Will softness in housing inflation, jobs, and other metrics prompt the Fed to act soon?
Those long-sought-after Fed rate cuts are looking more plausible, thanks to recent soft landing data points indicating that higher interest rates are working their way through much of the broad economy.
One key example: June shelter prices rose by just 0.2%—their lowest monthly increase since January 2021 (see the chart below). That’s a big deal because housing costs account for a large percentage of the Consumer Price Index (CPI) inflation gauge, and how those costs are calculated causes housing inflation to move more slowly than other CPI components.
This latest reading suggests the high, sticky housing prices (which have helped to keep inflation elevated) may finally be starting to break.
Month-Over-Month Change in Shelter Costs
Source: Bloomberg, calculations by Horizon Investments, as of July 12, 2024.
Here are some other recent signs of a soft landing that make near-term rate cuts appear more likely:
- Headline CPI inflation fell 0.1% month-over-month in June—the first decline in 23 months and lower than the 0.1% increase economists predicted.
- On an annual basis, the CPI rose 3.0% in June—down from 3.4% year-over-year in May and better than the expected 3.1% gain.
- One hundred eleven thousand fewer jobs were created in April and May than previously reported.
- A key U.S. “economic surprise” index, which measures the difference between actual results and forecasts has fallen to its lowest level in two years, showing that a growing percentage of recent economic data has been weaker than investors expected.
Of course, imminent rate cuts aren’t a sure thing. Housing costs, for example, are still up more than 5% during the past year. Additionally, this week’s retail sales report came in stronger than expected—a sign that consumers are still spending at a healthy clip, while the previous month’s retail sales figures were revised upward.
That said, we think continued weakness in enough key economic indicators—particularly more signs of falling inflation—would likely convince the Fed to begin easing. This, in turn, could potentially help fuel further stock market gains in the months that follow, especially with continued consumer strength.
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