Yahoo Finance’s Brian Cheung details the impact of July’s CPI and inflation data on stocks, the bond market, volatility and house prices.
RACHELLE AKUFFO: But first, let’s start with a look at the markets. Akiko.
AKIKO FUJITA: And it looks green all the way, Rachelle. There is one hour left in the trading day. And we’re seeing a rally here. Not quite the highs we saw early in the session. But still, the Dow Jones up more than 400 points. The S&P 500 up 71. And the NASDAQ up 305.
We are seeing a risky mode in the markets today. Let’s take a look at the sectors here. Those driving the payoffs today – technology, a big one. We are also seeing materials increase significantly. Communication services. And of course, we followed bond yields. We’ve seen the two-year yield curve, the shortest at year-end, pull back significantly following the weaker-than-expected CPI data you just mentioned, Rachelle. It’s a good thing on a day like today.
And let’s bring Brian Cheung from Yahoo Finance. Of course, Brian, we’ve seen these yield moves on the back of this expectation now that the Fed may not have to act so aggressively. What is the expectation? I mean, we still have a long way to go until the next meeting.
BRIAN CHUNG: There will be another report on CPI and another on jobs before we get to the next Fed meeting. But we saw the bond markets flash in response to that inflation report this morning. We were showing the yield on 10-year bonds. I want to show you, however, the movement throughout the morning, as we are at around 2.79%. This is only one basis point lower than where we ended the day yesterday.
But if you look at the two day base. Again, it was after hours. Nothing happens there. Boom, what’s going on? It fell to as low as 2.67% and then rebounded. So originally we were much lower over 10 years, which might reflect, because this is a proxy for Fed interest rates going forward, that the Fed doesn’t may not need to be so aggressive to reduce inflation. Maybe they could get away with, say, a 50 basis point hike at the next meeting in September.
Again, the Fed markets are now pricing in around a 60% chance of going for a 50bps move, as opposed to the 75bps move they priced in and favored by the majority prior to the report. on today’s inflation. But generally speaking, I want to show you what the markets in general think of this inflation report.
Take a look at the VIX. This is often called the “fear index”. Below a handful of 20 for, by the way, the first time since about April. And what that tells you is that there may be a little more certainty in the markets. And I think the settlement that we’ve seen is still reversed. But some sort of stabilization in the yield curve shows you that the markets are perhaps getting a little more clarity on how the Fed might move, again in about six weeks.
RACHELLE AKUFFO: So Brian, as we look a little further into the next steps in this inflation fight, things like the balance sheet and some of these long-term inflation expectations, what do we expect? As we have seen, you have stickier things, in terms of inflation, which are still going up a lot for housing and service costs.
BRIAN CHUNG: Yeah, and I think when we’re talking about the overall picture of inflation – and actually I might have a loaded item here from the previous show that just talks about inflation and housing, as you have mentioned.
Owners equivalent rent of residences in US cities, the blue line here. The purple line represents headline inflation. But you can actually see that it’s still going up. And that’s relevant because we know mortgages are getting more expensive. But it’s still for all intents and purposes a very hot housing market. And again, we haven’t seen any relaxation in the amounts people are paying, because of their overall market basket. Two, just put a roof over their heads.
So again, this is going to be a very interesting story to watch as we approach the August, September and October reports. But you’ve seen things like airfare, hotel/motel rates, other types of travel expenses that actually fall in the month of July. These could be very good for lowering inflation. But again, it’s a major component, about 30% of the overall CPI. So if that doesn’t come down, then maybe headline inflation can only come down to a certain level.