Hotter-than-forecast inflation data made a bad month worse for Joe Biden - MarketWatch

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Published: Feb. 13, 2024 at 3:31 p.m. ET By

Brett Arends

A bad month for Joe Biden just got worse.

The latest numbers show inflation is still running hotter than Fed chair Jay Powell — and the Biden administration — would like. The markets think that means short-term interest rates are going to stay even higher for even longer than they had been anticipating. It means mortgage rates are also going to stay higher for longer, and that is going to make it very hard to unfreeze the real-estate market. Oh, and it's also bad news for the stock market, which slumped SPXDJIA in response to the latest numbers.

All round, when it comes to the November election, this is not good for the current president, and it is good for the former president.

For Biden, what's more, it comes on the heels of last week's much-publicized woes.

The latest inflation numbers, as shown by January's consumer-price index, indicate prices are 3.1% higher than they were a year ago. That's way above the Fed's annual inflation-rate target, which is 2%.

But the CPI data were actually worse than they initially appeared. That widely quoted headline figure is backward-looking, because it compares consumer prices with prices a year ago. The monthly figure shows prices rose 0.3% from December to January alone. That pencils out to an annual inflation rate of 3.7% — nearly twice the Fed's target rate.

And while the three-monthly picture is better — it works out to an annualized inflation rate of 2.8% — that shows a reacceleration since November, when it was below 2%.

Not, in short, helpful for the current administration — even if Lael Brainard, the former Fed vice chair who is now the White House's economic-policy coordinator, insisted that the overall U.S. inflation story remained a positive one.

Financial markets begged to differ. Traders have now drastically slashed their predictions of hefty interest-rate cuts in time for November's election. Just a month ago, they were expecting rates to come down about 1½ percentage points between now and the vote, to around 4%.

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The latest betting: barely half a point, or a third as much, to around 5%.

There can be little doubt that both Powell and the Biden re-election team wanted high prices, and high interest rates, firmly in the rearview mirror long before voters headed to the polls.

The picture is similar on long-term interest rates, which help drive the real-estate market through their influence on mortgage rates.

The yield, or interest rate, on the 10-year Treasury note BX:TMUBMUSD10Y jumped Tuesday to its highest level since November. At 4.27% it has now erased about one-third of the cut that the markets had priced in during last fall's bout of optimism.

And that is ominous news for housing. It threatens to bring the recent decline in 30-year mortgage rates to a shuddering halt — and may throw it into reverse. (For technical reasons, the interest rate you get on a new fixed-rate 30-year mortgage is based on the rate offered in financial markets on those 10-year Treasury bonds.)

The housing market needs long-term rates to keep falling to get out of the vicious cycle it's been in for two years. Many homeowners are currently sitting on mortgages with very low long-term rates, which they took on during the decade from 2012 through early 2022. Rates on new 30-year fixed mortgages were below 4% for most of that period. During 2020 and 2021, in fact, they bottomed out below 3%.

Who wants to sell their house, and give up a 3% mortgage, if they then have to buy another home and take on a new mortgage at today's rate of 6.4%?

With sellers sitting on their hands, waiting for long-term rates to come back down, the inventory of for-sale housing has dried up. That, in turn, has driven up prices. Which means anyone who wants to buy a home now confronts not one but three cost hurdles: low inventory, high property prices and expensive mortgages.

Those would-be buyers priced out of purchasing a home remain renters instead. That extra demand drives up rents. Oh, and those higher home prices, and higher rents, then show up in, yes, the inflation numbers.

"The index for shelter continued to rise in January, increasing 0.6 percent and contributing over two thirds of the monthly all items increase," the U.S. Labor Department reports in its latest inflation release.

Stalemate.

Realtor.com reports that, at current levels, home sales per U.S. household are even worse than they were at the lows of the 2008-10 housing-market collapse. Active listings are 40% below levels seen in early 2019, and new listings are down 26%, the company reports. Meanwhile, listing prices are 42% higher.

(Realtor.com is owned by News Corp, the same company that owns MarketWatch publisher Dow Jones.)

Meanwhile, the latest inflation data have hit the stock market. The connection between stock-market performance and presidential elections is open to debate. But it's reasonable to conclude that if you're running for re-election you want Wall Street in the green. It makes investors feel better about their 401(k)s, and even noninvestors conclude that things are heading in the right direction.

The S&P 500 is still ahead on Biden's watch. It is 29% higher than it was on Inauguration Day in 2021. But, as many financial headlines have reminded us over the past year, so much of its gain is due to the so-called Magnificent Seven jumbo stocks, including Apple AAPL, -1.13%, Microsoft MSFT, -2.15%, Tesla TSLA, -2.18% and AI chip phenom Nvidia NVDA, -0.17%. It is notable that both the S&P 400 index MID of midsized companies and the Russell 2000 RUT index of smaller companies, are lower than they were when Biden took office.

What is all this going to mean for the election?

President Biden's most recent presidential approval rating is 41%, according to the long-running Gallup poll. But those numbers are from January. At current trends, February's numbers are unlikely to be higher. At this stage of his 2012 re-election campaign, Obama's numbers hit a low of 45% in the same poll, and he went on to win in November. In early 1996 Bill Clinton's numbers briefly hit 42%. This didn't stop him from winning easy re-election in November.

Ronald Reagan's approval ratings hit a stunning low of 35% before his landslide re-election. But that was in early 1983, nearly two years before the election. By early 1984, the election year, he was over 50%.

Bookies and gamblers have now made Donald Trump the favorite. At Predictit, a small-stakes U.S. election betting website, gamblers are giving Trump a 49% chance of winning in November, and Biden 40%. A few weeks ago the picture was reversed.

Big-money sites, which for legal reasons can only operate overseas, tell a similar story. Bookmaking giant Ladbrokes quotes Trump at odds of 5-to-6 to win in November, equivalent to a 45% chance of winning. Biden? Just 5-to-2, or 28%.

A spokesman for rival Flutter.com (which owns FanDuel in the U.S., as well as Paddy Power, Betfair and others overseas) told the same story. "Trump was 4-to-1 to win 12 months ago," he says. Now the former president is being "heavily backed."

Nonetheless, even a week is a long time in politics. And there are nine months to go until Election Day.