Not only has the data remained strong, but the economic data have also recently improved.
Also, gas prices have fallen from their peak and inflation is no longer skyrocketing.If the labor market collapses this year and unemployment claims rise significantly, 10-year yields 2.73%and mortgage rates could go as low as 5.25%.
Unemployment insurance claims have been solid for some time, which is a big reason why I don’t think the Federal Reserve will turn any other direction. They often make it clear they want the labor market to collapse, so go with that premise until they say otherwise.
Housing permits decline all year, but sales have recently rebounded, which is positive for the economy and means more fee transfers. . Especially when inflation rises.
If the opposite were to happen, economic data would be weaker as spending fell and more people filed for unemployment insurance. Unlike in the 1970s, lower economic growth and fewer jobs will not cause inflation like he did in 1974, so interest rates should fall.
While it’s true that inflation has spiked to levels not seen since the 1970s, the reality is that 10-year yields would be set much higher than they were last year if the bond market believed inflation had taken hold. It must have been.
CPI inflation rose several times in the 1970s, along with mortgage rates and 10-year yields. Now, although inflation is rising again, mortgage rates are still not above 8% as they were in the mid-to-late 1970s, and bond markets are pushing him to 5.25% at 10-year yields. not exceeded. Nor is the Fed discussing returning the Fed Funds interest rate to his late 1970s levels.
1970s housing boom!
Have you ever wondered why the Federal Reserve said it needed a reset of housing in March 2022 but said it didn’t need a reset of the labor market? Targeting the labor market. It means that if Americans lose their jobs, the supply of workers will increase, leading to higher wages and lower inflation. But they didn’t use the word reset when it came to the labor market.
The Federal Reserve has said it doesn’t want the entrenched inflation of the 1970s. This, if you believe them, means they fear the death of the housing boom!The 1970s saw three rental inflation booms, but the mid-to-late 1970s Inflation that has taken hold over is something they don’t want to see again.
Inflation and interest rates rose despite the 1974 recession, and inflation and housing demand surged in the late 1970s. I doubt they believe in this kind of inflation, so they’re talking about approaching the end of rate hikes.
43% of core CPI is shelter inflation, so you can see why rents are so important. Since the 1970s, as rent inflation has fallen, the rate of increase in inflation has slowed and remained fairly stable until the global pandemic hit.
It is well known that CPI rent inflation data lags far behind. As I told him on CNBC at his CPI Inflation Day last September, we’re already seeing growth in the rent cooldown.
From core logic:
Look at today’s CPI shelter inflation data. Big difference. To the Federal Reserve’s credit, they created an inflation index to keep shelter inflation out of the debate. That is, we want to focus more on service inflation due to lagging rent inflation.
Again, this is why I believe they fear 1970s inflation, but deep down there is also no background to 1970s inflation as the bond market knows. I know. I’m not sure they knew the lag aspect for a while, but they solved this by creating an index that doesn’t take into account housing inflation in December.
With a record number of five units under construction, the most important component of CPI has already fallen substantially. With the Federal Reserve (Fed) doing everything it can to cool the economy, there will be plenty of supply online as well.
The prospects are therefore good for preventing the inflationary boom of the 1970s rent rises. As you can see below, the recession of 1974 also killed the growth of his five units under construction. Not today!
I recently realized that people don’t realize just how booming housing was in the mid-to-late 1970s. Existing home sales doubled before we saw a collapse in demand. It went from 2 million to 4 million and back to 2 million. Existing home sales are not currently in the booming sales demand phase as they recorded the biggest monthly sales collapse in the past year.
So until unemployment claims hit the 4-week moving average of 323,000, I’m no Fed man, but the 10-year yield peaked at 4.25% This year 7.25% The highest level of mortgage interest rates. I’m not turning a blind eye to the reality that interest rates have risen, the supply of 5 units has started, and inflation and growth have reached their limits.
I think the bond market has always known this. So today’s high inflation, 10-year yields, and mortgage rates don’t look like they did in his 1970s.
Mortgage rates are unlikely to rise from these levels, so why are they more likely to fall?
Inflation has already leveled off, supply chains are improving, and rent inflation will eventually catch up with inflation data. All this points to the lack of 1970s redux.
There will be economic turmoil and turmoil here and there, and the Fed is doing itself no favors when they talk week after week and sound confused about what to do.
That being said, however, we still need three handles of core PCE inflation by the end of the year. In the 1970s, this data line, the Fed’s main target level, was approaching 10%. It’s currently at 4.7% and even the Fed’s forecasts show this slowing by the end of the year.
The Fed’s target of 2% y/y inflation this year will not be met, but core PCE growth is already slowing. We are about to reach 1970s levels of inflation.
There’s been a lot of buzz about interest rates and inflation lately, and some say that destroying inflation will require a stronger-than-expected unemployment recession, like the one seen in the 1970s. I hope we can put an end to the 1970s.
If your baby boomer friend is dreading the 1970s again, give him a hug and tell him that everything will be fine. we will get through this. Remember, there is a time lag between Fed rate hikes. Because the economic impact has been delayed. The Fed wants to stop rate hikes really soon, so there is no need to cut rates any sooner than necessary.