Preparing for Market Moves: Navigating CPI and PPI News on Wednesday and Thursday
MARKET MOVING NEWS FOR THE WEEK OF 09.11-09.15.23
Let’s Recap Last Weeks News:
The array of Fed speakers last week provided strong indications that the Fed might be inclined to put a hold on rate hikes during their upcoming meeting on September 20. Noteworthy comments came from influential members, such as New York President John Williams, who expressed confidence that monetary policy is currently "in a good place" and is achieving its intended effects. While he emphasized the importance of remaining flexible based on incoming data, his overall tone suggested a preference for pausing rate hikes this month.
Dallas Fed President Lorie Logan also weighed in, suggesting that skipping a rate hike this month "could be appropriate." She acknowledged that further tightening might still be necessary to reach the Fed's 2% inflation target. Philadelphia Fed President Patrick Harker echoed this sentiment, hinting that the Fed may be reaching a point where it needs to "hold rates steady."
It's essential to remember that the Fed has been steadily increasing its benchmark Fed Funds Rate to cool down the economy and combat inflation. The most recent hike in July marked the eleventh consecutive increase since March of the previous year, bringing the Fed Funds Rate to its highest level in 22 years.
The Fed has been closely monitoring signs of a softening labor market as a key factor in considering further rate hikes. Recent data from the Bureau of Labor Statistics (BLS) reveals a clear decline in job growth. Notably, the June job creation figures were revised significantly downward, from 209,000 to just 105,000 after two months of revisions – a substantial adjustment. The unemployment rate has also risen slightly, from 3.6% to 3.8%.
The Fed has been eagerly awaiting a less robust labor market, and recent indicators suggest it may be materializing. Year-over-year job growth has slowed to 2%, the lowest since 2021. Wage growth stands at 4.3% year-over-year, and quit rates are at 2.3% year-over-year, both hitting their lowest levels since 2021. While new jobs surged after a sharp decline during the COVID-19 pandemic, the job market appears to be stabilizing, with fewer new job openings and fewer people leaving their jobs, signaling a slower job market.
Wage growth remains a focal point for the Fed, and the current environment of reduced labor demand and the slowest wage growth since 2021 suggests that the Fed's strategy is yielding results. It's worth recalling that the unemployment rate soared to 14.7% during the height of the pandemic. Although our economy continues to expand, the pace of growth is finally moderating. Without a significant downturn, the Fed is unlikely to halt its rate-hiking agenda.
Taken together, all signs seem to point toward another pause in rate hikes at the forthcoming Fed meeting on September 20.
MARKET MOVING NEWS THIS WEEK: KEY WORD INFLATION
Important inflation reports are on the horizon, with August's Consumer Price Index scheduled for release on Wednesday, followed by the Producer Price Index on Thursday, offering insights into wholesale inflation. These reports hold particular significance as they are the last ones before the upcoming Fed meeting.
According to projections from researchers at the Cleveland Fed, we can anticipate a notable uptick in month-on-month CPI inflation for August. This increase is primarily attributed to a more than 6% month-on-month surge in gasoline prices. However, when we exclude food and energy from the equation, the core CPI is expected to show a 0.4% month-on-month rise. While this figure is higher than the preceding two months, it carries less weight with the Fed than broader trends in critical categories.
In addition to overall inflation levels, the Federal Reserve is closely monitoring inflation within the service sector, which encompasses various areas like healthcare and financial services. The Fed's interest lies in the fact that service prices have been on the rise, driven by increasing wages. Given the recent slowdown in wage growth, there is a possibility that service prices may also stabilize. The Fed is diligently tracking this data for emerging patterns, although recent data has provided some reassurance.
Furthermore, the Fed is paying close attention to trends in home prices. It's worth noting that the Consumer Price Index (CPI) lags behind the latest changes in home prices, as much of the pricing data relies on lease rates that are often adjusted annually. Consequently, CPI data for housing costs takes several months to catch up with the most recent trends in home prices.
The Fed anticipates a decline in inflation for housing expenses, particularly in rent prices, which are showing signs of cooling down. Currently, U.S. rents are 1.2% lower than they were a year ago, marking the most significant decline since December 2020. The decrease in home prices during late 2022 and early 2023 will eventually be reflected in the CPI data as well, although there will be a delay before it becomes evident.
