✅MORTGAGE RATES DECLINING HOME ACTIVITY ON THE RISE✅
WELCOME TO 2024
January 9, 2024
The Bureau of Labor Statistics (BLS) reported the addition of 216,000 jobs in December, surpassing the expected 170,000. However, this positive news is tempered by downward revisions to the October and November figures, reflecting a collective reduction of 71,000 jobs. Despite these fluctuations, the unemployment rate remains stable at 3.7%, slightly below the anticipated 3.8%.
Approaching the headline job growth for December with caution is prudent, given historical trends indicating potential downward revisions. Last year's cumulative reduction of nearly half a million jobs from initial reports serves as a clear example of this pattern.
The Jobs Report encompasses two surveys: the Business Survey, which models and estimates the headline job figure, and the Household Survey, offering a more real-time assessment based on household employment status. Surprisingly, the Household Survey indicates 683,000 job losses. Another noteworthy indicator, the average weekly hours worked, experienced a slight decline, equating to a loss equivalent to 2 million jobs across the labor force.
On a more positive note, the ADP Employment Report paints a brighter picture for the private sector, with an addition of 164,000 jobs in December, particularly in service industries. Annual pay increases for job stayers and changers have moderated from previous highs.
However, the latest Job Openings and Labor Turnover Survey (JOLTS) presents a contrasting view, showing job openings at a two-year low and a decline in hiring and quit rates. Remote work and multiple-state job postings may be influencing this data. Unemployment filings during the holiday season suggest a complex labor market scenario, with initial jobless claims decreasing, but continuing claims indicating challenges for those seeking employment post-layoff.
While some aspects of the labor market exhibit resilience and growth, others highlight underlying challenges and uncertainties, reflecting a dynamic economic landscape. The labor market plays a significant role in the Federal Reserve's decision-making process, with a 10% decrease in rate cut expectations since last week's job news. While the markets anticipate a Fed pivot in 2024, caution is advised in delivering this news.
Balancing the desire for tamed inflation and lower rates with the potential challenges posed by a quick spike in buyer activity and low inventory is crucial. Mortgage rates impact purchasing power, a critical factor in the economic equation. The recent decline in mortgage rates from their 2023 peak offers some relief, emphasizing the substantial difference in payment when buying with a 6.5% rate compared to an 8% rate.
In the four weeks leading up to December 31, the median mortgage payment in the United States saw a noteworthy decrease to $2,361, marking a substantial $372 (14%) reduction from the previous record high in October. This figure represents the lowest point observed in almost a year. This decline aligns with a decrease in mortgage rates, which, by the end of December, had dropped to 6.61%, a significant retreat from the 23-year peak of 8.03% recorded in late October.
As mortgage rates retreat, there are visible indications of renewed interest in early-stage homebuying. Buyers are seizing the opportunity presented by these lower rates, coupled with a notable 10% year-over-year increase in new listings. The Redfin Homebuyer Demand Index, which monitors requests for tours and other homebuying services, has surged by 10% compared to the previous month, reaching its highest point since August. Moreover, the rate of decline in pending sales has slowed, registering only a 3% annual decrease, reflecting the smallest drop observed in two years.
FED INDICATE RATE CUTS IN ‘24
The recent minutes from the Federal Reserve's December meeting indicate a notable shift in perspective among Fed members, suggesting the potential for rate cuts in 2024. This change is largely attributed to the successful management of inflation, as reflected in the decrease in Core Personal Consumption Expenditures—the Fed's preferred inflation measure that excludes the often unpredictable food and energy sectors. The Fed also expressed concerns about the potential economic risks associated with maintaining an "overly restrictive" monetary policy for an extended period.
Following a series of aggressive rate hikes—totaling eleven increases since March 2022—aimed at tempering economic growth and controlling inflation, the majority of Fed participants now entertain the possibility of reducing the benchmark Fed Funds Rate by the end of the year. However, specific details regarding the timing and extent of these rate cuts remain uncertain, as the minutes did not provide explicit information on their implementation.
