⚠️ITS FED WEEK: NEWS ON RATE CUTS INCOMING⚠️
THIS WEEK’S MARKET MOVING NEWS FOR THE WEEK OF MARCH 18TH
March 18, 2024
MARKET MOVING NEWS
MAJOR DEVELOPMENT: The likelihood of a rate cut in June has dipped below 60% following the release of CPI/PPI reports that surpassed expectations. Just a week ago, this probability stood at 74%, dropping from 82% a month prior. The economy is displaying notable resilience.
Let’s delve into the figures:
CPI Inflation Surges for Two Consecutive Months to 3.2%: The Consumer Price Index (CPI) tracks the average prices of various consumer goods and services. The consecutive rise to 3.2% indicates an upward trend in prices, suggesting either a strengthening economy or potential concerns regarding living costs if wages fail to keep pace with inflation.
PPI Inflation Nearly Doubles, Spiking to 1.6%: The Producer Price Index (PPI) gauges changes in the selling prices received by domestic producers. The significant jump to 1.6% suggests marked increases in producer prices, possibly due to heightened demand, rising production costs, or other factors. Continued PPI increases may lead to elevated consumer prices in the future.
US GDP Records Six Straight Quarters of Growth, Projected Over 3% This Quarter: Gross Domestic Product (GDP) represents the total value of goods and services produced within a country. The sustained growth over six consecutive quarters, with a projected over 3% rise this quarter, reflects consistent economic expansion fueled by consumer spending, business investment, and government expenditure.
Unemployment Rate Remains Close to Historic Lows: A low unemployment rate indicates a high proportion of the workforce is employed, signaling a healthy economy with ample job opportunities. However, factors like labor force participation and underemployment should also be considered to fully assess the job market.
US Reports Addition of 4.9 Million Jobs Since 2020: This signifies a notable recovery in the job market following the adverse impacts of the COVID-19 pandemic. The addition of 4.9 million jobs indicates business growth and economic recovery from the pandemic-induced downturn.
Housing Prices Surge Amidst Rising Interest Rates: Typically, higher interest rates lead to increased mortgage rates, potentially making borrowing more expensive for homebuyers. Nevertheless, rising housing prices indicate robust demand for housing and a thriving real estate market. However, affordability concerns may arise, particularly for first-time homebuyers.
Why the hesitation on a Fed rate cut?
The Federal Reserve typically slashes interest rates to spur economic activity. By reducing borrowing costs, consumers are incentivized to spend more and businesses are encouraged to invest, which can help bolster demand during economic slumps or recessionary risks, ultimately preventing deflationary pressures.
However, in a scenario where the economy is thriving amid a high-rate environment, the rationale for a rate cut becomes less clear. So, why the contemplation?
Factors that could potentially throttle economic momentum include a pullback in consumer spending. US Retail Sales data provides a nuanced perspective on consumer behavior:
1. Nominal Growth of 0.8%: Retail sales surged by 0.8% over the past year in nominal terms, indicating an uptick in consumer expenditure. Yet, this data doesn't factor in inflation.
2. Real Decline of 2.3% Post-Inflation Adjustment: Adjusting for inflation reveals a stark reality: retail sales plummeted by 2.3%. This implies that the nominal sales surge failed to keep pace with inflation, resulting in decreased purchasing power for consumers.
3. Deviation from Historical Averages: Current figures trail historical norms, with nominal growth averaging +4.7% and real growth at +2.1%. This signifies a sluggish expansion in consumer spending compared to past trends.
Implications for Consumer Spending:
Inflationary Strain: The disconnect between nominal and real growth underscores the erosive impact of inflation on consumer spending. Despite apparent nominal increases, consumers find their buying power diminished.
Consumer Caution: The subpar growth rates hint at a cautious consumer sentiment, likely stemming from economic uncertainty or apprehensions regarding future inflationary pressures.
Potential Economic Deceleration: Should consumer spending persistently lag, it may herald an impending economic slowdown, given its pivotal role as a growth engine.
While there's semblance of growth in retail sales, the downtrend in real terms suggests consumers grappling with inflationary pressures. Such a trend carries broader implications for the economic landscape, warranting a judicious approach towards monetary policy adjustments.
JOB REPORT REVISED
How does a job count miss by 112,000?
