Monday: A Quiet Start with a CPI Cliffhanger
Another quiet Monday in terms of economic data, which is typical, yet this week brings with it one of the most pivotal economic reports: the Consumer Price Index (CPI) on Wednesday morning. With the week starting out with mortgage rates already near their highest levels since February, a lot is at stake. An unfavorable CPI reading could easily push rates back to levels not seen since November. Conversely, if the CPI comes in much lower than expected, rates could drop significantly.
There weren't any compelling news headlines or economic reports, yet the average 30-year fixed mortgage rate ended the day at 7.11%, a 10 basis point jump from last Friday’s close. How could this be without a catalyst? The likely culprit is the aftershocks from Friday's jobs report, which came in hotter than expected, depicting a resilient economy and enduring employment picture that could potentially enable the Fed to maintain higher rates longer if necessary. As we know, a 'higher for longer' scenario means that the market would need to adjust its expectations. Where things stand now, the market has baked in 3 rate cuts in 2024, so if that thesis is jeopardized, there will be a significant correction and steepening in bond yields, and mortgage rates will follow suit.
Tuesday: Small Business Index and the Pulse of Main Street
Tuesday's NFIB (National Federation of Independent Business) Small Business Index surveys small businesses, which might seem insignificant on the surface, but considering that small businesses make up 99% of all U.S. businesses and employ around 50% of the country's private workforce, the health of small business is vital to economic prosperity. The NFIB Index provides a snapshot of the health of Main Street, which can be a leading indicator as the vitality or lack thereof of small businesses tends to bleed into all other businesses and broadly impacts consumption, employment, and capital outlays.
This month's report showed that small business optimism had reached its lowest level since 2012, marking the 27th consecutive month the index was below its 50-year average of 98. Notably, 25% of small businesses reported that inflation was their single most significant problem when operating their business. A net negative 29% (The term "net negative" in the NFIB index refers to a situation where there is a greater number of negative survey responses than positive ones, indicating a prevailing pessimistic outlook among small business owners) of small business owners reported positive profit trends due mostly to weaker sales and rising input costs. Also, the net percent of owners expecting real sales to increase decreased 8 points from February to a net negative 18%, and a net negative 10% expected an increase in nominal sales in the next three months.
Although this report is not a significant market mover, it is often underrated. Small businesses are the lifeblood of the U.S. economy, and when they struggle or lose their sense of optimism, it can send ripple effects throughout the economy. The story within this report should not be underestimated.
It was encouraging to see mortgage rates recover some of the ground lost from yesterday, but truthfully, Tuesday was mostly a placeholder day, as Wednesday's CPI report will be the critical determinant of where rates are headed. The average 30-year fixed mortgage rate ended the day with a slight recovery to 7.06%.
Wednesday: CPI's Stark Revelations and Mortgage Market Moves
Few economic reports come with as much anticipation as the Consumer Price Index, released on Wednesday. This is largely because it is the first direct inflation indicator released each month, whereas the PCE, the Fed's preferred index, isn't released until the end of the month. Therefore, the CPI often has a greater impact on markets than the PCE due to its leading nature, as directionally, the two inflation reports tend to move in unison.
Unfortunately, the market didn’t get what it was hoping for as the CPI brought unwelcome news, indicating that inflation progress has significantly slowed. Inflation for March was up by 0.4%, higher than the market's expected 0.3%. Year-over-year inflation also increased to 3.5% compared to 3.2% last month, suggesting that the last few miles to reach the Fed's 2% inflation target may be challenging and prolonged.
The primary contributors to the inflation increase were sheltered, up 0.4%—consistent with four out of the last five months—and gas prices, up 1.1%, accounting for over half of the monthly increase in the all-items index. The index for all items less food and energy rose by 0.3%, consistent with previous months. Year-over-year, core inflation (all items less food and energy) rose to 3.8%, well above the Fed's 2% target.
