Favorable Inflation Data Contributed to Bond Rally

Favorable inflation data contributed to a rally in the bond market, while new construction in December was driven by a surge in multifamily projects. Here are the latest headlines:

·      Bonds Rally on Improved Core CPI

·      Wholesale Inflation Lower Than Expected

·      Home Builder Confidence Increases Slightly

·      Multifamily Projects Boost Construction Activity

·      Retail Sales Miss Estimates but Are Widespread

·      Fires and Hires Remain Low

Bonds Rally on Improved Core CPI

December's Consumer Price Index (CPI) showed a 0.4% inflation increase, pushing the annual rate from 2.7% to 2.9%. However, when we exclude food and energy prices, the Core measure was below expectations with a 0.2% rise. Annual Core CPI dropped to 3.2% after remaining at 3.3% for several months, sparking a bond rally on Wednesday.

What’s the bottom line? Rising energy costs drove over 40% of the overall increase in December’s headline inflation. Food prices also didn’t help as they rose by 0.3%. However, shelter costs showed signs of easing. As shelter accounts for nearly 46% of Core CPI, lower shelter costs could help inflation move towards the Fed’s 2% target over time.

Wholesale Inflation Lower Than Expected

The Producer Price Index (PPI) rose by 0.2% in December, below the expected 0.4%. The annual rate increased from 3% to 3.3%, mainly because a negative figure from December 2023 was removed from the rolling 12-month calculation. Core PPI, which excludes the typically volatile food and energy prices, remained unchanged last month while the year-over-year rate held steady at an upwardly revised 3.5%.

What’s the bottom line? PPI data is crucial because some of its components are factored into Personal Consumption Expenditures (PCE), the Fed’s preferred inflation measure. We will need to see if the lower monthly PPI readings result in a cooler PCE on January 31.

Home Builder Confidence Increases Slightly

Home builder sentiment rose 1 point to 47 in January, according to the National Association of Home Builders (NAHB). Although confidence is still in contraction territory below the breakeven point of 50, it’s at the highest level since April and has been trending in the right direction.

What’s the bottom line? Builders continue to balance their hopes for an improved regulatory environment with concerns about elevated costs, home prices and rates. NAHB chief economist, Robert Dietz, noted that, “NAHB is forecasting a slight gain for single-family housing starts in 2025, as the market faces offsetting upside and downside risks from an improving regulatory outlook and ongoing elevated interest rates.”

Multifamily Projects Boost Construction Activity

After a disappointing November, new home construction increased 15.8% in December, driven by a nearly 62% surge in multifamily projects. Single-family home starts also saw a modest monthly rise. However, Building Permits, indicating future construction, were down 0.7% overall.

What’s the bottom line? Household formations are at an annualized rate of 1.9 million, while Housing Starts are only at 1.5 million. This indicates a significant imbalance in demand versus supply and should be supportive of home values going forward.

Retail Sales Miss Estimates but Are Widespread

Retail sales rose by 0.4% in December, slightly below the 0.6% forecast. However, gains were seen in 10 out of 13 categories. The control group reading, excluding autos, gasoline, building materials, and food services, jumped by 0.7%, which could potentially boost GDP estimates.

What’s the bottom line? December's sales figures indicate strong consumer demand during the holiday season. This aligns with the Fed’s latest Beige Book, which is a survey of economic conditions across the country. The report stated, “Economic activity increased slightly to moderately across the twelve Federal Reserve Districts in late November and December. Consumer spending moved up moderately, with most Districts reporting holiday sales that exceeded expectations.”

Fires and Hires Remain Low

Initial Jobless Claims rose by 14,000 to 217,000 in the latest week. Continuing Claims fell by 18,000, with 1.859 million people still receiving benefits after filing their initial claim.

What’s the bottom line? Unemployment claims fluctuate weekly, but the trend of low firings and low hirings persists. Initial Jobless Claims have been historically low recently, with Continuing Claims exceeding 1.8 million for 32 weeks straight. Employers are retaining workers while also slowing their hiring pace.