Monday: Quiet Anticipation: Markets Brace for Imminent Economic Updates
The week opened on a subdued note with no economic reports released on Monday. With the heavyweights of economic indicators—the Consumer Price Index, the employment data, and the Federal Open Market Committee's meeting—not due until the following weeks, Monday sets the stage for the market to hold a subdued tone, with the expectation for muted interest rate volatility for the current week.
The absence of major economic revelations, save for the lone figure of Friday’s Personal Consumption Expenditures Price Index, suggests that the market may well be in a holding pattern, with investors and analysts alike poised for a placid interval.
However, it's important to remember that the economic landscape is meticulously crafted with each data point, painting the broader economic picture one stroke at a time. Consequently, even though rate fluctuations are predicted to be muted, this doesn't diminish the importance of each economic indicator—every datum contributes to shaping our comprehensive understanding of the economic trajectory.
Mortgage rates echoed this calm, commencing the week where they left off last Friday, with the average 30-year fixed rate mortgage holding steady at 7.43%.
Tuesday: Warning Signals: PMI Dips as Economic Slowdown Takes Hold
Tuesday unveiled the S&P Purchasing Managers' Index (PMI). Esteemed for its pulse-taking of financial decision-makers across industries, it provides early insights into the economic health of both the service and manufacturing sectors covering aspects like production levels, new orders, inventory levels, supplier deliveries, and employment. These elements are crucial because they reflect the managers' perspectives on future industry conditions, making the PMI a leading indicator with cascading effects on key economic measures such as the CPI and employment figures.
In a turn of events, the index recorded surprising results: Business confidence plummeted to its lowest level since November, with business activity notching only a fractional uptick, presenting signs of contracting demand and a labor market in retreat. The year-to-date output growth, mirroring this sentiment, marked its lowest level year to date, reflecting a retrenchment in new sales pervading both the manufacturing and service landscapes.
For the first time in a six-month span, the index noted an annual downtick in new orders—a movement that precipitated a recalibration of employment strategies unseen in the last four years. As companies grappled with this ebbing demand, both input and output prices experienced a welcome reprieve in April, signaling potential easing on the inflationary front.
The PMI output gravitated to 50.9, teetering at the expansion baseline and marking a discernible regression from March's 52.1 figure. The service sector, bearing the brunt, delineated the steepest fall in output growth in over 5 months and witnessed a contraction in new orders for the first time in half a year—elevated interest rates and escalated prices being the culprits curtailing demand. Employment trends mirrored this downturn; the paucity of demand and order inflows propelled firms to taper off hiring initiatives, marking the inaugural employment contraction since the midpoint of 2020. Barring the pandemic-induced anomalies, this deceleration in service sector hiring was the most pronounced since the end of 2009 during the global financial crisis.
This paradigm potentially portends a future where the impetus of inflation shifts from service-led pricing to the manufacturing realm, buoyed by the uptick in commodity and energy costs—a narrative I've previously entertained. Yet, there’s a silver lining for mortgage rates, signaling a softening demand, which dovetails with the Federal Reserve's rate elevation strategy. Moreover, the labor market’s descent, while unwelcome for Main Street, portends well for inflationary trends, as a decelerated wage growth trajectory, especially in the service sector, which is the dominant employer in the private sector, could usher in more circumspect consumer expenditure patterns in anticipation of stagnant wage horizons.
The day rounded up with the release of new home sales data for March. Sales climbed 8.8% from February and registering an 8.3% year-over-year increase. The recent 18-month period has chronicled a discernible shift towards new construction homes, with homebuilders capitalizing on the dearth of resale properties—a circumstance attributed to sellers’ reluctance to relinquish the advantageous interest rates secured during 2020 and 2021.
Bolstered by the PMI's revelations of economic weakness, interest rates receded. This is a good sign as it shows that the bond market still sees value and responds to the less polarizing reports and what their data reflects, which affirms what I mentioned at the beginning of this article: that every report matters. Reflecting the day’s developments, the average 30-year fixed-rate mortgage wound down at 7.38%, its lowest in a week.
Wednesday: Midweek Mortgage Metrics: Reading the Tea Leaves of Homebuyer
Midweek arrived absent of major economic disclosures, but as always, the Mortgage Bankers Association reliably provided a key metric for the pulse of the housing market through its mortgage applications volume data.
The figures painted a subdued picture: Refinance applications dwindled by 6% and were down 3.8% from the same time last year. The purchasing applications, not immune to the trend, recorded a 1% downturn—remarkably, its fifth slump in the span of six weeks, underscoring a 15% decrease relative to the analogous week in 2023. This contraction in application volume sends a clear signal—a harbinger of dwindling demand as fewer applications mean fewer potential buyers.
