As long as inflation is the top concern for financial markets, the Consumer Price Index (CPI) is the most important economic report on any given month and it came out this week. Stocks and bonds both improved sharply despite the results merely matching forecasts.

This is the reality of the market's current relationship with inflation: it's been so much higher for so much longer than expected that the absence of more bad news is actually good news. 

To be fair, this report was definitely a bit better than the last with the most closely-watched metric (core, month-over-month) hitting its 0.3% forecast.  That number matches the average reading over the past 12 months which is why the annual rate of core inflation remains well above its 2.0% target.

Core inflation ultimately needs to be down in the 0.1 to 0.2 range in month-over-month terms if the annual number is to hit the 2.0% target.  But the Fed will be willing to cut rates before we officially hit 2.0% as long as the monthly data makes it seem highly likely.

Both the Fed and financial markets are also watching other parts of the inflation data for reassurance about further cooling.  Among these, the metric measuring home payment inflation (Owners' Equivalent Rent or OER) is arguably at the top of the list.  This makes sense considering it accounts for the largest portion of the most problematic inflation category.

OER is also good to watch because it is more prone to gradual trends than other line items and it is also typically well-correlated with more timely rental data from private market sources. This allows for increased confidence that it will end up where it looks like it's headed.  In fact, this belief is one reason that many market participants expected more progress in inflation by now. 

OER had been moving in the right direction before unexpectedly pausing at elevated levels.  This has been a source of confusion and consternation for market participants and Fed officials alike. 

What will it take for OER to get over this stalled progress? There are several theories and/or factors, depending on whom you ask, but most answers include the factor of time.  

Another important factor is the supply of housing--especially multi-family housing which has a more direct impact on rent price trends than other housing.  In new data from the Census Bureau this week, multi-family residences were completed at one of the fastest paces in decades despite being just off recent highs.

The caveat is that new multi-family construction projects are breaking ground at much slower pace than a year ago.  If "starts" are running at an annual pace of just over 300k, it's only a matter of time before completions are no longer able to remain in 500k+ territory.

The slower pace of new construction isn't specific to the multifamily sector.  Even when looking at the all-inclusive numbers, building permits and housing starts have definitely been in a holding pattern as completions continue adding up.

Analyzing housing supply in order to anticipate improvements in inflation data is forward-looking to say the least.  Back in the present, mortgage rates ended the week much lower than last week despite some push-back on Thursday and Friday.

In other words, rates have pulled back only slightly after a solid winning streak. Granted, you could take an even longer term view and say rates only managed the winning streak because they were at their highest levels in more than 5 months by the end of April, but nobody likes a party pooper.

Either way, we are where we are now and we're only going to see meaningful improvement if big ticket inflation data moves back toward the Fed's 2% target.  With that in mind, we don't really have any big ticket data until the first week of June.  Between now and then, anything goes when it comes to market movement, but it probably won't go too far in either direction until the data returns.

The only real caveat for next week is the Fed.  There will not be a new Fed announcement, but there are multiple speakers on the circuit as well as the release of the minutes from the most recent Fed meeting.  If we had to guess, we'd say the market is already well aware of the Fed's current stance, but it's always prudent to consider potential volatility surrounding any major Fed communication.