Monday: Subdued Start with a Focus on Labor Market Equilibrium and Rate Predictions
As we know, the biggest economic data points the Central Bank is paying attention to and the impetuses directing monetary policy at the moment are the labor market and inflation. Reflecting on last week, which saw an array of pivotal data releases with an intense focus on employment. from the Employment Cost Index (ECI) to the Job Openings and Labor Turnover Survey (JOLTS), the ADP Employment Report, and the Bureau of Labor Statistics Employment Report, the narrative was clear. Collectively, these reports depicted a labor market inching towards equilibrium, with wage growth moderating towards historical norms and the ratio of job openings to unemployed individuals narrowing closer to long-term averages. This shift suggests a more balanced labor market, where jobs remain available but fewer employees are quitting in pursuit of better opportunities, reflecting a gradual erosion of employee leverage. Notably, the unemployment rate edged up to 3.9%, and the economy added only 175,000 jobs in April—well below the recent monthly average of 242,000.
This data bodes well for the Federal Reserve, as a balanced labor market forms one half of the equation necessary to address inflation and set the stage for the Fed to reengage the path to potential rate cuts in 2024. This positive news from the labor market is a primary driver for the decline in interest rates over the last two weeks.
The other half of this equation—the demand side—will come into sharper focus this week with the release of the Producer Price Index on Tuesday and the critical Consumer Price Index (CPI) released on Wednesday. These reports are poised to significantly influence the direction of interest rates for the coming weeks until the next round of market-moving data arrives.
Despite a quiet Monday, the undercurrents suggest we may be on the cusp of a shift. As we assess the economic indicators from the first four months of the year, which have largely stalemated monetary policy due to stubborn inflation prompting the Central Bank to pull back on its optimism and suggest rates may need to be higher for longer, one wonders: could a softer demand outlook herald a new narrative for the latter half of the year, steering the economic ship towards normalcy and a possible soft landing?
The day concluded with the average 30-year fixed mortgage rate declining by 4 basis points to 7.12% from Friday’s 7.16%, likely propelled by the continuing momentum from the previous week’s employment data.
Tuesday: Producer Price Puzzle: Navigating Unexpected Inflation Signals
Tuesday saw the release of the Producer Price Index (PPI), a measure reflecting the prices that producers pay for their inputs for goods and services. Recognized as a leading indicator, the PPI gives insights into future consumer prices as producers often pass cost increases onto consumers. Any increases which subsequently surface in the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) inflation reports.
The headline numbers came in higher than expected at 0.5%, against the anticipated 0.3%, with nearly 75% of this increase attributed to a 0.6% rise in services—the segment that has exhibited the most stubborn inflation over the last 18 months. The core PPI, which excludes the volatile categories of food, energy, and trade services, saw a month-on-month increase of 0.4%, up from 0.2% in March. Additionally, the index noted a pickup in annual velocity, as the demand excluding food, energy, and trade services rose 3.1%, marking the largest advance since the 3.4% climb for the twelve months ending in April 2023.
Despite the spike in April’s PPI data, the markets reacted with moderation, likely due to the index's inherent volatility. A significant revision to the March numbers was revised downward from a 0.2% increase to a decline of 0.1%. While the April PPI did not deliver remarkable news, the revision carried considerable weight, suggesting that recent monthly figures might also see future adjustments. However, the increase of 0.5% is viewed as unsustainable in the long term and therefore remains a point of focus going forward.
Interest rates ended the day slightly lower at 7.11%, as the market appears to be in a holding pattern, likely awaiting Wednesday’s CPI report before making any decisive directional moves.
Wednesday: Inflation Eases: CPI Delivers Promising News for Rate Optimists
This Wednesday delivered the week's most anticipated report—the Consumer Price Index (CPI). For the first time in 2024, the CPI brought good news for those rooting for lower rates, with a headline number showing a monthly increase of 0.3%, below the market's expectation of a 0.4% rise and a slowdown from March's 0.4% increase. Shelter and gas prices drove 70% of the monthly increase for the all items index. Core CPI, excluding more volatile elements like food and energy, also increased by 0.3%, coming in below the anticipated 0.4%.
The narrative of the CPI reflected a sensible outcome, indicating that the Fed’s tight monetary policies are effectively dampening demand. The declining items, which included new and used cars, home furnishings, and appliances, were unsurprising given as these are often financed through interest-rate-sensitive loans.
Year-over-year, the all items index rose 3.4%, slightly less than March's 3.5% increase. The core index rose 3.6% on a year-over-year basis, a deceleration from 3.8% in March. This was particularly positive news for the markets, countering the prevailing narrative of persistent, accelerating inflation suggested by the previous month's CPI report. The data confirmed that while inflation remains above the Fed’s 2% target, the increased Fed funds rate is having its intended effect. With the shelter component expected to roll over and reflect the more present trends of flat rents and stagnant owner's equivalent rent, reaching the 2% inflation target could happen sooner than anticipated.
The Retail Sales report, also released on Wednesday, indicated a potential cooling in the consumer sector. Following a robust previous month that showed a 0.7% increase, this month’s retail sales were flat month-over-month, significantly below the expected 0.4% increase. Year-over-year, sales were up 3%, but given that retail data doesn’t adjust for inflation—and we just got the newest CPI report which showed year-over-year inflation at 3.5% its probable that the apparent increase in retail sales is likely attributed to rising prices rather than actual increases in nominal sales. Adjusted for inflation, real retail sales might be flat or even negative depending on the category.
