Monday: The Rate Rollercoaster Continues
The reverberations of last month's CPI report catapulted mortgage rates to a zenith not encountered since the prior November, setting a somber tone for homebuyers and bond investors alike, who were seeking a glimmer of relief as the week commenced with retail sales data. Alas, no such respite was afforded; retail sales marked a .7% increase from the preceding month and a robust 4% ascension year over year. From January to March 2024, the aggregate sales surged by 2.1% compared to the corresponding period a year earlier, which, if sustained annually, translates to an 8.4% uptick in total sales. To compound the industry's dismay, January to February sales figures received a revision, escalating from an initially modest .6% to a pronounced .9%.
Considering inflation hovering below 4% per both the CPI and PCE, the robust retail numbers, unadjusted for inflation, affirm that regardless of the inflation gripes, consumer spending remains undeterred along with demand for goods and services— an unwelcome sign for advocates of lower mortgage rates.
The Home Builder Index was released as well on Monday, giving a gauge on the industry’s perception of market conditions for both the sale of new homes and the outlook for home construction. The index came in unchanged, breaking from its 4-month streak of gains with a reading of 51. (A reading above 50 indicates that more builders view conditions as good rather than poor).. Parsing through surveyed responses, it showed fewer home builders resorted to price reductions — 22% compared to February's 24% — the median discount sustained at 6%. When it came to current sales conditions, the index showed an increase of one point to 57 and lastly, the index reflecting sales expectations for the next six months fell two points to 60.
Although the index's reading of 51 hovers slightly above the breakeven threshold it signifies that while homebuilders acknowledge the persistence of market demand, demand is intricately entwined with the volatile mortgage rates — a factor that may sideline future buyers awaiting clearer economic and financial market trajectories.
The buoyant retail sales report was interpreted by the market as yet another hurdle for the Fed in its battle against rampant inflation, particularly challenging to subdue when consumer demand remains steadfast. Consequently, mortgage rates found no grounds for a decline, prompting a recalibration of the bond market. The narrative challenging rate hikes in July persisted, culminating in the average rate for a 30-year fixed mortgage ascending to 7.44% by the day's conclusion.
Tuesday: Building Tensions: Construction Data & Powell's Pivotal Pivot
The real estate sector brought to light new construction data on Tuesday. Building permits dipped by 4.3% on an annualized basis to 1.458 million, a descent from February's 1.523 million. Single-family permits declined by 5.7%, and a general slowdown in construction was evidenced by a 14.7% decrease in housing starts, with single-family starts receding by 12.4%. The contraction in housing construction is ostensibly a response to recalibrated expectations of mortgage rates declining by year-end. Enduringly high rates could ultimately coerce buyers into a holding pattern, plagued by an affordability mismatch — a scenario that disincentivizes builders from advancing new developments, given the potential compromise on demand and pricing power.
In the long run, if the construction of new homes remains deterred it will only exacerbate the housing shortage. Compounded by the continuing increase in the US population mostly due to a net influx of residents through immigration, the extant housing scarcity will only intensify, perpetuating a trend of inadequate housing supply amidst escalating buyer numbers. This could foster a fiercely competitive real estate market, with significant home price appreciation continuing to inflame the affordability conundrum.
Attention then shifted to Jerome Powell's discourse in Washington DC, alongside Bank of Canada’s Governor Tiff Macklem, dissecting the economic outlook and monetary policymaking of the two nations. Although the stage differed from a FOMC meeting, the market's attunement to Powell's orations always garners much attention
During his remarks, Powell acknowledged the U.S. economy's stalwart performance was clear, highlighting formidable job growth, the revival of the manufacturing sector, and an unemployment level persisting below 4% for a 26-month stretch, the longest streak in over half a century.
However, Powell's inflation commentary conveyed less optimism, particularly when addressing the core PCE report, which showed year-over-year inflation for March at 2.8%, which demonstrated negligible advancement from February. When viewed under a shorter duration, the picture becomes even less favorable as measures such as 3 and 6-month year-over-year inflation exceeding 2.8%.
Jerome cited that this lack of further progress on returning inflation to the Feds 2% goal has not given the fed the greater confidence and in fact has given the central bank greater cause to pause and that it may take longer to reach the 2% target. Though this is disappointing he said that monetary policy is in position to deal with this and if higher inflation persists than they can maintain rates and policy at their current levels.
This perspective marked a decisive pivot from Powell's previously confident assertions during the recent FOMC meeting, where he envisaged imminent rate hikes in 2024. The emergence of a "higher for longer" scenario triggered a market response, prompting a reassessment of expectations and the possibility of delaying rate cuts to perhaps the end of 2024 or later. The Fed's reiterated stance on data dependency suggests that until inflation demonstrates a consistent downward trajectory, the average rate for a 30 year fixed mortgage will likely hover at the upper end of the spectrum. The day ended with the average 30-year fixed rate at an elevated 7.50%.