The recent revision in the Bureau of Labor Statistics (BLS) report, marking a downward adjustment of 112,000 jobs, raises eyebrows and prompts scrutiny into the intricacies of job counting:
Revisions Trending Downward: January's initially reported 353,000 job gains underwent a significant downward revision to 229,000, constituting a 35% reduction. This pattern of downward revisions has persisted in 10 out of the last 12 months, hinting that initial estimates of job growth might be overly optimistic.
Government Sector Surge: February witnessed a substantial addition of 52,000 jobs in the government sector, indicating a notable chunk of job expansion emanating from public employment avenues.
Rise in Multiple Jobholders: A conspicuous trend emerges with more Americans taking on supplementary employment. In February alone, 278,000 individuals embraced additional jobs, marking a record high in the number of multiple jobholders. Such behavior could signal financial necessity or a quest to capitalize on available opportunities.
Discrepancy in Job Additions vs. Employment Figures: Despite headlines touting 275,000 job incorporations in February, Zerohedge reports a contradictory drop of 184,000 in the total employed populace. The count of employed individuals stands at 160.968 million, marking its lowest since May 2023. This incongruity stems from the rapid surge in individuals holding multiple jobs, artificially inflating job addition statistics without commensurate growth in employed individuals.
These nuanced signals paint a complex picture: while the labor market displays job growth, underlying dynamics such as reliance on government employment, the prevalence of multiple jobholders, and recurrent downward revisions in job figures cast doubt on the labor market's overall robustness and stability.
The juxtaposition of a weakening job market against persistent inflation underscores the Federal Reserve's quest for fissures within the economic framework, as they seek to navigate through uncertain terrain.
WILL WE SEE RATE CUTS ANYTIME SOON?
Federal Reserve Chair Jerome Powell expressed optimism about the resilience of the U.S. economy during a discussion at the Economic Club of New York, noting that despite earlier predictions of recession, the economy is now exceeding its long-term growth trend.
Recent job market reports offer a mixed picture:
· February Job Growth: The U.S. added 275,000 jobs, surpassing expectations, but revisions to previous months reduced overall job counts. The unemployment rate rose slightly to 3.9%.
· Job Report Surveys: While the Business Survey indicated strong job growth, the Household Survey reported job losses. Additionally, there was an increase in part-time employment and a decrease in full-time jobs, indicating some softening in the market.
· Federal Reserve's Response: Despite recent rate hikes, a cooling job market could prompt the Fed to consider rate cuts sooner than anticipated.
· Private Sector Job Growth: ADP reported lower-than-expected private payrolls growth, mainly in the services sector and larger businesses.
· Job Openings: The JOLTS report showed a slight decline in job openings, hires, and quits, potentially influenced by the rise in remote work.
· Unemployment Claims: Initial claims remained steady, but continuing claims increased slightly. Announced layoffs in February were the highest since 2009.
The job market is showing signs of cooling, with differing signals from various reports. The Fed's response and future job market trends will be crucial to monitor in the coming months. The top three sectors adding jobs are Healthcare, Leisure/Hospitality, and Government.
BIG NEWS AHEAD THIS WEEK
This week, financial news will pivot around a blend of housing data and the Federal Reserve's meeting, carrying significant implications for both the economy and the real estate market.
1. Housing Data:
Builder Confidence (Monday): The National Association of Home Builders will unveil its March index, offering insights into the sentiment prevailing among homebuilders. This serves as a leading indicator for gauging future construction activity.
Housing Starts and Building Permits (Tuesday): February's figures on new residential construction and the issuance of building permits will be disclosed, shedding light on the health of the housing market and prospects for future supply.
Existing Home Sales (Thursday): Data on previously owned home sales will be unveiled, providing a snapshot of demand and activity within the existing home market.
2. Federal Reserve Meeting:
The Fed's two-day meeting, commencing on Tuesday, will culminate in the release of the Monetary Policy Statement and a subsequent press conference on Wednesday. Investors and economists alike will closely scrutinize any hints regarding potential future interest rate adjustments. The Fed's stance on rates holds significant sway over borrowing costs, including mortgage rates, thereby exerting influence on both the housing market and broader economic landscape.
3. Other Economic Indicators:
Jobless Claims (Thursday): The weekly report on individuals filing for unemployment benefits will serve as a pivotal gauge of labor market vitality.
Philadelphia Manufacturing Update (Thursday): An update on manufacturing activity within the Philadelphia region will furnish insights into the health of the manufacturing sector, a vital component of the economy.