In response to the market's escalating mortgage rates, buyers pivoted towards adjustable-rate mortgages (ARMs). These offerings, laced with greater risk but baited with lower initial interest rates, saw a 7.6% uptick in applications from the previous week.
Absent significant economic revelations, Wednesday unfolded with a monotonous rhythm in the realms of rates and the bond market. The average 30-year fixed mortgage rates held their ground at 7.38%, relatively unchanged from Tuesday.
Thursday: Sentiments"GDP Insights: Economic Softening and Surging Inflation Concerns
The release of the initial jobless claims on Thursday imparted a narrative consistent with recent weeks, depicting a labor market demonstrating slight ebbs but holding steady within a narrow range. The claims edged down to 207K, a modest decline of 5K from the preceding week's revised figures, with the four-week moving average similarly ticking down to 213K.
Continued claims also painted a portrait of resilience, dipping beneath the 1.8 million mark to 1.78 million. In tandem, the numbers for the prior week's continued claims were recalibrated downwards by 16K to 1.79 million. This gradual downtrend was further mirrored in the four-week moving average, which contracted to 1.794 million, a decrease of 7,250.
Furthermore, total claims across all programs witnessed a notable drop of 79K, with a year-over-year uptick of 3%. This tightening spread of total claims on a year-over-year basis over successive reports bespeaks the robustness of the labor market's backbone.
Next up was pending home sales, a leading indicator of forthcoming transactions, which ascended by 3.4% in March. Though the annual comparison revealed a scant increase of 0.1%, quite minuscule but, hey let’s have a glass half full mindset. At least it's trending upwards, not downwards. However, with projections from NAR forecasting a 9% upswing and my own forecasts leaning towards a 10% increase in sales for 2024, a crossroads emerges: for a substantial uptick in sales to materialize, either a descent in rates must ensue or home prices must retreat, thereby enhancing affordability.
The most significant data released on Thursday came from the Bureau of Labor and Statistics unveiling the GDP estimates for Q1 2024 (January-March). This report in particular, is a bit unique because it is one of 4 times each year that the GDP report also incorporates quarterly PCE data and because it is released a day before Friday’s more detailed and monthly PCE report, it gives the market a head start to try and calculate and speculate what the Friday report will detail.
The GDP data entered the fray significantly below forecasts, with an annualized rate of growth at a mere 1.6%—a figure starkly divergent from the market’s anticipation of a decrease from the prior year’s 3.4% to around 2.2%.
The drivers of growth were primarily consumer spending on services—less surprising considering the vigorous retail sales report of the preceding week—and an uptick in residential fixed investments. On the flip side, the contractions in consumer spending on goods and a reduction in private inventory investments signified that businesses were throttling back on stockpiling goods and services.
Typically, a deceleration in economic growth heralds a potential recalibration of fiscal policy, as it may hint to the Federal Reserve that the prevailing monetary policy could be overly constrictive, thereby warranting a reduction in rates to preempt a potential economic downturn or recession. Yet, the undercurrents of this particular report carried a more complex narrative: it encompassed data from the quarterly Personal Consumption Expenditures (PCE) Price Index, which notched a 3.4 percent increase, overshadowing the 1.8 percent rise from the previous quarter, Q4 2023. The core PCE price index ascended by 3.7 percent, outpacing an earlier increase of 2.0 percent from last quarter.
Most importantly the hot quarter inflation data gave the market a cause to pause and generate immediate concern that Friday’s monthly PCE price index would also come in hotter than expected.
The reaction to potential inflation reacceleration from the market was swift and pronounced, with interest rates surging in tandem with the unanticipated inflationary signals. This surge in rates, fueled by concerns that the PCE price index might presage further inflationary heat, cast doubts on the previous expectations for imminent rate cuts.
Thus, despite the GDP report's ostensibly positive implications, they were rendered moot as the inflation data, surpassing anticipations, drove interest rates to breach the 7.5 percent mark—a pinnacle not seen since the previous November. The day concluded with the average 30-year fixed mortgage rates anchoring at 7.52%, a stark reminder of the market's sensitivity to inflation trajectories.
Friday: PCE Revelations: A Tug of War Between Growth and Inflation
Friday's release of the Personal Consumption Expenditures (PCE) index left the market somewhat disoriented as the previous day's GDP report had already signaled a substantial uptick in the PCE price index. This initially sent ripples of concern through the bond market, driving interest rates higher in its wake. However, this was reflective of the aggregated data for the first quarter, spanning January through March.
