All Things in Moderation

Vital Statistics:

Stocks are flat after the CPI came in higher than expected. Bonds and MBS are down.

Consumer prices rose 0.5% MOM in January, according to the BLS. This was higher than the 0.3% Street expectation. The core rate rose 0.4%. Given that we have typically seen a bump in January as companies raise prices in the new year, a 0.3% increase was probably tough to get. On a year-over-year basis, the headline rate rose 3% and the core rate rose 3.3%.

The shelter index rose 4.4% on a YOY basis, the smallest increase since January, 2022. Transportation (especially motor vehicle insurance) was up 8% on a YOY basis.

The bond market sold off pretty heavily on the number, with the 10 year yield rising about 10 basis points. That said, sentiment in the bond market remains lousy given the tariff backdrop, and rates are up big in Europe and Asia today.

I showed the chart below yesterday, which gives an idea of how much annual inflation is front-loaded in the first quarter, and how inflation seems to tail off as the year goes on. I put a red line on the chart to show the January of 2025 number. The 0.3% expectation was basically a heavy lift, given that pre-pandemic January inflation typically came in at that level, but we are close. Things are improving.

Jerome Powell testified in front of the Senate yesterday as part of his semiannual Humprey-Hawkins testimony. Here are his prepared remarks.

With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the FOMC will assess incoming data, the evolving outlook, and the balance of risks.

The March Fed Funds futures see little to no chance of a rate cut, and the December futures see a 32% chance of no cuts this year. The bottom line is that rates are still restrictive but as long as the economy continues to behave they will remain that way.

Mortgage applications rose 2.3% last week as purchases fell 2% and refis rose 10%. “Mortgage rates moved slightly lower last week, which led to the pace of refinance applications reaching its strongest week since October 2024,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The average loan size for refinance borrowers increased, as these borrowers tend to be more responsive for a given change in rates. Purchase applications were down from the previous week’s level but were slightly ahead of last year’s pace. The average loan size for a purchase application increased to its highest level since March 2022 at $456,100, partially driven by fewer FHA purchase applications but more VA loans compared to the previous week.”

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