*The Core Consumer Price Index rose 3.8% in May from May 2021, the largest annual increase in 29 years.
*Bond yields, and mortgage rates, surprisingly fell following the release.
*There were 9.3 million job openings in April, the most ever recorded in a given month.
*4 million people voluntarily quit their job in April.
*Fannie Mae’s National Housing Survey showed just 35% of respondents believe it’s a good time to buy a home.
*Weakening buyer sentiment does not necessarily indicate dwindling demand.
So what?
Data released this week showed that prices are rising at their fastest annual pace in 28 years, and yet financial markets responded with a resounding “meh.” The core Consumer Price Index (CPI) – a measure of inflation that strips out volatile categories like food and energy – increased 3.8% in May from a year before, the strongest annual growth since May 1992. All else equal, rising inflation weakens the value of bonds’ fixed-payments and normally places upward pressure on bond yields. But the yield on a 10-year U.S. Treasury bond has fallen since Thursday’s inflation release, and is now near its lowest point in three months. There are likely other factors at play, but in a vacuum, the market’s reaction to the historic price increases indicates investors have embraced the Federal Reserve’s messaging that the sharp rise in inflation is temporary and overwhelmingly due to pandemic-driven factors. A significant portion of the CPI increase was driven by industries reopening from pandemic-driven freezes – like air travel and hotels – as well as by goods in short supply due to COVID’s economic disruption. Stripping out these COVID-heavy indicators shows that prices are indeed rising, but at a much more reasonable pace. The Federal Reserve Bank of Cleveland’s trimmed mean inflation index – which removes the items with the biggest price swings – increased in May at an annual pace of 2.6%, up slightly from 2.4% in April. For now, the Fed appears to be sticking to its guns and has no intention of meaningfully tightening policy anytime soon in order to rein in inflation.
Wages, especially for new hires, have also been trending upward in recent months. A measure of wages that controls for the industry composition of current employment rose in the past two months at a faster rate than any pre-pandemic, two-month period since the early 1980s. The April Job Openings and Labor Turnover Survey (JOLTS) data show that there were 9.3 million job openings in April, and that 4 million people (2.7% of all employed workers) voluntarily quit their job in April. Both measures were series highs, and the number of job openings is now about a third higher than it was in February 2020. Voluntary employment quits are viewed as a measure of worker confidence, as it indicates that people are certain of their ability to find a new, and presumably better (for them) job. Altogether, the release indicated that workers and job seekers currently have the upper hand in the labor market and suggest that more wage increases are likely to come as companies vie for talent.
Growing worker optimism helped a broad measure of consumer sentiment rebound in early June. The University of Michigan’s Index of Consumer Sentiment ticked up 3.5 points from May to reach 86.4, down slightly from the post-pandemic high reached in April. According to the report, the share of respondents who expect a net decline in unemployment reached an all-time high in June. While consumers are weary of rising prices, there is a growing sense that the economy is gaining steam. But the report, and others, also shed light on weakening confidence among would-be homebuyers. According to the Michigan report, the share of respondents who said they believe it’s a good time to buy a home dropped to its lowest level since 1982. A similar measure from Fannie Mae – which showed just 35% of respondents believed it was a good time to buy – touched its lowest level since at least 2010, when the series began. Combined, the measures suggest that would-be home shoppers are losing some confidence in their ability to compete in today’s ultra-competitive markets, in which prices are rising at a historically strong pace and there are a limited number of homes for sale. It’s important to note, though, that despite weakening sentiment, demand for homes remains very strong: The typical home nationwide is going under contract in about a week, and more than twice as many homes are selling above their initial list price than were before the pandemic. In other words, the weakening home shopper sentiment is not so much an indication of weakening demand but more a lamentation at a lack of supply.
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