Inflation Moderates

During a light week for economic data, investors were mostly focused on the CPI inflation report. The results were roughly in line with the expected levels, however, and mortgage rates ended the week with little change.

While still very high by historical standards, investors were primarily interested in the moderation in inflation from the prior month. Fed Chair Powell has repeatedly said he believes that higher inflation has mostly been the result of disruptions caused by the pandemic and will be "transitory," returning to more normal levels as the economy recovered. If the downward trend continues in coming months, it would lend support to his view and keep the timing of Fed policy tightening on the expected path. If Powell is incorrect and inflation remains elevated, the Fed might decide to tighten sooner. Since inflation is negative for bonds, the outcome will have a large influence on mortgage rates.

The JOLTS report measures job openings and labor turnover rates, and the latest data indicated that the labor market is extremely tight. At the end of June, job openings unexpectedly surged to 10.1 million, shattering the former record high. Openings are now about three million higher than they were in January 2020 prior to the pandemic. A high level of job openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills. A large number of employees also willingly left their jobs in June. This is viewed as a sign of labor market strength as well, since people usually quit only if they expect that they can find better jobs.

Looking ahead, investors will closely watch Covid case counts around the world. They also will look for hints from Fed officials about the timing for changes in monetary policy. Beyond that, Retail Sales will be released on Tuesday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth. Housing Starts will come out on Wednesday.