PPI, inflation at the wholesale level, came in +.3% in June, slightly stronger than expected. Excluding food and energy, “core” inflation rose +.3% as well, now pushing that measure to +2.7% year-on-year. Input costs seem to be the devil in the details as they continue to rise. Processed intermediate goods jumped +.7% in June, with both energy costs and non-energy related materials for manufacturing seeing increases. Tariffs and the early onset of a trade war will only make matters worse and you can bet that the Fed will pay close attention to this report in the months ahead.
CPI, inflation at the consumer level, rose +.1% to post a year on year gain of +2.9%. “Core CPI” rose +.2% when we strip out food and energy for a year-on-year gain of +2.3%. The multi-year high prints can be traced to a large jump in fuel costs over the past year along with energy goods up 24% over that period of time. Further gains in shelter and medical care are also key contributors to the rise within the inflation index. Given the current pace, we see the Fed on track for two more price hikes: one in September, and the other in December. However, as mentioned, the current trade wars could change that outcome.
Most of the headlines over the past week have continued to center around trade and more potential tariffs set on by President Trump kicking things off with his comments about adding $200 billion in additional tariffs aimed at China. Combine that with the fact that he began his trip to the UK by also criticizing Prime Minister May’s approach to Brexit, and it’s apparent that he has an agenda at hand. It was also somewhat interesting that the Bank of Japan left rates unchanged at their latest monetary policy meeting. Reasons seem to point to more uncertainty around U.S. & China trade tensions and their potential to disrupt economic growth on a global level. With our Federal Reserve pushing short term rates higher while other global partners are on hold, the risk is that investors have potential to earn better returns in U.S. short term debt. That’s reason enough to flock to our safe haven higher yielding bonds, and this is just another reason we see longer term yields staying low, supportive of our mortgage products.
Looking ahead to next week, the calendar lines are a bit lighter. As we’ve seen over the past few weeks, economic data has somewhat taken a backseat to the Trade headlines, so we are expecting to see much of the same going forward. We still think a larger catalyst is needed to push rates significantly lower; however, current trading patterns and sentiment suggest that lower rates are ahead. We