Some Disinflation Green Shoots Popping Up

Last Friday’s release of the Personal Consumption Expenditures (PCE) index report for April was a breath of fresh air for the economy, consumers, businesses and the markets. The past couple of weeks were marred by weak Treasury auctions, yields ticking higher and stocks correcting; it was as if nothing could change the negative tone that had taken hold of investor sentiment. Even Friday’s session was lackluster until the last half hour of trading saw a huge rally into the closing bell, likely driven by short-covering and month-end repositioning by fund managers.

Highlights from the Fed’s favored inflation reading showed personal income increased 0.3% month over month in April (consensus 0.3%) following an unrevised 0.5% increase in March. Personal spending increased 0.2% month over month (consensus 0.3%) following a downwardly revised 0.7% increase (from 0.8%) in March.

The PCE Price Index was up 0.3% month over month, as expected, leaving it up 2.7% year over year, unchanged from March. The core PCE Price Index was up 0.2% month over month (consensus 0.3%), leaving it up 2.8% year over year, unchanged from March. Some key factors that are moving in the right direction include the PCE Price Index for Services was up 3.9% versus 4.0% in March. The personal savings rate as a percentage of disposable personal income held steady at 3.6% and rental income increased 0.1% month over month on the heels of a 1.5% increase in March.

Another development reported last week was how there are some early signs of stress in the housing market. With mortgage rates stuck above 7%, home affordability is starting to negatively impact consumer spending, as was voiced by several retailers during the first-quarter reporting season. With the Fed set to hold rates steady through the summer, the rate pressure is frustrating those seeking to purchase homes. Renters say there is a 60% likelihood they will never be able to own a home.

That is the highest since the New York Fed started the survey a decade ago. And as if a record median price tag of $433,000 for a home wasn’t bad enough, insurance costs and property taxes have also spiked. Zillow reported last month that homeowners are committing on average 35% of their income to their house payment compared to just 29% for renters.

It is being reported that foreclosures are also on the rise in what have been some of the hottest markets in the United States. In Houston, foreclosure filings jumped 37% in the first quarter from a year earlier, according to data from property tracker Attom. That was the biggest increase among the 15 metro areas with the most filings, followed by Orlando, Tampa and Miami.

The shelter component within the Consumer Price Index (CPI) accounts for 42% of all items reported. For April, the shelter index was up 0.4% month over month and up 5.5% year over year after peaking at 8.2% back in March 2023. So, lower year over year, but still stubbornly too high for most first-time home buyers to buy into their favored markets.

To this point, the length of time the Fed holds rates higher seems to be capping some of the price appreciation that has gripped the housing market. With the large national homebuilders continuing to bring new supply to the market, there is a chance that home prices will start to level off. But that has yet to be the case in the form of hard data.

With earnings season all but complete, the inflation data showing slight signs of improvement, the artificial intelligence (AI) rally still intact and the wealth effect of rising stocks and real estate prices underpinning consumer spending among the upper half of income earners, the one major factor the market is showing growing concern for is the deficit spiral by the government. Last week’s soft demand risks becoming a trend if there is no coherent set of plans to rein in spending at the federal level.

Below is a schedule of future Treasury auctions, of which $140 billion will be auctioned off this week. Fortunately, they involve 30-day and 6-month T-Bills, for which there is usually a strong appetite. It’s during the second and third week of June when the 3-year, 10-year and 30-year notes and bonds need to see buyers show up to hold yields below 5%.

www.treasury.gov

Despite the volatility from a couple of shaky auctions, May was actually a good month for the bond market. One month does not make for a trend, but inflation is beginning to cool, and rates are moving in the right direction. It was a good finish to a choppy month.

• Yield Check:
  • 2-yr: -4 bps to 4.89% (-6 bps for the week; -16 bps in May)
  • 3-yr: -4 bps to 4.70% (-2 bps for the week; -18 bps in May)
  • 5-yr: -4 bps to 4.53% (UNCH for the week; -19 bps in May)
  • 10-yr: -4 bps to 4.51% (+5 bps for the week; -18 bps in May)
  • 30-yr: -3 bps to 4.65% (+8 bps for the week; -14 bps in May)