☝🏾MORTGAGE RATES REACT TO RETAIL SALES, PEOPLE ARE SPENDING MONEY

THIS WEEK’S MARKET MOVING NEWS FOR THE WEEK OF APRIL 15TH

April 16, 2024
 

This week, a series of significant events are poised to exert influence on interest rates and financial markets:

1. March Retail Sales Data (As of 04/15): The latest retail sales figures are under close scrutiny by investors to discern consumer spending trends, pivotal for economic growth forecasts and inflation expectations. March witnessed robust growth in retail sales, surging by 0.7%, surpassing the anticipated increase of 0.3%. Moreover, February's figures were revised upward from 0.6% to 0.9%, indicating even stronger previous performance. Excluding auto and gas sales, there was a notable 1% increase, signaling widespread consumer spending. Core retail sales, a crucial component of GDP, soared by 1.1%, significantly exceeding the expected 0.4% rise. This robust performance, along with revisions reversing previous declines, underscores resilience in consumer spending. As a result, the likelihood of a rate cut in July now stands below 50%. The bond market reacted sharply to this news, selling off after the release, and rates are up again today.

2. Fed Chair Powell Speaks (Tuesday): Federal Reserve Chair Jerome Powell's statements hold significance for understanding the central bank's monetary policy stance, particularly concerning interest rates and inflation management.

3. Existing Home Sales Data (Thursday): The forthcoming release of existing home sales data will provide crucial insights into the state of the housing market, influencing mortgage rates and broader economic sentiment.

4. Philly Fed Manufacturing Index (Thursday): This index, measuring manufacturing activity in the Philadelphia region, can signal broader economic trends, shaping market expectations for growth and inflation.

5. S&P 500 Earnings Reports (~10%): As a substantial portion of S&P 500 companies unveil earnings, market sentiment may fluctuate based on corporate performance and outlooks, impacting investor risk appetite and market dynamics.

6. Federal Reserve Speaker Events (Throughout the Week): With a total of 13 Federal Reserve speaker events scheduled, investors will closely monitor policymakers' comments for any indications regarding future monetary policy decisions, including interest rate adjustments.

These events unfold amidst heightened geopolitical tensions, adding another layer of uncertainty to market dynamics. As geopolitical risks escalate, investors may display increased risk aversion, potentially impacting asset prices and interest rate movements. Vigilant observation of these developments is warranted.

WILL WE SEE RATE CUTS IN SEPTEMBER?

In March, the most recent Consumer Price Index (CPI) report revealed a higher-than-forecasted inflation rate, marking a 0.4% uptick from February. On an annual basis, CPI escalated to 3.5% from 3.2%.

The Core measure, which excludes the volatile elements of food and energy prices, also climbed by 0.4%, registering an annual figure of 3.8%, slightly surpassing expectations. This pattern mirrors recent months' trends, attributed to the escalating costs of energy and shelter, thereby intensifying pricing pressures.

Regarding fuel prices, California currently leads with the highest average of $5.46 per gallon of regular gas, while Colorado boasts the lowest average at $3.06 per gallon.

Although inflation has subsided since its peak in 2022, the pace of decline has slackened, postponing anticipated rate cuts until September of this year.

Regarding employment, a softening job market accompanied by a surge in unemployment could potentially nudge the Fed towards contemplating rate cuts at an earlier juncture. However, March's Jobs Report painted a picture of robustness overall, highlighted by a decline in the unemployment rate, which may not hasten the schedule for rate modifications. The unemployment rate decreased to 3.8%, coupled with the creation of over 300,000 new jobs. The rationale behind this is straightforward: businesses tend to refrain from hiring if they're not generating profits. This dynamic serves as yet another indication to the Fed that the economy is thriving notwithstanding the elevated rates.

In March, wholesale inflation, gauged by the Producer Price Index (PPI), experienced a modest 0.2% rise, slightly under initial estimations. However, the annual increase in PPI to 2.1% surpassed expectations, while Core PPI remained in line with forecasts. Despite the favorable monthly PPI figures, they failed to counterbalance the market impact following the high CPI readings. Mortgage rates surged last week and continued their upward trend today. Consequently, the average 30-year rate has now escalated to 7.44%.