Additionally, February to March retail sales figures were revised down from a 0.7% increase to 0.6%, further validating the day's CPI report that consumer demand is responding to Fed actions, and there's hope that inflation could trend downward again.
It is important to not that the retail sales report doesn’t include all the same components as the CPI as retail sales do not incorporate a lot of services spending such as travel, lodging, and restaurant spending. But it still is a strong reflection of the direction in which consumer spending is headed.
The day also saw the release of the Home Builder Confidence Index, which declined for the first time since November 2023. All components—current sales conditions, six-month sales expectations, and traffic of prospective buyers—showed declines. This downturn isn’t surprising given that interest rates have hovered above 7% for most of 2024. Survey responses highlighted that rising rates were sidelining buyers and emphasized the need for fiscal support for builders to help increase supply and alleviate shelter-related inflation pressures. Notably, 25% of builders cut prices, a slight increase from the previous month, though the average price reduction remained steady at 6%.
The Mortgage Bankers Association's weekly report showed a 0.5% increase in mortgage application volumes, with refinancing applications up 5% from the previous week and 7% year-over-year. Many homeowners who secured mortgages at rates above 7.5% are starting to capitalize on the recent rate declines. However, the purchase index fell 2% from the previous week and was down 14% year-over-year, reflecting that despite the drop in rates over the last 2 weeks purchasing application volume has yet to rebound.
The day concluded with a notable dip in mortgage rates; buoyed by the favorable CPI data and tepid retail sales, the average rate on a 30-year fixed mortgage dropped below 7% for the first time since April 4th, settling at 6.99%. This flurry of positive economic data offers a glimmer of hope for homebuyers and may herald a more optimistic outlook in the housing market.
Thursday: Building Concerns: Housing Data Reflects Shifting Economic Tides
Thursday's economic landscape was shaped by the release of initial jobless claims, and the results came in rather muted. Weekly Initial claims landed at 222,000, which was 10,000 fewer than last week's revised number but still above the market's expectation of 219,000. The four-week moving average edged up by 2,500 to 217,000, and continued claims rose slightly by 13,000, settling at 1.784 million.
Additionally, total claims for benefits across all programs for the period ending in April showed a minor decrease of 10,000 from the previous week, yet they were up almost 5% from the same time last year.
On the housing front, new construction data indicated a shift in market dynamics. Building permits declined by 3% from the revised March numbers and were down 2% year-over-year. However, housing starts showed a positive movement, up 5.7% compared to March, though they experienced a slight drop of 0.6% from the previous year. Housing completions surged by 10.3% from March, with single-family homes leading the increase by 15.4%. This marked the most significant completion rate for single-family homes seen in a year. Despite this uptick, the issuance of building permits for single-family homes hit a seven-month low.
This sequential process from permit to completion is inherently linear, suggesting that the recent rise in completions is a lagging indicator of market conditions from a year ago or possibly even longer during a time when builders were enthusiastic about demand and developing new housing inventory due to the stifled resale market in an attempt to gain market share. The slowdown in permit issuance is a reflection of the current housing market and outlook and aligns with the decrease in builder confidence reported on Wednesday and tells a story of dwindling optimism in demand outlook and future production as a slowdown in permit issuance will inevitably lead to softer start and completion numbers in the months ahead offering a bleak outlook for the increase in production needed to establish a better supply and demand dynamic in the housing market.
By the end of the day, the interest rate for the average 30-year fixed-rate mortgage saw a modest increase, ending at 7.02%. This slight uptick reflects ongoing market adjustments and hints at the nuanced influences affecting housing affordability and market activity.
Friday: Leading Indicators Decoded: Economic Headwinds Challenge Growth Outlook
The week, which began quietly, hit a dramatic midpoint and is concluding on a subdued note similar to its start. The only major economic data released on Friday was the Leading Economic Indicator (LEI), which decreased by 0.6% in April to 101.8 after declining by 0.3% in March. While this indicates an accelerating decline on a month-to-month basis, over the past six months, the LEI has contracted by 1.9%, a rate considerably slower than the 3.5% decline observed in the preceding six months.
The report highlighted several factors contributing to the economic outlook: elevated inflation, higher interest rates, rising household debt, and a depletion of pandemic-era savings. Although the LEI no longer signals an imminent recession, it suggests that economic headwinds could persist, with GDP growth projected to remain below 1% in both the second and third quarters of 2024.
Mortgage rates ended the week notably higher at 7.09%. This increase was not triggered by any specific economic data or announcements from the Fed, but rather as a market response to the significant progress made over the past two weeks. April concluded with rates at 7.51%, which then dipped to 6.99% by Wednesday. Such significant movements—either upward or downward—often require the market to take time to digest and consolidate. This was evident on both Thursday and Friday as bond market investors began to exit their positions and strategize for the next market-moving economic release.
Next week's notable economic reports:
Monday - No reports Scheduled
Tuesday - No reports Scheduled
Wednesday - Existing home sales, Release of Fed meeting minutes
Thursday - Initial jobless claims, S&P flash services and manufacturing PMI, New home sales
Friday - Consumer Sentiment
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