Morning Report: Inflationary expectations remain elevated.

Posted on May 30, 2023 by Brent Nyitray

Vital Statistics:

Stocks are higher as investors return to a short week. Bonds and MBS are up.

It sounds like there is a deal on the debt ceiling, so that concern will disappear until 2025. I’m hoping this will help ease some of the pressure on the 10 year bond.

The week ahead will be dominated by the jobs report on Friday. We will also get home prices, productivity, and ISM data. This will be the last jobs report before the mid-June FOMC meeting. The Fed Funds futures currently see a 60% chance for another 25 basis point hike.

Consumer confidence declined in May, according to the Conference Board. “Consumer confidence declined in May as consumers’ view of current conditions became somewhat less upbeat while their expectations remained gloomy,” said Ataman Ozyildirim, Senior Director, Economics at The Conference Board. “Their assessment of current employment conditions saw the most significant deterioration, with the proportion of consumers reporting jobs are ‘plentiful’ falling 4 ppts from 47.5 percent in April to 43.5 percent in May. Consumers also became more downbeat about future business conditions, weighing on the expectations index. However, expectations for jobs and incomes over the next six months held relatively steady. While consumer confidence has fallen across all age and income categories over the past three months, May’s decline reflects a particularly notable worsening in the outlook among consumers over 55 years of age.”

Inflationary expectations remain high, with consumers expecting 6.1% inflation over the next 12 months. This is down from the peak of 7.9%, but is well above the Fed’s 2% target. Note it is also above the University of Michigan survey as well.

Home prices rose 4.3% in the first quarter, according to the FHFA House Price Index. “U.S. house prices generally increased modestly in the first quarter” said Dr. Anju Vajja, Principal Associate Director in FHFA’s Division of Research and Statistics. “However, year over year prices in many western states have started to decline for the first time in over ten years.”

The fastest growing states were South Carolina, North Carolina, Maine, Vermont and Arkansas. North Carolina’s appreciation has been going for a while, but the other states are new on the leader board. The declining states include Utah, Nevada, California, Washington, and D.C.

Separately, the Case-Shiller home price index rose 0.7% in March. “The modest increases in home prices we saw a month ago accelerated in March 2023,” said Craig J. Lazzara, managing director at S&P DJI in a release. “Two months of increasing prices do not a definitive recovery make, but March’s results suggest that the decline in home prices that began in June 2022 may have come to an end.”

It noted big declines out West: “One of the most interesting aspects of our report continues to lie in its stark regional differences,” added Lazzara. “The farther west we look, the weaker prices are, with Seattle (-12.4%) now leading San Francisco (-11.2%) at the bottom of the league table. It’s unsurprising that the Southeast (+5.4%) remains the country’s strongest region, while the West (-6.2%) remains the weakest.”

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