increases we are seeing in many other rent reports that are showing double digit increases year over year. We may see some catch up in this CPI data in future months but for now the reporting continues to be dragged down by their methodology.
Also of note, owners’ equivalent rent has increased to 3.1% year over year.
Inflation is critical to monitor because rising inflation reduces a Bond’s fixed rate of return. In other words, inflation can cause Mortgage Bonds to worsen or lose value and the home loan rates tied to them to rise. The high headline CPI reading certainly caused a reaction in the Bond markets for the worse when the data was released on Wednesday.
After its Federal Open Market Committee meeting earlier this month, the Fed said that inflation was elevated but “reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors.”
In essence, the Fed is hoping that supply chain bottlenecks ease, which will cause inflation to move lower. Though many factors influence the markets, monitoring inflation data in the months ahead remains crucial, especially as households around the country have been feeling the pressure of higher prices.
Annual Wholesale Inflation Remains at Record High
The Producer Price Index, which measures inflation on the wholesale level, rose 0.6% in October and 8.6% on a year over year basis. The annual reading was unchanged from September, matching the highest level on record.
Core PPI, which again strips out volatile food and energy prices, rose 0.4% in October and 6.8% on a year over year basis. This annual reading was also unchanged from September and is still extremely elevated.
Wholesale inflation continues to remain hot, which can lead to hotter consumer inflation levels if producers pass those higher costs along to consumers.
Initial Jobless Claims Reach a New Pandemic-Era Low
The number of people filing for unemployment benefits for the first time continues to decline, as Initial Jobless Claims fell 4,000 to 267,000, reaching the lowest reading since before the pandemic began.
Continuing Claims, which measures individuals who continue to receive benefits, did increase by 59,000 to 2.16 million.
There are now 2.57 million people in total receiving benefits, which is down 107,000 from the previous week. Despite the challenges in hiring workers that many businesses are facing, the jobless claims picture continues to improve, with the numbers starting to resemble the levels we saw prior to the pandemic.
Important Note and Bond Auctions Disappoint
Investors were closely watching Tuesday’s 10-year Treasury Note auction and Wednesday’s 30-year Bond auction to see the level of demand. High demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower.
Weak demand, on the other hand, can signal that investors think yields will continue to move higher, which can have a negative effect on rates.
Tuesday’s 10-Year Treasury Note Auction was met with below average demand. The bid to cover of 2.35 was below the one-year average of 2.46. Direct and indirect bidders took 84.8% of the auction compared to 80.6% in the previous 12.
Wednesday’s 30-Year Bond Auction was also met with weak demand. The bid to cover of 2.20 was below the one-year average of 2.33. Direct and indirect bidders took 74.8% of the auction compared to 82% in the previous 12. Part of the reason for the weak Bond auction is the higher inflation readings we have seen, which leads investors to believe rates will be higher in the future. And if that is the case, they don’t want to tie up their money for 30 years at the current yields.
What to Look for This Week
The week kicks off Monday with manufacturing news for the New York region when the Empire State Index for November is reported.
On Tuesday, Retail Sales data for October will be delivered. We’ll also get an update on how builders are feeling this month with the National Association of Home Builders Housing Market Index, which is a near real-time read on builder confidence.
More housing news follows on Wednesday when Housing Starts and Building Permits for October are released.
And on Thursday, the latest Jobless Claims figures will be reported along with more regional manufacturing news via November’s Philadelphia Fed Index.
Investors will also be keeping a close eye on the 20-year Bond auction coming on Wednesday.
Mortgage Bonds ended the week battling with support at 102.266. If Bonds don’t remain above support, there is ample room to the downside, with the next support level at 101.969. The 10-year is trading at around 1.57% and is battling its 25-day Moving Average. If yields can break beneath their 25-day, there is room to improve and move lower until reaching the 50-day Moving Average at 1.48%.