TSY Curve/ Shelter/ Unemployment levels/ Momentum Unwind

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TSY Curve

Is it different this time?

Since 1992, each time the 3m/10yr TSY spread has gone negative the US has entered a recession.
The question this time is the time delay: The 3 previous occurrences have generated a recession within a year. What is noticeable is that each time the recession itself did not begin until the spread moved back into positive territory, which of course we just did.

Shelter

Is the impact on inflation from Shelter yet to emerge?

CPI was released Wednesday, December 12th, and the Headline YoY came in at +2.7%. Rent of Shelter comprises 34.8% of that number.

Since the depths of the pandemic, when Shelter bottomed out in early 2021 at .50 and then rallied to 2.68% in q1 2023, it has retraced by just about 50% from that high recently to 1.7%. To the technicians out there, that is very close to the 50% retracement of the original move suggesting the Index has reverted back to trend. It could also be argued that the long-term trend is possibly within the 2 white lines of 1.46% to 1.07% below.

Why is this worth highlighting?

It might have to do with how the BLS, Bureau of Labor Statistics, calculates the Rent of Shelter metric.

“The CPI aims to capture the change in the prices of goods and services consumed by households over time. For housing, the BLS wants to capture the change in the consumption value of a home—the price of the shelter it provides—not the change in the value of the home outright.”

But there is a lag between how the BLS calculates and how a few well-known indices calculate, such as Zillow or Corelogic.

“The measure of the rents in the CPI tends to lag well-known indices of market rents like the Zillow Observed Rent Index and the CoreLogic Single Family Rent Index. CPI rent inflation rose only moderately in 2022, while market rents were soaring (see figure). More recently, CPI rent inflation has been much higher than Zillow and CoreLogic rent inflation.“

The charts tell the story.

Over time, changes in house prices do predict changes in rents—although the relationship is far from one-to-one and occurs with long lags. Xiaoqing Zhou and Jim Dolmas of the Dallas Fed find that the correlation between house price growth and OER inflation peaks at about 0.75 after 16 months.

So, if we consider that 16-month lag mentioned above, that will take us back to July of 2023.

Considering the lag effect from the Zillow and Corelogic chart above, if the relationship follows historical norms that ECANUJ4R Index, Shelter, will continue to move lower. How much nobody can know exactly, but if we do a little back of the envelope math, the most recent Shelter number of 1.7% contributed 63% of the total 2.7% headline CPI. In an overly simplistic view, if that Shelter number were to drop to 1.4%, arguably the high-end range of the long-term trend, and that same 63% relationship held true, that would generate a 2.22% Headline CPI YoY. Lower inflation numbers could provide unexpected aircover for the Fed to continue cutting sometime late Q1 25 or Q2 25. That thought seems very different from chatter of the cutting cycle concluding after the December FED move.

Unemployment levels

Harder to find a Job lately?

According to Indeed, new postings have taken a turn lower.

We thought comparing this to a few other Unemployment metrics could offer some perspective.

Below are the Indeed metric from above, the Unemployment rate, and finally the JOLT Index. Panels 1 and 3 have the obvious downward trend, while the unemployment rate in panel 2 is has been moving higher on 7 of the last 8 prints.

Momentum Unwind

We saw a fair amount of commentary earlier in the week on the momentum unwind that has wreaked some havoc with Hedge Fund positioning. GS provided a forward-looking matrix to help put the move in perspective.

Hope it offers some relief to those concerned.

Have a great weekend!

Best,

Meraki Trading Team

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