Markets rise as Fed's preferred inflation gauge falls below 3%

Dow went up 106 after a slow start, advancers over decliners better than 3-2 & NAZ edged up 13.  The MLP index added another 1+ to the 264s & the REIT index stayed near 381.  Junk bond funds were sold & Treasuries had limited selling, raising yields slightly (more below).  Oil was down pennies in the 77s after yesterday's gain & gold hardly budged at 2017.

AMJ (Alerian MLP Index tracking fund)

An inflation measure closely watched by the Federal Reserve rose in Dec after declining the previous month as high prices continued to weigh on Ms of Americans.  The personal consumption expenditures (PCE) index showed that consumer prices rose 0.2% from the previous month, according to the Dept of Labor.  On an annual basis, prices climbed 2.6%, unchanged from the previous month.  The figures were both in line with estimates.  In a sign the Fed's fight against inflation is slowly making progress, core prices, which strip out the more volatile measurements of food & energy, climbed 0.2% from the previous month & 2.9% from the previous year.  It marked the best reading for core inflation since 2021.  While the Fed is targeting the PCE headline figure as it tries to wrestle consumer prices back to 2%, Chair Jerome Powell previously told reporters that core data is actually a better indicator of inflation.  Both the core & headline numbers point to inflation that is steadily returning to the Fed's preferred 2% target.  Other figures included in the report showed that consumer spending rose 0.7% in Dec compared with a 0.4% increase in Nov, suggesting that Americans ramped up their spending during the pivotal holiday season.  Still, many economists anticipate that spending will slow in the coming months as consumers continue to grapple with expensive goods, high interest rates & the resumption of federal student loan payments. 

Inflation rises again in December as high prices persist

The 10-year Treasury yield was little changed as investors assessed yet another encouraging inflation reading, suggesting the Federal Reserve can start cutting rates later this year.  The yield on the benchmark 10-year Treasury note  was down by 1 basis point at 4.122%, while the 30-year bond yield was lower by roughly 2 basis points at 4.363%.  The yield on the 2-year Treasury note was up about 1 basis points at 4.332%.  Yields move inversely to prices & 1 basis point equals 0.01%.  Investors assessed the Dec's personal consumption expenditures price index, the Fed’s preferred inflation reading, which rose 0.2% last month & was up 2.9% from a year ago, excluding food & energy.  That's compared to respective increases of 0.2% & 3% anticipated.  The encouraging inflation reading comes after yesterday's surprisingly strong GDP, which showed the economy growing at an annualized rate of 3.3%, higher than expectations of 2%.  The report also showed slowing inflation.  In the GDP report, core personal consumption expenditures price index, which the Federal Reserve monitors for longer-term inflation trends, rose by 2.7% on an annual basis, down from 5.9% a year ago.  Investors are closely monitoring the economic data for hints as to when the Fed can start to cut interest rates, as it works to tamp inflation down to its 2% goal.  According to the CME FedWatch Tool, markets are currently pricing in a 46% likelihood the central bank will lower by a qtr percentage point in Mar.

10-year yield steady around 4.14% after another encouraging inflation report

Freddie Mac's latest Primary Mortgage Market Survey showed that the average rate for the benchmark 30-year fixed mortgage climbed to 6.69% this week, an increase from 6.60% last week.  The popular note averaged 6.13% a year ago.  The rate on a 15-year fixed mortgage also increased, jumping to 5.96% after coming in last week at 5.76%.  One year ago, the rate on the 15-year fixed note averaged 5.17%.  Sam Khater, Freddie Mac's chief economist, said that the stabilization of rates has caused some potential homebuyers to jump "off the fence back into the market."  Khater added, "Despite persistent inventory challenges, we anticipate a busier spring homebuying season than 2023, with home prices continuing to increase at a steady pace."  There has been an increase in purchase activity recently despite higher rates, but the shortage of existing homes on the market is expected to continue to hinder the real estate market this year.  "While softness in mortgage rates may encourage some buyers to re-enter the market, given that approximately two-thirds of outstanding mortgages currently boast rates below 4%, a notable portion of existing homeowners may opt to postpone their buying and selling plans and wait for the potential for even lower rates before making decisions about their next residences," said Realtor.com economist Jiayi Xu.  "As a result, we expect the 2024 housing market will continue to be slow, particularly in light of the still-climbing existing home sales prices in December 2023."

Mortgage rates are up again after taking a slight dip last week

In the first hour of trading Dow rose, & then the it slid back a little.  The GDP data yesterday & the inflation data today suggest there is reason to expect the Fed will begin to cut interest rates soon.  That assumes the economic picture doesn't change sharply in the coming weeks.

Dow Jones Industrials