One of the biggest challenges central banks now face is trying to meet inflation targets in a world plagued with weak growth, falling commodity prices and an ageing population, which appears reluctant to spend. This is reflected in government bond yields around the world that are touching multi-decade lows as a consequence of global deflationary forces and unorthodox monetary policy in Europe and Japan. Fears that the US and the UK may also adopt unorthodox monetary policies to stimulate growth haven’t helped sentiment.
That being said, US inflation data released today showed an improving picture for the world’s most important economy. The consumer price index rose in June for the fourth straight month, as the effects of low energy prices and a strong dollar start to wear off.
On a seasonally adjusted basis, the consumer price index increased to 0.2% in June, from the prior month according to the Labor Department. Previous readings saw the index climbed 0.2% in May and 0.4% April. Excluding food and energy consumer prices also rose 0.2% in June.
Analysts were expecting growth of 0.2% to 0.3% depending on which source you use. Analysts polled by the Wall Street Journal predicted growth of 0.2% while CNBC cites a forecast of 0.3%. The overall price index rose 1% in June from a year earlier, below the 1.1% expected by analysts.
Despite the modest improvement in inflation data, overall price growth has fallen short of the Federal Reserve’s 2% annual targets the past four years, and it doesn’t look as if inflation will return to this level anytime soon. In other news, a report from the Labor Department released today said inflation-adjusted average weekly earnings fell 0.1% in June from the prior month. Average hourly earnings were up 0.1% while prices climbed 0.2%.
Such lacklustre data presents a challenge for investors, but analysts at BCA Research believe that they have found the perfect trade for investors to profit from as the world is swamped by disinflation.
US housing: The best disinflation trade?
BCA’s analysts believe that the US housing market is the perfect trade to play disinflation. Falling bond yields around the world have pushed down the US 30-year mortgage rate, presenting an incentive for US homeowners to refinance, upscale or perhaps by their first home. A simple homebuilding demand/the supply indicator, comprising new-home sales expectations versus new home inventories is steadily rising. Moreover, this year a number of regions have seen a small bump in housing market growth over the past few months.
According to the latest real estate analysis report, last quarter the housing market grew at a steady 0.6% quarter-on-quarter and similar growth is expected for the rest of the year.
Certainly an interesting trade idea worthy of further research.