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Housing market prices lag behind rising CPI and cooling inflation

Yahoo Finance's Brian Cheung details how July CPI and inflation data are impacting stocks, the bond market, volatility, and housing prices.

Video transcript

RACHELLE AKUFFO: But first, let's start off with a look at markets. Akiko.

AKIKO FUJITA: And it is looking green across the board, Rachelle. One hour left to go in the trading day. And we are seeing a rally here. Not quite at the highs that we saw early on in the session. But still, the Dow up more than 400 points. The S&P 500 up 71. And the NASDAQ up 305.

We are seeing full on risk on mode in the markets today. Let's take a look at the sectors here. Those that are leading the gains today-- tech, a big one. We're also seeing materials up in a big way. Communication services. And of course, we've been tracking the bond yields. We saw the two-year, the shorter end of the year yield curve pull back in a big way on the back of that CPI data you just mentioned, Rachelle, coming in weaker than expected. That's a good thing on a day like today.

And let's bring in Yahoo Finance's Brian Cheung. Of course, Brian, we saw those yield moves on the back of this expectation now that the Fed may not have to move as aggressively. What's the expectation? I mean, we still have a long way to go until the next meeting.

BRIAN CHEUNG: There's gonna be another CPI report and another jobs report before we get to that next Fed meeting. But we've seen bond markets blink in response to that inflation report this morning. We were showing the 10-year bond yield. I want to show you, though, the movement across the morning, because we're at about 2.79%. That's only a basis point lower than where we ended the day yesterday.

But if you take a look at the two-day basis. Again, this was after hours. Nothing happening there. Boom, what's going on? It dropped to as low as actually 2.67%, bounced back. So originally, we were down much lower on the 10 year, which could reflect because this is a proxy of Fed interest rates in the future that maybe the Fed doesn't have to get as aggressive to take inflation down. Maybe they could get away with, for example, a 50 basis point hike in the next meeting in September.

Again, Fed markets are now pricing in about a 60% chance that they'll go with a 50 basis point move as opposed to the 75 basis point move that they were factoring in and majority favoring prior to today's inflation report. But broadly speaking, I want to show you what overall markets are thinking about that inflation report.

Take a look at the VIX. This is often called the "fear index." Below a 20 handle for, by the way, the first time since about April. And what this tells you is that maybe there's a little bit more certainty in the markets. And I think that the settlement that we've seen is still an inverted. But kind of settling yield curve does show you that perhaps markets are getting a little bit clearer clarity into exactly how the Fed might move, again about six weeks from now.

RACHELLE AKUFFO: So Brian, as we look a little further down the road in terms of next steps in this fight against inflation, things like the balance sheet and some of these long-term inflation expectations, what are we expecting? You have some stickier things as we saw, in terms of inflation, still going up a lot for shelter and service costs.

BRIAN CHEUNG: Yeah, and I think that when we talk about the overall inflation picture-- and I actually, I might have an element in here loaded up from the previous show just talking about inflation and shelter, as you mentioned.

Owners equivalent rent of residences in US cities, the blue line here. The purple line is overall headline inflation. But you can actually see it's continuing to go up. And this is relevant because we know that mortgages are getting more expensive. But it's still very much by all intents and purposes, a very hot housing market. And again, we haven't seen any letting up of the amounts that people are paying, as a result of their overall consumption basket. Two, just putting a roof over their heads.

So again, that's gonna be a very interesting story to look at as we get towards the August, September, October reports. But you did see things like airline tickets, hotel/motel fare, other types of travel types of expenditures actually fall in the month of July. Those could be very good to bring inflation back down. But again, this is a major component, about 30% of overall CPI. So if this isn't going down, then maybe overall headline inflation can only get down to a certain level.