What Does the Newly Released Inflation Data Mean for Rate Cuts?

The Weekly Recap

Good morning! A busy week to catch up on. The new CPI and PPI numbers came out a little hotter than expected from a market perspective but was in line with what the Federal Reserve thought. Mortgage rates have dropped for two consecutive weeks. Rents in NYC increased again in the month of February by 3.3% as tight inventory, low unemployment and higher rates kept some house hunters in the rental market. The Hamptons market is booming as single family home sales are up 51% YoY in February. Goldman is the only firm bullish on US Commercial Real Estate. Blackstone believes that Real Estate prices have bottomed out. The US House finally agreed on something as they passed an overwhelmingly bipartisan bill to ban TikTok in the US unless China sells it stake in the company. Steve Mnuchin saved NYCB with a $1 billion capital infusion and is now looking to put a group together to buy TikTok. Bitcoin just keeps going up, now over $70k and the sun mercifully stays out longer now.

If you missed last weeks newsletter on How’s the Market and Is Now A Good Time to Buy you can read that here.

What Does the Newly Released Inflation Data Mean for Rate Cuts?

For the second report in a row, inflation came in higher than expected as consumer prices rose to 3.2%, heading in the wrong direction from the Fed stated goal of 2%. Even with the increase in Consumer Price Index (CPI), it did little to change the expectations that rates wont start getting cut until the 2nd half of 2024. Markets had a slight recoil when the news broke but recovered quickly.

This second consecutive report will more than likely reinforce the Federal Reserve’s ‘wait and see’ approach as to when rate cutting should begin. Fed officials are still focused on cutting rates and getting the timing correct, rather than whether or not to raise them again. As wages and salaries continue to move downward and some positive signs that rental prices are flattening/decreasing in most of the country, the last two reports should not alter expectations that we will see three rate cuts this year as echoed by Eric Rosengren who was the former head of the Boston Fed.

The big impact this may have is on the tone and type of conversations that take place during the Fed meeting next week. The doves in the room will be sure to continue to advocate for the notion of an ‘inflation for longer’ approach but the 2% target that the Fed looks at is not necessarily the CPI number, but a figure known as Core PCE which normally runs cooler because it strips out food and energy costs that are reflected in the CPI.

The reason behind having two different numbers that show almost the same data is that food and energy prices are way more volatile than anything else that appears in the CPI report and are impacted by exigent circumstances outside of just consumer behavior. It’s believed that the economy is cooling faster than being reported and in his congressional hearing, Jerome Powell mentioned that the Fed needs to see consistency in CPI reports that show decreases or remain relatively flat. They do not need to see “better news” every month.

This newsletter still maintains that we will have three rate cuts this year with the first cut occurring in June 2024.

Market Performance

Here are how some other indexes and asset classes have performed as of this mornings opening bell.

NYC Market Update

Here is a view of new inventory that has come onto the NYC market month over month as well as newly signed contracts in Manhattan.

Mortgage Rate Update

Rates decreased again this week, with drops totaling almost a quarter of a point over the last two weeks. Despite the dip, rates are still higher than ideal but with how aggressively rates are moving as treasury yields soften, it is a wonderful indicator in how they will react when the Fed does cut rates.

News You Can Use

• Feds Seen Sticking With Three 2024 Rate Cuts Despite Higher Inflation Bloomberg

• Blackstone Says Time to Buy Real Estate as Prices At Bottom Bloomberg

• Manhattan Apartment Rents Climb During Busy February for Leasing Bloomberg

• Sticky Inflation Reading Not Likely to Knock Fed off Course for Rate Cuts Yahoo News

• The Fed’s Inflation Fight Is Starting to Feel Like a Forever War Axios

• Yellen Says Rates ‘Unlikely’ to Return to Pre-Covid Levels Bloomberg

• US Job Market Data Bolsters Fed’s ‘No Rush’ Rate Cut View Reuters

• The February Jobs Report Shows a Healthy, but Cooling, Labor Market Axios

• Yellen Says Flattening Rents Nationwide Will Provide More US Inflation Relief Bloomberg

• Family Offices Have Tripled Since 2019, Creating a New Gold Rush on Wall Street CNBC

• Wall Street Forecasts Are Chasing the US Economy Higher Yahoo

• Here’s the Inflation Breakdown for February 2024 in One Chart CNBC

• Stocks, US Yields Climb After Inflation Data Reuters

• Houses Passes Bill That Could Lead to a TikTok Ban; Fight Shifts to the Senate CNBC

• NYC’s First Ever ‘Mini Forest’ Coming to Roosevelt Island this Spring NY Post

The Deep Insight

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