Cooling Inflation & the Housing Goldmine.
On Thu, 10 Oct 2024 the latest US consumer price index (CPI) inflation data was dropped.
It was not exactly what US market and analysts were expecting.
As a result, US stocks turned south on Thursday, blurring the picture of the Feds next interest rate decision in November, 6-7, slightly less than a month’s time.
When the clock chimed 4pm: (see above)
DJIA: -0.14% (-57.88 to 42,454.12).
S&P 500: -0.21% (-11.99 to 5,780.05).
Nasdaq: -0.05 (-9.57 to 18,282.05).
CPI - September 2024.
Here’s the summary, very quickly.
Headline Inflation.
YoY: was 2.4% vs forecast 2.3% vs Aug’s annual inflation 2.5%. Cooling. This is the smallest annual rise since February 2021.
MoM: was 0.2% vs forecast 0.1% vs Aug’s monthly inflation 0.2%. Status quo.
Core Inflation.
YoY: was 3.3% vs estimates 3.2% vs Aug’s annual core inflation 3.2%. Ticked higher by +0.1%.
MoM: was 0.3% vs estimates 0.2% vs Aug’s monthly core inflation 0.3%. Status quo.
Core inflation (annual) has again accelerated marginally with food prices rising to +0.4% monthly (up from +0.1% in August 2024).
Headline inflation reaches lowest point in 3 years, though some price pressures remain.
Deep Dive.
Which component/s is/are causing inflation to remain stubbornly stagnant ?
Excluding volatile food and energy costs, “core” prices, a gauge of underlying inflation, remained elevated in September.
This was driven up by rising costs for :
Medical care.
Clothing.
Auto insurance.
Airline fares.
Economists closely watch core prices, which typically provide a better hint of future inflation.
According to former Fed Reserve economist Alan Detmeister, (now economist @ UBS Investment Bank):
Some items that contributed to higher core inflation last month, eg used cars, may rise again in the coming months, keeping prices a bit elevated.
Other items that rose in price in September, eg clothing, air fares, are more volatile and should cool soon.
Things are still gradually coming down, but there is going to be volatility month to month.
A positive note in September’s data is “apartment rental prices” grew slower, a sign that housing inflation is finally cooling, a long-awaited development that would provide relief to many consumers.
Overall September inflation was held down by a big drop in gas prices. The -4.1% monthly fall from August helped to keep inflation in-checked.
My thots: In the event of an escalation in the Middle East conflict, don’t be surprised that US November CPI inflation might rise further, post US President election.
US Weekly Jobless claims.
Thursday also saw the release of US weekly jobless claims report. (see above)
Initial filings for unemployment benefits took an unexpected turn higher, hitting as seasonally adjusted 258,000 for the week ending 5 Oct 2024, a 14-month high - since Aug. 5, 2023.
Its a gain of +33,000 from the previous week and well above the forecast of 231,000, and its the largest since July 2021.
On digging further, many analysts have largely attributed the surge in claims to:
Damage from Hurricane Helene that struck US on 26 Sep 2024, impacting large swath of Southeast, with both Florida and North Carolina, being two of the hardest-hit states.
Boeing’s 33,000 workers’ strikes could also be hitting the numbers and just for the record, Michigan state had the largest gain in claims, up +9,490 on the week
Rounding off, many economists think the US labour market will continue to be affected in the short term due to another weather calamity - Hurricane Milton.
On Thu, 10 Oct 2024, it torn thru the state of Florida, destroying homes, knocking out power - leaving a path of destruction.
Whatever the situation is, economists are in consensus that the Fed will view the impact of these recent events (weather & strike) on the labor market as temporary and won't let them affect their next policy move.
CME FedWatch Tool
With the CPI inflation data out of the way and the PCE inflation numbers not due for another 2½ weeks, attention has shifted to (a) the Fed’s FOMC meeting on Nov 6-7 and (b) the next interest cut quantum.
There have been a shift in mindset with “no interest cut” gaining traction (see above).
Amid all the moving parts, traders now see a 20.6% chance (as of 9 Oct 2024) that the Fed will hold rates steady in November, (see above right circle).
Just one week ago, the odds of no cut were at 0% as the market heeded policymakers' message and prepared for a 25 basis point rate reduction.
Separately, the Fed members were out in (full) force socializing before, during and after the CPI report drop.
(1) Atlanta Fed President Raphael Bostic.
In an interview with The Wall Street Journal, he has raised the possibility of a a rate-cut "pause in November", saying that he is definitely open to the suggestion.
(2) Dallas Fed President, Lorie Logan:
In her Wednesday speech, she iterated that the Fed should not rush to reduce its benchmark rate, but rather should proceed gradually.
A more gradual path back to a normal policy stance will likely be appropriate from here to best balance the risks to our dual-mandate goals.
(3) New York Fed president John Williams
In a speech on Thursday, he said that he expected that it will be appropriate to continue the process of moving the stance of monetary policy to a more neutral setting over time.
(4) Chicago Federal Reserve Bank, Austan Goolsbee:
In an interview with CNBC on Thursday, he said that he sees a series of interest-rate cuts over the next year to year and a half, stopping short of confirming each interest cut’s quantum.
Strategic Investment.
Looking at the breakdown to CPI index, housing continues to be a focal component.
With easing of interest rate, housing inflation is finally cooling as confirmed by former Fed Reserve economist Alan Detmeister.
Some possible “housing” stocks / ETFs to consider (after due diligence):
$Home Depot(HD)$ : A leading home improvement retailer.
$Lennar(LEN)$ : One of the largest homebuilders in the US.
$iShares U.S. Home Construction ETF(ITB)$ : Provides exposure to companies involved in home construction.
$SPDR S&P Homebuilders ETF(XHB)$ : Focuses on homebuilding and home improvement companies.
Revisiting the Fed’s dot plot (dated of 18 Sep 2024), US interest rate will be further trimmed in 2025.
Assuming this forecast is holding “true”, this would mean gradual cooling in interest rate will have a positive impact and housing sector will improve over time.
Investing in housing stocks or ETFs now in preparation for 2025 can be a strategic move because:
Lower Mortgage Rates: Fed's interest cuts make borrowing cheaper, boosting home purchases.
Increased Demand: Lower rates mean more buyers, driving up home sales and prices.
Supply Constraints: Limited housing supply keeps prices high, benefitting housing investments.
The early bird catches the worm. Be that early bird, do your homework, balance the risk and strike when the price is “right” (subjective).
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Do you think US inflation is going to trend higher when the PCE inflation data is out ?
Do you think US Housing is a “reliable and stable” sector (for stocks, ETFs) to plonk our hard-earned monies in ?
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Markets do not tank at all-time highs. It will settle around here for a while.
I’m done today anyways 🥱