Markets selloff as inflation reading signals small Fed rate cut

Dow tumbled 684, decliners over advancers better than 3-1& NAZ sank 220.  The MLP index was off 1+ to 280 & the REIT index declined 7+ to 431.  Junk bond funds & Treasuries had modest buying which reduced yields.  Oil rose to the mid 66s & gold fell 7 to 2535.

Dow Jones Industrials

Inflation fell in Aug to the lowest level in over 3 years, adding to the Federal Reserve's case for an interest rate cut next week even as prices remained uncomfortably high for Ms of Americans.  The Labor Dept said that the consumer price index (CPI), a broad measure of how much everyday goods like gasoline, groceries & rent cost, rose 0.2% in Aug from the prior month, in line with the expectations.  Prices climbed 2.5% in Aug from the same time last year, slightly less than estimates & down from 2.9% in Jul, the lowest level since Feb 2021.  Core prices, which exclude more volatile measurements of gasoline & food to better assess price growth trends, rose 0.3% in Aug from the prior month, slightly above estimates of 0.2%.  The gauge was up 3.2% from a year ago, in line with expectations, & unchanged from last month.  Overall, the report indicates that inflationary pressures in the US economy are continuing to ease, though prices remain above the Federal Reserve's 2% target.  The softer-than-expected inflation reading comes as Federal Reserve policymakers are set to hold a highly anticipated meeting in which they are likely to cut interest rates amid signs that the economy is cooling.  After the central bank kept interest rates at a 23-year-high of 5.25-5.50% in Jul, Fed Chair Jerome Powell signaled in an Aug speech at the Jackson Hole conference that the "time has come" to cut interest rates.

Inflation unexpectedly cools to slowest rate in more than three years

Treasury yields ticked higher as traders assessed a mixed consumer price index report & its implications for the Federal Reserve's rate move next week.  The yield on the 10-year Treasury was more than 2 basis points higher at 3.667%, with the 2-year Treasury yield last up 4 basis points at 3.646%.  Yields & prices move in opposite directions & 1 basis point is equivalent to 0.01%.  The report comes ahead of the Fed's Sep 17-18 meeting, with traders widely expecting a rate cut.  The only remaining question appears to be by how much the central bank will reduce rates.  Some economists have argued the Fed should deliver a ½-point rate cut next week, accusing the central bank of having previously gone “too far, too fast” with monetary policy tightening.  Others have described such a move as one that would be “very dangerous” for markets, pushing instead for the Fed to deliver a qtr-point rate cut instead.  Traders are currently pricing in a 83% chance of a 25-basis-point rate cut, with 17% expecting a 50-basis-point rate reduction, according to the CME Group’s FedWatch Tool.

Treasury yields tick higher following mixed CPI report

Mortgage rates fell for the 6th straight week last week, but mortgage demand still seems to be waiting for something bigger.  The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766K or less) decreased to 6.29% from 6.43%, with points falling to 0.55 from 0.56 (including the origination fee) for loans with a 20% down payment, according to the Mortgage Bankers Association (MBA).  That is the lowest level since Feb 2023 & nearly a full percentage point lower than the same week 1 year ago.  “Treasury yields have been responding to data showing a picture of cooling inflation, a slowing job market, and the anticipated first rate cut from the Federal Reserve later this month,” said Joel Kan, VP & deputy chief economist at the MBA.  Total mortgage demand, however, rose just 1.4% for the week, according to the MBA’s seasonally adjusted index.  The results also included an adjustment for the Labor Day holiday.  Refinance applications only increased 1% week to week, but were 106% higher than a year ago.  That may sound like a massive increase, but the numbers were so low last year, that even with that large gain, refinancing is still historically low.  “There is still somewhat limited refinance potential as many borrowers still have sub-5 percent rates. It is a positive development that there are homeowners who can benefit from a refinance as rates continues to move lower,” added Kan.  Most of those refinancing likely bought their homes in the last 2 years, when rates had moved significantly higher off of record lows.  Applications for a mortgage to purchase a home rose 2% for the week but were 3% lower than the same week 1 year ago.  “Despite the drop in rates, affordability challenges and other factors such as limited inventory might still be hindering purchase decisions,” Kan added.

Mortgage rates hit lowest level since February 2023

Stocks tumbled as investors digested an inflation report that showed consumer price increases ticked lower during Aug & analyzed the first presidential debate between Donald Trump & Kamala Harris.  After a mixed monthly jobs report, the price data was expected to help settle the debate over whether to expect a 0.5% or 0.25% easing next week.  And the hotter-than-expected month-over-month increase for core inflation, is viewed as favoring a smaller cut by the Fed meeting next week.