Inflation data still pointing toward rate cuts in 2024

Inflation surprised everyone by rising more than expected on Thursday, but discussions about rate cuts in 2024 are still ongoing. The 10-year yield had a slight reaction to the data, increasing a bit early on and now stands at 3.98%, quite a drop from last year’s 5.04%. Despite historically low jobless claims, when the market senses the Federal Reserve is done raising rates, both the 10-year yield and mortgage rates tend to drop significantly.

A few months ago, the 10-year yield fell from 5% to recent lows of 3.80%, and now, with talks of rate cuts, the 2-year yield, more tied to the Fed Funds rate, has noticeably dropped. Recent Consumer Price Index (CPI) data shows a 0.3% increase in December, with a 3.4% rise over the last 12 months.

While the Fed usually focuses on core inflation, today’s headline and core inflation prints were hotter than expected. Rent remains behind the data, but the downtrend in shelter inflation is evident. The belief is that the Fed will cut rates in 2024 due to an over-hike in 2022-2023. The Fed Funds rate is higher than the inflation growth rate, suggesting room for cuts.

The market isn’t overly concerned about the recent inflation data, attributing it to the unique circumstances of a global pandemic. Expectations are for initial hot inflation data, followed by disinflation as supply chains normalize. Shelter inflation should fade as more supply enters the market. Despite low unemployment and a successful stock market in 2023, addressing housing policies related to COVID-19 is crucial for renewed growth in existing home sales.