This week's data releases and the Fed's meeting carry substantial weight in deciphering the current state of the economy, the trajectory of the housing market, and potential shifts in monetary policy. Of particular interest is the Fed's commentary on recent CPI and PPI reports, with their preferred measure of inflation being the PCE report. Additionally, attention will be drawn to the Fed's remarks on the latest revisions to the BLS report, notably the uptick in the unemployment rate from 3.7% to 3.9%, suggesting a potential cooling off in the job market. The outcome of these deliberations will be pivotal in assessing whether they can counterbalance the persistently stubborn inflationary trends. All eyes are poised to discern the unfolding developments in the days ahead.
INVENTORY ON THE RISE
The housing market is witnessing a notable surge in activity, as indicated by recent data from Zillow:
1. Sharp Increase in New Listings: February saw a remarkable 20.3% month-over-month spike in new listings, marking the most substantial monthly gain since at least 2018. This surge is notably higher compared to recent trends, with new listings standing at 20.8% higher than the same period last year.
2. Expansion in Total Inventory: February recorded a 3.4% uptick in total inventory from January, with a notable 12% increase compared to February 2023. However, it's crucial to acknowledge that inventory levels still fall below those of previous years.
3. Growing Prevalence of Price Reductions: The proportion of listings featuring price cuts has reached 20.1%, signaling a rise in price reductions compared to typical market conditions. Despite this trend, Zillow suggests that most sellers possess adequate equity to absorb price adjustments while remaining profitable relative to their purchase prices.
4. Regional Disparities: Significant regional variations are observed in the surge of new listings. For instance, Dallas witnessed a remarkable 50.7% year-over-year increase, with Minneapolis, Austin, and Tampa also reporting substantial upticks.
5. Anecdotal Insights: Anecdotal evidence from Los Angeles highlights a noticeable increase in listings and for-sale signs, contrasting with previous supply shortages. Unusual occurrences like midday open houses on weekdays are being reported, indicating heightened market activity.
6. Steady Home Value Growth: The typical home value in the United States has soared by 40.8% compared to pre-pandemic levels, reaching approximately $350,000.
In summary, the data suggests a notable shift in the housing market towards increased listings and expanded inventory, albeit with regional disparities. While price reductions are becoming more prevalent, most sellers remain well-positioned to profit from home sales.
WEALTH HACK FOR THE WEEK OF MARCH 18TH- MARCH 22ND
Homeownership has historically been a potent avenue for wealth accumulation, with properties typically appreciating over time, offering tax benefits, and serving as a form of forced savings. Leveraging a relatively small down payment to control a significant asset can further amplify returns on investment, a strategy that has proven successful over decades.
But is now still a favorable time to invest in real estate? Can home prices sustain their upward trajectory?
Despite the rise in home prices and an increase in inventory, the housing market remains robust, buoyed by several factors:
1. Signs of Recovery: Active listings have reached their highest level in a year, with supply showing stability compared to the previous year. Notably, states like Texas and Florida, known for significant new construction, are witnessing a surge in new and active listings.
2. Seller Adaptation: Sellers are adjusting to higher mortgage rates, becoming more willing to list their properties. This gradual improvement in market dynamics indicates a shifting sentiment among sellers.
3. Easing of "Lock-In Effect": Homeowners are increasingly willing to move despite previously locking in low mortgage rates. This alleviation of the "lock-in effect" contributes to market fluidity.
However, challenges persist:
1. Supply-Demand Imbalance: Despite the uptick in listings, there's still significant unmet demand from buyers. This demand-supply imbalance continues to pose challenges, particularly in highly sought-after markets.
2. Affordability Concerns: Elevated mortgage rates and home prices present affordability hurdles for many potential homebuyers. The median U.S. home sale price has seen a substantial year-over-year increase, exacerbating affordability challenges.
Looking ahead, uncertainties loom:
1. Potential Fed Rate Cuts: As the Federal Reserve contemplates interest rate cuts starting in June, the housing market may experience adjustments in equilibrium. However, concerns persist regarding whether supply can keep pace with increased demand once rates improve.
In conclusion, while the housing market exhibits resilience and signs of recovery, challenges persist in terms of supply-demand dynamics and affordability. The impact of potential Fed rate cuts remains uncertain, underscoring the need for cautious observation and strategic decision-making in real estate investment.