Diving into the specific data for March, the PCE and core PCE—which excludes the more volatile food and energy sectors—increased by 0.3%, aligning perfectly with market expectations. Year over year, the core PCE was up 2.8%, maintaining consistency with forecasts. How did this congruence come about? The earlier months of January and February saw upward revisions in PCE figures, adjustments that were already accounted for in Thursday's report. Therefore, rather than a significant hike in March's figures, the increase was effectively distributed over the preceding months. Moreover, the GDP's annualized metrics extrapolated a three-month pattern to a twelve-month forecast, which indicated a 3.7% rise in the price index. But Friday's report allowed for a direct comparison between March of the previous year and March 2024, revealing a stabilized core inflation rate at 2.8%, identical to February's rate.
This revelation offered the bond market, and consequently the rates, an opportunity to stabilize. The data provided a sigh of relief, suggesting that while inflation may not be retreating rapidly, it isn’t spiraling unchecked—an important consideration for the Federal Reserve as it contemplates future rate adjustments.
Consumer sentiment, however, remained steadfastly unchanged for the third consecutive month, hovering within a remarkably narrow 2.5 index point range, significantly below the 4.8 points needed for a meaningful divergence. The long-term business outlook ascended to its zenith since June 2021, although personal finance perceptions saw some softening. The month observed varied shifts across different demographics, with Republicans noting a dip in sentiment in contrast to the more constant figures among Democrats and Independents. Youthful consumers expressed a rise in confidence, while the sentiment among middle-aged and older adults either held steady or waned slightly. Overall, the consumer base projected a sense of ongoing uncertainty regarding the economic future, especially in light of the impending election results.
Inflation expectations for the year ahead inched up modestly from 2.9% to 3.2%, while long-term forecasts also saw a slight increase from 2.8% to 3.0%. These expectations have stayed within a tight range of 2.9-3.1% for the majority of the past 33 months, indicating a persistently elevated stance compared to the pre-pandemic range of 2.2-2.6%.
Despite the initial turmoil induced by Thursday’s PCE report, by the end of Friday, the rates experienced a recalibration, erasing much of the week's gains to close nearly where they started. The average 30-year fixed-rate mortgage nestled at 7.45%, a reflective pause as the market assimilated the week’s influx of economic data.
Looking Ahead:
As the calendar pages turn, the coming week looms large, with pivotal economic data set to hit the wires. The lineup includes a significant jobs report and an FOMC meeting, anticipated to bring clarity on interest rate decisions for May. This confluence of influential and consequential factors could well serve as a watershed moment for the trajectory of interest rates and the guiding principles of Federal Reserve monetary policy.
The week’s curtain raises on Tuesday with the Employment Cost Index, a measure of the evolving price tag of labor for employers, reflecting the woven fabric of wages and benefits over time. This metric offers a panoramic view of the labor market and the inflationary pressures—or the absence thereof—emanating from wage growth. Tuesday also delivers the Consumer Confidence Survey, a pulse-check on the collective economic sentiment of households.
Wednesday comes packed with the ADP jobs report, providing a granular look at job openings and wage trends within the private sector. Accompanying this is the ISM Manufacturing Report. Capping the day, Jerome Powell is set to helm another FOMC press conference, posturing to unveil a statement from the Fed regarding its rate decisions for May. The import of these meetings on the bond market cannot be overstated, with every nuanced phrase or a subtle shift in tone from Powell dissected for hints on the economic landscape and future policy moves.
On Thursday, we turn to initial jobless claims alongside U.S. productivity figures, including unit labor costs—a gauge of how much output each worker generates relative to their compensation. Although trailing the real-time economic pulse, these figures are crucial in gauging whether heightened wages are being matched by productivity gains. Businesses failing to see such alignment may face the pressure to scale back their workforce to recalibrate costs.
The week reaches its crescendo on Friday with the release of the major monthly Jobs Report—an event the market anticipates with bated breath each month. It will shed light on job availability and the unemployment rate for April. An environment of abundant job openings coupled with low unemployment could stoke concerns within the bond market, potentially driving interest rates upwards. Conversely, signs of a cooling labor market and a tick-up in unemployment could prompt a welcome downturn in mortgage rates.
The ISM Services Report, which offers insights into the service sector—a segment that could reflect the weaknesses highlighted in this week's S&P PMI report—will also be in the spotlight on Friday.
In summary, next week is primed for volatility, with potential swings contingent upon how closely the incoming data adheres to forecasts. Should the figures align with projections, we might witness mortgage rates maintaining their current range. Yet, as with all things economic, only time will unveil the true impact. We stand watchful for the ripples these reports will send across the financial landscape, ready to interpret and understand their profound implications.
Next week's notable economic reports:
Monday - No reports Scheduled
Tuesday - Employment cost index, Consumer confidence
Wednesday - ADP employment report, ISM Manufacturing, Job Openings, FOMC press conference
Thursday - initial Jobless claims, Unit Labor cost
Friday - US employment report, ISM Services
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