🚨DECEMBER FED MEETING🚨
BIG WEEK AHEAD
December 12, 2023
Let's begin with a brief overview. In the latest update, the Job Openings and Labor Turnover Survey (JOLTS) for October revealed a notable decline in job openings, dropping to 8.7 million from the previous month's 9.4 million, falling short of expectations. The hiring rate held steady at 3.7%, marking the lowest point since the pandemic-related shutdowns. Meanwhile, the quit rate remained at 2.3% for the fourth consecutive month, indicating a decreased inclination among employers to entice workers with new job offers. It's worth noting that the dip in job openings may be somewhat overstated due to the surge in remote work, leading to job listings appearing in multiple states. However, these figures alone do not provide the complete picture.
Moving to Friday's update from the U.S. Bureau of Labor Statistics, the creation of 199,000 jobs was reported, slightly surpassing the anticipated 180,000. Yet, revisions for September and October resulted in a combined reduction of 35,000 reported jobs. The unemployment rate saw a decline from 3.9% to 3.7%, which is positive news; however, it may not be the ideal outcome for mortgage rates. This rate is derived from the Household Survey, known for its immediacy as it involves direct outreach to households to assess employment status. The survey also indicated a noteworthy increase of 747,000 jobs, many of which are part-time positions.
Additionally, the report highlighted a 0.4% uptick in average hourly earnings for November, surpassing expectations. Despite this, the annual growth in earnings has slowed to 4%, suggesting a diminished inflationary impact from wages. When people earn less, or even think they’ll be earning less, spending habits change.
Key Insight: The recent update on Friday shifts expectations for rate cuts in 2024 from March to May. It's crucial to closely monitor how developments in the labor sector and inflation will influence the Federal Reserve's decisions on interest rates. Fed Chair Jerome Powell has consistently emphasized that planning for rate cuts is premature, underscoring the importance of understanding headlines before dissemination.
While there are indicators of weakness in the labor market, the overall demand for labor is on a downward trend. Despite this, the current unemployment rate stands at 3.7%, a relatively low figure that contradicts recessionary concerns and underscores the market's resilience in the face of rate hikes. Notably, there are 1.342 job opportunities available for every individual seeking employment—a positive sign indicating a robust labor market. This figure brings us closer to the pre-Covid growth rate, signaling a normalization of the labor market. The labor market's trajectory is a pivotal factor in the Federal Reserve's decision-making process.
Key Events This Week:
1. November CPI Inflation data - Tuesday
2. OPEC Monthly Report - Wednesday
3. November PPI Inflation data - Wednesday
4. Fed Rate Decision and Statement - Wednesday
5. Retail Sales data - Thursday
6. Initial Jobless Claims – Thursday
All attention is set to focus on the upcoming two-day Federal Reserve meeting starting this Tuesday, culminating in the release of the Monetary Policy Statement and a press conference on Wednesday. The Federal Reserve is expected to closely scrutinize the inflation data scheduled for release this week, specifically November's Consumer Price Index (CPI) on Tuesday and Producer Price Index (PPI) on Wednesday. These key indicators will likely play a significant role in shaping the Fed's stance and decisions during the meeting.
Projections:
The anticipated headline Consumer Price Index (CPI) reading is expected to fall within the range of 3-3.1%, a slight decrease from the previous 3.2% on a year-over-year basis.
Core inflation is expected to see a 0.3% increase from its current level of 4%, with some anticipating a figure of 4.1%. The Core reading differs by excluding food and energy prices from the calculation.
Despite these inflation projections, it's anticipated that the Federal Reserve will maintain its current stance and refrain from hiking or cutting rates during this week's meeting.
For the second consecutive month, the nationwide average price of regular gasoline experienced a significant drop. November recorded a 7.8% decrease, following a 5.6% fall in October. If gasoline prices remain stable, there's potential for another substantial decline in December.
The Consumer Price Index (CPI) plays a pivotal role in influencing the Federal Reserve's decisions regarding the federal funds rate. A rising CPI could prompt the Fed to increase rates to mitigate spending and cool the economy, thereby alleviating inflationary pressures. Conversely, a low inflation or deflation indication in the CPI may lead the Fed to consider rate cuts, aiming to stimulate borrowing and spending to bolster economic activity. However, some argue that it might be premature to stimulate economic activity given the persistent high prices in various sectors, such as groceries, housing, and other goods and services, resulting in potential inflationary consequences.
In light of last week's job market developments and the expected inflation data this week, substantial improvements in mortgage rates are not anticipated. Forecasts for potential Fed rate cuts in the coming year remain subject to change, particularly after Wednesday's press conference, warranting close monitoring.
THE UPDATE ON RATE CUTS
Last week, there was a 65% probability that the Federal Reserve would initiate its first rate cut in March 2024. Currently, market expectations are leaning towards rate cuts starting in May 2024, approximately 10 months after the last rate hike.
Examining historical patterns provides valuable context: after raising rates to 2.5% in December 2018, the Fed made a 0.25% rate cut by July 2019, a span of 7 months. In June 2006, rates were increased to 5.25%, followed by a cut to 4.75% 15 months later. The cycles in 2000-01 and 1995 had respective timelines of 8 months and 5 months. These historical perspectives highlight the cyclical nature of rate adjustments, a trend subject to change based on evolving economic conditions, especially in an election year.