HIGHER RATES FOR LONGER

Here's an overview of the impact of prolonged higher rates across various sectors:

For Borrowers:

- Credit Card Rates: Currently at a historic high of 21.6%, credit card holders are grappling with increased interest expenses on their outstanding balances. The sustained elevation in rates escalates the cost of carrying credit card debt, potentially straining household budgets.

- New Car Loans: With rates standing at 8.57%, borrowers seeking auto financing face higher monthly payments. Elevated rates may deter some buyers or prompt them to opt for shorter loan terms to mitigate interest costs, influencing affordability and purchasing decisions.

- Mortgage Rates: Approaching 7.5%, mortgage borrowers are encountering heightened borrowing costs, impacting monthly mortgage payments. Higher rates could dissuade potential homebuyers or lead existing homeowners to refinance under less favorable terms, thereby affecting housing market activity and potentially reducing inventory.

For the Government:

- Interest Expense on US Public Debt: Soaring to a record $1.02 trillion over the past 12 months, higher interest rates amplify the government's interest payments on outstanding debt. This diversion of funds from other priorities could potentially impact government spending and fiscal policy. Notably, government spending is a significant contributor to inflation, with concerns lingering as the pandemic-induced spending spree continues to cast a shadow.

For Savers:

- Savings Yields: Savers stand to benefit from higher rates as they earn increased yields on their savings. While the national average rate on savings accounts remains low at 0.47%, savvier savers can explore alternative options such as money market funds, high-yield savings accounts, or direct investment in Treasury bills to earn yields exceeding 5%. These higher yields present an opportunity for accelerated savings growth, particularly if the Federal Reserve refrains from rate cuts.

For Investors:

- Bond Yields: Investors may observe a gradual increase in bond yields as markets recalibrate their expectations regarding interest rates. Although the 10-year Treasury yield is expected to rise, the trajectory may not be meteoric given the possibility of rate cuts later this year. Nonetheless, this scenario could prove advantageous for fixed-income investors, offering an opportunity to secure higher income, especially with real yields now in positive territory. Additionally, if the Fed opts for rate cuts, bond prices could experience further appreciation, boosting yields.

- Stock Market Volatility: Despite recent market fluctuations spurred by unexpected inflation data, experts advise adhering to a long-term investment strategy and bracing for volatility. Temporary market downturns could present opportune moments for investors to capitalize by purchasing stocks at lower prices. Similarly, in bond markets, such fluctuations could be leveraged to bolster investments and generate enhanced income over time.

HOME PRICES AND HIGH RATES

I've emphasized countless times that affordability is an ongoing concern, and this graph exemplifies that point. Despite what headlines may suggest about declining home prices, let's examine the reality.'

Please note, this graph depicts Canadian prices, while the figures for homes in the US are provided below.

In February 2024, the median price of single-family homes in the United States saw a rise to $411,887, up from $402,079 in January, reflecting the ongoing trend of escalating home prices in the country.

Over the span from 1968 to 2024, the average price of single-family homes in the United States stood at $137,671.22.

The highest recorded median price hit an all-time peak of $416,000 in June 2022, marking a significant surge in housing costs compared to the rates observed today.

Conversely, the lowest recorded median price was a mere $19,700 in January 1968. These figures vividly depict the dynamic nature of the real estate market in the United States, characterized by both remarkable growth and periods of economic downturn throughout its history.

In February 2024, the total housing inventory in the United States expanded to 1.07 million units, a slight uptick from 1.01 million units in January of the same year, indicating a modest increase in housing supply.

Over the period spanning from 1982 to 2024, the average housing inventory in the United States stood at 2.26 million units. The highest recorded inventory peaked at 4.04 million units in July 2007, flooding the market.

Conversely, the lowest recorded inventory was 860,000 units in January 2022. This data highlights how low inventory, coupled with low rates, forms the ideal conditions for rising prices.

These figures depict the fluctuations in housing inventory over the years, showcasing how market conditions can shift between periods of ample supply and times of constrained availability. Despite these variations, the underlying trend remains consistent: home prices tend to rise over time. While rates are high, competition may be lower, but the driving force behind stable and rising home prices is often low inventory. Opting to purchase a house within one's means becomes increasingly sensible in such a market.