In a cautious stance, the Fed highlighted the existence of "an unusually elevated degree of uncertainty" in the current economic environment. This statement underscores that while rate cuts are under consideration, the prospect of additional rate hikes has not been entirely ruled out. The Fed emphasizes its commitment to maintaining flexibility in its monetary policy, prepared to adjust its course as necessary based on evolving economic conditions and data. This balanced approach underscores the Fed's vigilance in navigating the complex dynamics of economic recovery, inflation control, and financial stability.
As a side note, historical data since 1970 reveals that the 10-year US Treasury yield typically declines by an average of 0.9% in the three months preceding the first Fed rate cut in a cycle. Currently, the market anticipates the first rate cut on March 20, less than three months away, making it a development worth monitoring closely.
The Fed dot plot serves as a visual representation of the interest rate projections put forth by individual members of the Federal Reserve's Federal Open Market Committee. Each dot on the chart signifies a member's perspective on the future trajectory of interest rates. While the Fed dot plot offers insights into the expectations of Federal Reserve officials, its accuracy in predicting future interest rates is varied. The projections are subject to change based on evolving economic conditions and unforeseen events. Consequently, while the dot plot is valuable for grasping the current sentiments of the Fed, it should not be regarded as an absolute forecast of forthcoming rate movements.
During the most recent Fed meeting, a noteworthy departure from the trend of rate hikes emerged, with significant mentions of potential upcoming cuts. The market's initial tendency to overestimate rate hikes has now shifted to a possible overestimation of rate cuts. It's important to note that a rapid decline in rates may lead to an increase in home prices as more buyers enter the market, intensifying concerns about affordability. While lower rates can motivate sellers to act, there is a potential for demand to outpace supply. As a result, conditions may soon become more dynamic, presenting an opportune time for making offers and engaging in negotiations.
On January 6, Federal Reserve Bank of Dallas President Lorie Logan issued a cautionary statement, suggesting that the U.S. central bank might need to resume elevating its short-term policy rate to prevent a recent decline in long-term bond yields from reigniting inflation.
Logan, in remarks prepared for delivery at an American Economic Association conference in San Antonio, Texas, highlighted the importance of maintaining sufficiently tight financial conditions. She expressed concern that without such measures, there could be a risk of inflation resurging and undermining the progress made. Logan emphasized that given the recent easing in financial conditions, the possibility of another rate increase should not be ruled out at this point.
When voting members of the Fed articulate their views, the market pays attention, and this week, four members of the Fed are expected to speak.
Significant market movements are anticipated with key inflation reports, starting with the release of December's Consumer Price Index on Thursday. Additionally, the Producer Price Index, gauging wholesale inflation, is scheduled for reporting on Friday.
Investors will closely monitor Thursday's delivery of the latest Jobless Claims. Furthermore, attention will be directed towards Wednesday's 10-year Note and Thursday's 30-year Bond auctions to gauge the level of demand.
Amid these considerations, Lawrence Yun, chief economist at the National Association of Realtors, conveyed optimism about the housing market. He stated that the worst in home sales and housing affordability is in the past, anticipating a year of recovery in home sales.
WEALTH STRATEGY OF THE WEEK
Inflation remains a persistent factor in our economic landscape, gradually diminishing the purchasing power of your money over time. To shield your wealth against inflation, particularly in light of potential future increases influenced by factors like decarbonization spending and labor shortages, adopting a proactive strategy is imperative.
Outlined below are three straightforward steps to safeguard your wealth from the erosive effects of inflation:
Prudent Cash Management: Inflation erodes the value of cash, making it essential to limit excess cash holdings. While maintaining some cash for emergencies or investment opportunities is wise, hoarding large amounts that depreciate in value over time should be avoided.
Invest in Tangible Assets: Instead of holding onto cash, consider allocating funds to physical assets. Real estate, although presenting challenges in the current market, remains a common choice. Alternatively, explore options like gold, which has a historical track record of preserving value during inflationary periods.
Select Stocks with Pricing Power: Opt for investments in companies that possess the ability to raise prices without jeopardizing customer loyalty, such as those with strong brand allegiance or unique product offerings. These companies tend to exhibit resilience even in times of inflation.
By adhering to these guidelines—minimizing excess cash, investing in tangible assets, and making astute stock choices—you can enhance your ability to shield your wealth from the adverse impacts of inflation.