Shelter could possibly be the most critical component that the central bank is monitoring, as data for this specific element experiences the most significant lag within the index. Despite significant decreases in rent and home prices in 2022 and stability of rents in 2023, none of this data has yet to be reflected in CPI. Given that shelter constitutes a third of the all-items index, 40% of all items excluding food and energy, and 60% of services CPI excluding energy, once the CPI data starts reflecting current conditions, we could see a significant shift in the inflation reading, though unfortunately, nobody knows when that will come.
Though the CPI, of course, stole the show, the Mortgage Bankers Association (MBA) report came out as well on Wednesday as it always does, providing insights into the trends of mortgage applications. Last week, despite the interest rate for conforming 30-year fixed-rate mortgages once again exceeding the 7 percent mark, the mortgage application volume edged up by 0.1 percent on a seasonally adjusted basis and by 0.2 percent on an unadjusted basis compared with the previous week. However, the gains in applications were a bit misleading as there was a significant contrast between applications to refinance vs applications to purchase. Refinance applications increased by 10 percent and a 4% year over year increase, while applications to purchase fell by 5.0 percent on a seasonally adjusted basis. Furthermore, the non-seasonally adjusted Purchase Index declined by 4.0 percent week-over-week and plummeted by 23 percent from the same week last year, underscoring the inverse relationship between mortgage rates and home buying interest. Whenever rates go up, demand softens. This divergence highlights the ongoing challenges and shifting dynamics within the housing market, reflecting broader economic sentiments and consumer caution. This retrenchment is not the news the spring housing market wanted to hear. If interest rates continue to rise and more and more buyers move to the sidelines due to lack of affordability, inventory levels will inevitably rise, and where the supply-demand imbalance gets too lopsided, home prices will be next to fall.
Wednesday ended with the realization that inflation may be more stubborn and difficult to tame than anticipated. The CPI casts doubt on the market's expectation of three rate hikes by the end of 2024. Although Jerome Powell indicated at the March meeting that he anticipates rate cuts by year-end and that it is likely we are at the peak of monetary policy tightening, the Fed has reiterated that its decisions will remain data-dependent. So as incoming data suggests that inflation is stickier than usual, it could mean delays in rate hikes or even the absence of rate hikes in 2024, a scenario the market has not fully anticipated, necessitating a readjustment of expectations. This was reflected in Wednesday's market activity, with one of the largest single-day movements on record as the average rate for a 30-year fixed-rate mortgage shot up to 7.34%.
Thursday: PPI Insights and Labor Market Stability
Thursday started with the release of the Producer Price Index (PPI), which covers a broad range of producers in the US economy, from manufacturers and wholesalers to service providers, measuring the change in selling prices these producers receive for their output. The PPI is considered a leading indicator as it provides an early signal regarding pricing trends of goods and services in the economy before the costs are passed on to consumers. If the PPI rises, it is unlikely that businesses will be willing to absorb additional costs, and therefore, they will pass them on to consumers, which can then, in turn, show up as higher prices in the PCE and CPI inflation indexes.
The PPI showed a slight improvement:
Final demand moved up 0.2% in March, compared to 0.6% in February and 0.4% in January, beating the market's 0.3% expectation.
Final demand less food and energy increased by 0.2%, following a 0.3% rise in February. Year-over-year, the total index increased by 2.3%, which is pretty close to the Fed's 2% inflation target.
Final demand for services, a critical and stubborn part of inflation, rose by 0.3% for the third consecutive month. At .3% monthly, this would lead to an annual rate of 3.6%, validating that services inflation is the true thorn in the side of the Fed and inflation.
The PPI was followed up by a peek into the labor market, with initial jobless claims presenting a relatively unchanged picture over the past few months.
Initial claims stood at 211,000, marking a decrease of 11,000 from the previous week’s revised figures; this is well within the range that has persisted over the past few months and describes a labor market that continues to exhibit robustness.
Looking at continued claims, there was a modest uptick to 1.817 million, a rise of 28,000 from the previous week.
The four-week moving average for continued claims nudged up by 3,500 to 1.802 million. This increment, albeit slight, may indicate some softening, a narrative to observe closely in forthcoming reports.
The aggregated total of all continued claims for benefits across all unemployment programs, ending as of the third week of March 23rd, was 1.965 million—a notable decrease of 72,000 from the preceding week.
