Massive inflation and double-digit mortgage rates in the 1970s and early 1980s seemed to haunt the world. federal reservewants to cool the economy and even trigger a job-loss recession to avoid that scenario.
But the latest CPI inflation report shows how fears of 1970s-style inflation are exaggerated. Today’s numbers look nothing like the 1970s, when rents, wages and oil crises caused the most violent inflation in recent modern history.
shelter inflation
April’s haven inflation rate eased slightly month-on-month. This data line is the most important component of the CPI, accounting for 44.4% of the index, so the fact that the index will slow over the next 12 months is a sign that we are seeing an inflationary boom like the one seen last time. I assure you that no. 1970s.
rent inflation
You don’t have to worry about rent inflation like in the 1970s. The haven inflation growth rate is already easing, and this is confirmed by more real-time data, so no such inflation will happen today.
And with over 900,000 apartments coming online soon, the best way to beat inflation is to increase supply. Trying to overcome inflation by destroying demand is only a short-term solution. This is great news for mortgage rates, as a fall in rent inflation is a better reason for mortgage rates to fall next year rather than rise.
In September CNBC I talked about how the brighter story for 2023 will be revealed by the start of the year: haven inflation will slow inflation growth. Inflation data lags behind, so we knew it would take time, but it did.
Now, with massive interest rate hikes and credit crunch from the banking crisis, the inflationary outlook of the 1970s is becoming increasingly bleak. In fact, I never had that chance.
from consumer price index report: The U.S. Bureau of Labor Statistics announced today that the consumer price index (CPI-U) for all urban consumers increased by 0.1% in March after seasonally adjusting for 0.1% in April. increased by 0.4%. The all-items index over the past 12 months rose 4.9% before seasonal adjustments.
How did mortgage rates react?
What happened to the 10-Year Yield after this report? As expected, it fell, but it’s still stuck in the Gandalf line, or between 3.37% and 3.42% territory. The chart below shows the 10-year bond yield and headline year-over-year inflation. As you can see, yields fell significantly when inflation data rose.
But 10-year bond yields appear to have peaked unless a fresh wind blows in the economy and it begins to expand more rapidly. On October 27th, I argued for lower mortgage rates and bond yields in 2023. I think the super bear housing camp was hoping that the 10-year bond yield would approach 5.25% and bad spreads would push mortgage rates higher. to 8% to 10%.
In my 2023 forecasts for 10-year yields and mortgage rates, there was a clear view that 10-year yields should be in the range of: 3.21%-4.25 As long as the economy is strong. Remaining strong means that the labor market does not collapse and jobless claims and jobless claims remain at the bottom. 323,000 with a 4-week moving average. The reason I’ve been focusing more on the labor market than inflation this year is because I think the market has recognized that inflation is declining.
Of course, the banking crisis added another variable to the economic picture this year. But even so, while the labor market is softening, it has not yet collapsed. Mortgage rates did indeed drop to 6.57% on Wednesday, but this is still higher than it should be as the spread between 10- and 30-year mortgage rates remains historically high. Today, with normal spreads, mortgage rates would be around 5.25%.
Can you imagine what the housing market would look like if mortgage rates remained the same? 5.25% today? The Fed, which says it wants a housing policy reset, will lose it completely. Under this reset, it will be older Americans who will be able to buy a home, not young Americans starting a new life. That’s one reason why we haven’t heard a whisper about housing market support from the Fed this time of year.
Cold labor market
The labor market has cooled recently, with job openings down by nearly 2.5 million from its peak in 2022. The Fed isn’t afraid of a recession in jobs, in fact, the 2023 unemployment forecast is foreseeing a recession in jobs. They think they can cover it until job openings plummet further.
It looks to me like they’re back in jobs and more comfortable. 7 a million, this was where we were before COVID-19 hit us. I wrote about the recent jobs figures and analyzed a number of labor figures that are important to my 10-year mortgage interest rate forecast.
The labor market has cooled, but has not yet collapsed. Given the inflation story of the 1970s, mortgage and bond yields could rise in a recession just as they did then. But as you can see, the bond market just didn’t bite his 1970s inflation premise. Remember, the love between these two has been slowly dancing since his 1971 and never stops. Sometimes they are close to each other, but sometimes they are far apart. But they are always together.
Overall, there weren’t too many surprises in the CPI report, even though the headline numbers were lower than some expected. The Fed is considering inflation excluding the shelter element as data lines lag and service inflation has been strong lately.
But the story is settled. The Fed wants a recession because it will be a badge of honor for them when they leave, as Paul Volcker does. They chose to raise rates even though credit was tight and they knew a banking crisis could help them reach their inflation target.
So really, what will the Fed do when headline inflation goes like this and the labor market collapses? We will have a cooling period.
This is why tracking your weekly housing data will be more important than ever this year. I don’t just track housing data. My main job is to track the economic cycle first, and housing is a secondary data line. 2023 will be full of drama and it will be an exciting season every week for the rest of the year.