Stocks are lower and Mortgage Bonds are slightly higher to start the day. Later this afternoon at 1:00pm ET there will be a 10-year Treasury Note Auction, which could impact the markets, depending on the level of demand. Our own Bill Hagmann will break down the auction results in the market news section of the markets overview page and later in today’s market wrap.
Key Numbers to Watch in tomorrow’s CPI (Consumer Price Index)
As mentioned yesterday, the market is expecting the May CPI reading to be 0.3%, which would not make for much improvement on the year over year inflation reading. Some estimates are looking for it to remain at 3.6%, while others believe it could improve slightly to 3.5%.
The two biggest components to look out for are Shelter and Motor Vehicle Insurance. If you remove those, year over year inflation is only increasing by 0.27%...so almost all the inflation is coming from those two areas.
Shelter measures rent price increase and owners’ equivalent rent, not home prices. Owners’ equivalent rent measures how much you could rent a home for that you own, but it typically tracks extremely close to rent increases.
Shelter makes up 45% of the core inflation reading and is the single biggest component. The May 2023 shelter reading that will fall off the annual calculation tomorrow is 0.54%, which is a pretty high replacement figure. The recent shelter numbers we have been seeing have been around 0.4%, but have started to moderate slowly the last few months. If we see this finally start to catch up or at least moderate further, we could see a little help from this area.
Motor Vehicle Insurance only makes up 3.6% of core inflation, but because it’s gone up 23% year over year, it is adding about 25% of the year over year inflation we have been seeing. The replacement figure from last year that will be falling off is high at 1.9%. If we see a number come in below that, we could see some help from this component as well.
Bottom line – We don’t’ think tomorrow’s CPI will hurt us and if anything there are reasons to believe it could come in beneath expectations.
NFIB Small Business Optimism Index
The May NFIB Small Business Optimism index rose to 90.5 from 89.7 and remains near the lowest levels we have seen in over 10 years.
The Chief economist at the NFIB expressed the pessimism amongst small business owner and said, “For 29 consecutive months, small business owners have expressed historically low optimism and their views about future business conditions are at the worst levels seen in 50 years.”
The job component with the NFIB report is near the lowest levels in 8 years when removing Covid, and is another sign that the BLS is overstating small business job growth. Last Friday’s report showed that through the Birth/Death model they use, there were 231,000 job creations, mostly in small businesses. But ADP showed 10,000 job losses in this category. The BLS clearly has a problem with their headline figures, but unfortunately, we will not know the extent of the revisions for months to come. We now know that according to the Census QCEW (Quarterly Census for Employment and Wages), the BLS overstated job growth by 800,000 in 2023.
Technical Analysis
Mortgage Bonds are in a narrow range between support at the 200 and 50 - day Moving Averages and overhead resistance at the 25-day Moving Average. Bonds will likely continue to trade in this range until we get the results of the 10-year Auction later today, tomorrow’s CPI, and results from the Fed meeting tomorrow afternoon.
The 10-year is also trading in a narrow range between support at the 25-day Moving Average and overhead resistance at the 50-day.
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