Dreams Of Lower Interest Rates Fade As Inflation Comes In Higher Than Expected
Key economic indicators that for months have been moving in a positive direction for commercial real estate reversed course Tuesday. New inflation data from the Bureau of Labor Statistics showed prices rose 3.1% in January.
Most crucially for CRE, the outlook on interest rates worsened after weeks of optimism that a rate cut was coming as early as March. Interest rate futures now predict that a cut is more likely in June, The Wall Street Journal reports.
Oxford Economics, which hadn't predicted a March cut, now expects the Federal Reserve's first rate cut in May.
“The January CPI does not warrant a change to our assumptions around monetary policy, but lends some upside risk to the inflation forecast this quarter,” the research firm said in a statement. “Recent gains in consumer prices have been concentrated in the less volatile categories of goods and services, suggesting that inflation may be a little stickier than some Fed officials thought.”
The new data runs counter to what Fed Chair Jerome Powell said in January would be needed to bring rates down.
“We have six months of good inflation data,” Powell said at a Jan. 31 press conference. “Is that six months of inflation data sending us a true signal that we are in fact on the path, sustainable path, down to 2% inflation? The answer will come from some more data.”
The 10-year Treasury yield jumped to 4.28% on Tuesday's news, its highest point since late November. Stocks fell, including for REITs and banks with considerable exposure to CRE.
The FTSE Nareit All Equity REIT Index fell 2.5%, highlighting investors' retrenchment from property-related stocks.
Regional banks' stock fell faster than their larger counterparts, according to the KBW Nasdaq Bank and Regional Banking indexes. Regional banks were off 5.1% in Tuesday afternoon trading, while the country's largest publicly traded banks were down 3.6% compared to their opening prices.
New York Community Bank, amid an already-tumultuous month, saw its stock fall 4% on the inflation news to $4.56 per share. That is an improvement over last week's sub-$3 position but a far cry from the $10 per share seen two weeks ago.
The 3.1% increase in the consumer price index is lower than the 3.4% recorded in December but above economists' expectations of a 2.9% rise. The Fed's target inflation rate is 2%.
Inflation edged up month-over-month in January, rising 0.3%. In December, the monthly increase was 0.2%.
The cost of shelter, which includes rent and mortgage costs, remains a dominant driver of overall inflation.
Shelter costs rose 6% year-over-year, one of the highest annual increases of the goods and services the bureau tracks. Only transportation costs, not including gasoline, had a bigger yearly increase in January, up 9.5%.
“That’s a bit of a mystery, since apartment rents are no longer rising and single-family rent growth is at low single-digits,” NAR Chief Economist Lawrence Yun said in a statement on Tuesday morning.
Yun said the 3.1% CPI rise “isn't comfortable,” but he anticipates that rents will be “much more well behaved” in the second half of this year. Until then, he doesn't expect any interest rate cuts by the Federal Reserve.