Wednesday: Mortgage Applications Defy Odds
Wednesday's economic calendar was devoid of new data, leaving us with the Mortgage Bankers Association (MBA) release of its Market Composite Index. Despite a consecutive rise in interest rates, last week saw mortgage applications increase as well — the market index was up by 3.3%, and the purchase index was up 5% from the prior week. Yet, compared to the previous year, purchase applications receded by 10%. The uptick in applications amidst rising rates suggests a proactive buyer sentiment, potentially prompted by concerns of rates climbing further, possibly retesting the October 2023 highs of over 8%.
Mortgage rates experienced a slight respite, declining by nearly 10 basis points, settling the average rate for a 30-year fixed mortgage at 7.41%. This dip, however, welcome, likely does not herald a reversal in the recent upward trend. Rate surges typically provoke a brief pullback as investors consolidate gains, cover shorts, recalibrate, and ready themselves for the next economic indicators.
Thursday: Jobs Hold Steady Amid Economic Ebbs and Flows
The week continued with the weekly jobless claims report on Thursday. Initial claims stabilized at 212k, unchanged from the previous week's revised figure, and the four-week moving average also remained static at 214k. Continued claims exhibited a nominal increase of 2,000 to 1.812 million, and the aggregated claims across all programs saw a reduction of 12,000 to 1.953 million, marking a 7% year-on-year increment from the comparable week in 2023.
The job market's fortitude reflects positively for the economy as a whole, and the Fed has said that they do not need to see the labor market soften in order to gain further confidence in softening demand and improved inflation dynamics and that maybe it is possible for the labor market stability to coexist with inflationary improvements. However, historical patterns indicate that for inflation to truly normalize, demand must soften, cooling inflationary pressures. As long as public sentiment remains positive regarding financial prospects and wage growth, demand is likely to stay constant, complicating the task of inflation regulation.
The real estate market contributed its share of news, with existing home sales reporting a decline of 4.3% from February and a 3.7% decrease relative to March 2023. The narrative was one of contrasting forces: rising interest rates bolstered inventory, which grew by 14.7% year-on-year, yet the persisting higher prices as the median home price rose in March by 4.8% compared to February and high rates pose challenges for prospective buyers, potentially necessitating either a price correction or decline in mortgage rates for sales to re-ascend.
The Leading Economic Indicator (LEI) contributed further to Thursday’s economic portrait, decreasing by 0.3% in March, following a modest increase of .2% in February. The six-month rate of contraction of 2.2% represents a deceleration from 3.4% velocity of decline from the previous half-year, hinting at a potential rebound towards expansion.
The biggest contributors that led to the decline in the index were building permits and private housing development, along with the decline in new orders in manufacturing. One thing to consider is that significant contributions to the non-financial elements of the LEI are predominately in manufacturing and construction and do not include activity in the services sector, which does make up the largest portion of GDP and employment and also typically declines after manufacturing.
Despite the importance of the LEI in projecting economic trajectory, the lag inherent in its components — such as stock prices, building permits, and ISM new orders are elements prior to the release of the LEI and therefor are previously baked into the bond market and interest rates
Little was expected from Thursday’s economic releases and their influences to extend Wednesday’s mortgage rate descent; the day concluded in line with a slight elevation of the average 30-year fixed-rate mortgage to 7.43%.
Friday: Quiet Closure: Week Ends with Powell Ponderings
The week's end was marked by silence on the economic front, a quiet coda to a week of fluctuations. Jerome Powell's latest comments crystallized the new uncertainty permeating market sentiment, casting doubts over the Fed's capability for rate cuts in 2024. In the interim, the market will be recalibrating, with the 10-year treasury seeking a new range to inform the settling of mortgage rates until the next consequential data batch.
In the context of the week's developments, Friday’s stationary movement of mortgage rates might be regarded as a modest triumph, staving off Tuesday's peaks throughout the week's end, potentially signaling a static interlude until May when the CPI and Jobs report will direct the next step in the journey. The week's final tally saw the average 30-year mortgage rate holding at 7.43%.
Looking Ahead:
The forthcoming week is not anticipated to precipitate drastic rate movements, yet noteworthy economic releases await. The week's procession begins on Tuesday with the unveiling of the S&P services and manufacturing PMI—a metric that, while not as market-moving as the CPI or employment data, serves as a bellwether due to its encapsulation of procurement leaders' strategic choices in areas like cost control, supplier engagement, and risk oversight. These are decisions that trenchantly impact the operational vitality of the services and manufacturing sectors and, by extension, offer prognostications about the country’s economic pulse.
The economic symphony continues Thursday with the release of GDP statistics transcribing the growth of the US economy coupled with the weekly dispatch of initial jobless claims—a barometer of labor market health. Pending home sales will also be in the spotlight, providing an aperture into the psyche of homebuyers navigating the incremental ascension of mortgage rates.
The crescendo arrives on Friday with the March PCE figures—a dataset not typically associated with immediate market upheaval akin to the CPI, yet it wields substantial influence as the Fed's preferred inflation gauge. An alignment or disparity with the CPI report could precipitate significant market recalibrations. The week draws to a close with the pulse of consumer sentiment, offering a window into the collective economic confidence of consumers.
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