Summary:
We are witnessing a slowdown in the creation of new jobs, with the unemployment rate on an upward trend. The upcoming inflation report in September is expected to send mixed signals. While gas prices are likely to contribute to a spike in the report, cooling shelter costs will help level out expectations. Based on the current data and the incoming inflation reports, it seems unlikely that the Fed will raise rates this month. The Fed's decision to pause could have a positive impact on mortgage rates, and we'll be closely monitoring developments as they unfold.
An improvement in mortgage rates is not only appealing to potential homebuyers but also to sellers who are holding onto their properties, hesitant to sell if they can avoid it. Lower rates could motivate sellers to act. For the first time since the 2007 financial crisis, existing home prices might surpass new home prices, possibly by December. People are willing to pay more for existing homes, driven in part by substantial builder incentives, and the fact that 90% of existing mortgages have rates under 5%.
A break in mortgage rates would be welcomed by many, and it appears that moment is drawing nearer. If the Fed decides to pause and maintains rate stability throughout the year, it would be considered positive news. Ideally, we'd like to hear the Fed discussing not just a pause but also the possibility of a rate cut in the future.
FRIGHTENING HEADLINES ABOUT CONSUMER DEBT: WHAT YOU NEED TO KNOW
The apprehension surrounding Americans accumulating excessive debt and potentially endangering the economy may not be entirely justified. According to Moody's data derived from Equifax credit records, the total amount of debt has increased by a modest 3.5%. Additionally, the debt-to-income ratio remains low and stable, and individuals are effectively managing their debt obligations.
Earlier in the year, there were valid concerns as people were taking on more debt through credit cards, unsecured personal loans, and auto loans. However, borrowing has since decelerated due to several factors, including a slower rate of inflation, which has bolstered people's purchasing power, and stricter lending criteria. Moreover, borrowing against home equity has nearly halted due to higher mortgage rates, resulting in reduced housing-related transactions.
Although the overall delinquency rate on household debt remains low, primarily due to minimal mortgage delinquencies, delinquency rates on credit cards, personal loans, and auto loans appear to have reached their peak. This trend is attributed to recent loans outperforming those issued a year or two ago, with individuals consistently meeting their financial obligations.
The expiration of the student loan payment moratorium is unlikely to substantially elevate delinquency rates on other forms of debt. Student loan borrowers are expected to prioritize payments on their other debts, and non-payment of student loans won't be reported to credit bureaus until September 30, 2024. It's important to note that all mortgage applicants with student loans are assessed with a proposed payment of 0.5-1% of the existing balance, and students have the option to enter into an income-based repayment plan with their loan servicer, often resulting in a payment obligation of $0.
Debt remains a valid concern for low-income households; however, most Americans have refrained from accumulating additional and unmanageable debt burdens. This resilience contributes to a strong economy that can withstand fluctuations in Fed interest rates.
When it comes to alarming headlines, it's crucial not to get caught up in the sensationalism. Conduct your own research and tailor your financial planning according to your specific goals and circumstances.
Let’s Start the Conversation…
Headlines often create confusion, and the concept of affordability is deeply personal. Let's set up a time to connect, and together, we can proactively plan for your financial future. During our conversation, we will delve into the following key topics:
1. **Credit**: We'll discuss how your credit score can influence your purchasing power and explore strategies to enhance your creditworthiness as you prepare to make a home purchase.
2. **Down Payment Assistance Programs**: I'll provide insights into the various nationwide programs that can assist you with your down payment.
3. **Debt Ratios**: We'll demystify how debt ratios are calculated and their significance in the homebuying process.
4. **Student Loans**: If you have student loan payments that are currently deferred, we'll explore whether you can still pursue homeownership.
5. **Down Payment Requirements**: We'll clarify the down payment requirements for your specific situation.
6. **Payment Ranges**: I'll guide you in understanding what you can comfortably afford, ensuring that your mortgage payments align with your financial goals.
7. **Entrepreneurs**: If you're an entrepreneur or self-employed, we'll discuss mortgage options tailored to your unique income structure.
8. **Q&A Session**: I'll draw upon my 20 years of experience to address any questions you may have, helping you feel confident and well-prepared as you embark on your journey to find a home.
Don't hesitate to jot down any questions you may have in advance; I'm here to provide expert guidance and support as you navigate the path to homeownership.