Fed Chair Jerome Powell's reminder underscores a cautious approach: "It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy if it becomes appropriate to do so."
This week, further insights are expected from Jerome Powell. The prevailing expectation is that the Fed will maintain a watchful stance, observing market responses to the existing rate environment. With a robust job market, controlled spending, reduced debt, and an anticipated stable inflation, there appears to be insufficient data supporting the need for rate cuts at this juncture.
Inflation in the United States is showing a gradual decrease, as indicated by the October Personal Consumption Expenditures (PCE) report, a pivotal measure of inflation. The report revealed no change in overall inflation for the month and a decline in the annual rate from 3.4% to 3%. The core PCE, closely monitored by the Federal Reserve and excluding food and energy prices, experienced a slight increase of 0.2% in October. However, its annual rate dropped from 3.7% to 3.5%, marking the lowest level in over two years. This development swiftly altered market perspectives on potential rate cuts.
The significant reduction in inflation since its peak last year is evident, with the current overall rate at 3% and the core rate at 3.5%. Examining the last six months, the core PCE hovers around 2.4%, closely aligning with the Federal Reserve's target of 2%.
This recent improvement in inflation could play a pivotal role in the Federal Reserve's decision-making process, potentially leading to a pause in rate hikes at their upcoming meeting on December 13. The outcome of this week's job market news will likely contribute to this decision, especially if the numbers come in below expectations.
HOUSING MARKET PERDICTION FOR 2024
Affordability has been a prominent topic throughout the year, and as we enter 2024, there is optimism for lower mortgage rates and programs designed to assist prospective buyers. The recent decline in rates is expected to contribute to an increase in inventory, thereby stimulating real estate transactions. Notably, mortgage rates experienced a significant fluctuation, rising from 2.65% in 2020 to 8.03% last October, and currently resting at 7.03%. This shift has notably impacted market demand in response to the evolving financial landscape.
The challenge of housing affordability stems from the fact that home prices have outpaced wage growth. In 2023, the typical monthly payment for a home surged to a record $2,715, reflecting a 12.6% increase from 2022. In contrast, average household income only grew by 5.2%, reaching approximately $78,642. This income growth has struggled to keep pace with the rising costs of housing.
The surge in mortgage expenses for homebuyers can be attributed to the Federal Reserve's interest rate hikes aimed at curbing inflation. Although the average rate for a 30-year mortgage reached a 23-year peak of 7.79% in October, it has slightly decreased to 7.22%. Despite this reduction, it remains significantly higher than the pandemic-era low of 2.65%, contributing to the altered dynamics of the housing market.
Elevated mortgage rates have dampened demand from potential homebuyers, while home prices continue to rise due to a shortage of available homes. The median home price in 2023 reached an all-time high of $408,806. Many homeowners are opting not to sell, as moving to a new home would mean relinquishing their existing low mortgage rates. The dynamics of the real estate market are poised for potential changes in the upcoming year.
Redfin Senior Economist Elijah de la Campa characterized 2023 as the "least affordable year for housing in recent history," attributing this to a confluence of factors including inflation, high prices, surging mortgage rates, and a constrained housing supply. Despite this challenging backdrop, there is optimism as affordability is already showing signs of improvement heading into the new year.
De la Campa highlighted several positive trends that are contributing to this positive outlook. Mortgage rates are on a downward trajectory, providing relief to potential homebuyers. Additionally, more homeowners are listing their homes for sale, increasing the available inventory. Furthermore, there is a notable pool of sidelined buyers, eagerly waiting to enter the market with the emergence of fresh inventory. Redfin anticipates these favorable conditions to persist and further improve in 2024, offering a more promising landscape for those navigating the housing market.
BUILDING WEALTH THROUGH REAL ESTATE
The 2022 Survey of Consumer Finances (SCF) reveals a substantial wealth gap between homeowners and renters, emphasizing the importance of homeownership in wealth accumulation. The median homeowner boasts 38 times the household wealth of a renter, a trend observed across all income levels.
For families in the bottom 20 percent of incomes, the contrast is stark, with median net worth reaching nearly $147,000 for homeowners and only $3,400 for renters. Housing emerges as the primary contributor to net worth for a majority of households, and an intriguing pattern emerges—the lower a household's income, the more significant the proportion of their wealth derived from homeownership.
In households with middle-range incomes, home equity constitutes approximately 37% to 68% of their total net worth. Conversely, for those in the top 10% income bracket, home equity makes up only about 23% of their net worth. This data underscores the pivotal role of homeownership in wealth accumulation, particularly for lower and middle-income families.
The key takeaway emphasizes that the optimal time to buy a home is when it aligns with one's financial capacity. Prospective buyers are encouraged not to hesitate in exploring their financial options and determining how much they can be approved for today. This approach ensures informed and empowered decision-making in the pursuit of homeownership.
If you would like your personalized buying strategy and know how much you can be approved for please don’t hesitate to contact me.
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