Furthermore, the data revealed that 1.871 million weekly claims were filed for all programs during the comparable week of 2023, marking a 5% increase year over year.
A muted unemployment report and a slight beat of the PPI offered little to markets in the form of a reprieve from the effects of Wednesday's CPI report, which catalyzed mortgage rates to highs not seen since last November. In fact, rates ended the day slightly up, likely due to further digestion of inflation data and a disappointment of another muted jobs report. Mortgage rates ended the day with the average 30-year fixed rate settling at 7.37%.
Friday: Consumer Sentiments and Inflation Expectations
Friday was one of the quieter ends to the week we've seen in some time, with the only significant data release coming from the consumer sentiment index, which dropped to 77.9 from 79.9 in February. While the index has stayed within this range since the beginning of the year, a notable development was that inflation expectations ticked up from 2.9% to 3.1%, possibly reflecting consumers' perception of stalling inflation progress. This is the first time this expectation has exceeded the 2.3% to 3% range since the two years before the pandemic. Long-term inflation expectations rose as well to 3% from 2.8% the previous month. Overall, sentiment has remained relatively unchanged since January, so consumers perceive little change in the economy.
Though overall sentiment has remained relatively unchanged since January, the uptick in inflation expectations will be a crucial element to keep an eye on. The importance of inflation expectations remaining anchored is something that has consistently been emphasized by the Fed; This is due to the fact that when consumers expect inflation to rise above trend, they tend to buy more goods in the short term in anticipation of higher future prices. This increase in immediate demand can accelerate inflation, creating a self-fulfilling prophecy as inflation expectations and actual inflation compound on each other. Though this is the first time we have seen this shift, it was not the best news to end the week and will be something we and certainly the Fed will be keeping a close eye on.
Friday ended a tumultuous week for interest rates on a positive note as rates retreated slightly to end the week. Gains were supported by a combination of European economic data and central banker comments, with geopolitical headlines and subsequent stabilization in the bond market after Wednesday's dramatic move. However, none of this significantly matters in the grand scheme as overall bonds lost a lot of ground this week, and inflation remained higher than the market hoped. Now, we wait for the next significant data that could shift the broader narrative. The Average 30-year fixed mortgage rate ended the week at 7.30%.
Looking Ahead: A Quiet Forecast with Subtle Tremors
In the week ahead, while we're not anticipating the release of any major economic reports potent enough to counteract this week’s upheaval in mortgage rates, a series of second-tier data and significant commentary are on the horizon. Monday will shed light on consumer behavior with the release of the retail sales report, providing insight into consumers’ spending resilience amid persistent inflationary pressures. A decline in spending would be a welcome harbinger for inflationary relief, signaling a consumer-led softening in demand.
Additionally, Monday will unveil the Homebuilder Confidence Index, offering a perspective on the real estate new construction sector's sentiment. Tuesday promises further real estate insights with hard data on new construction through housing starts and building permits. Also, on Tuesday, we will get a look into the industrial sector with production and capacity utilization figures.
In a noteworthy event, Tuesday also features commentary from Fed Chair Jerome Powell at a policy forum. His address is eagerly awaited, as it will likely touch upon the interpretation of recent inflation and economic data and its implications for future central bank policy.
The labor market will once again come into focus on Thursday with the release of initial jobless claims. These claims, alongside existing home sales figures, will offer a glimpse into the impact of rising interest rates on the early stages of the spring home-buying season. Rounding out the week, the Leading Economic Indicators (LEI) report, though comprehensive, will offer a retrospective look, lagging by nature.
Expectations for the upcoming week center on mortgage rates finding their footing, establishing a new norm after breaking out from the previous two months' trading range. This could be a pivotal period for gauging market sentiment and economic trajectory as the landscape adjusts to the latest shifts in rates and Fed rate cut expectations.
Next week's notable economic reports:
Monday - Retail sales, Home Builder Confidence.
Tuesday - New construction ( permits & starts), Jerome Powell Speaks
Wednesday - No Reports
Thursday - Jobless Claims, Existing home sales, Leading economic indicators (LEI)
No reports
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