Weekend Talking Points - 'Close Enough?"

Light at the end of the inflation tunnel? The Fed’s preferred inflation gauge — PCE — is getting pretty close to their 2% target. But how close is close enough for the Fed to resume cutting rates?

Encouraging inflation figures. In April, both the “headline” and “core” PCE (Personal Consumption Expenditures) indexes rose just 0.1% month-over-month. That brought annual “headline” PCE down to 2.1% YoY, while annual “core” PCE eased to 2.5% YoY.

TP: As a reminder, when the Fed talks about its 2% inflation target, they’re referring to “core” PCE. So we’re getting really close.

Home price growth is slowing. According to Cotality (the new name for CoreLogic), median home prices rose 0.6% MoM in April. But because that was actually slower growth than normal, annual price growth slipped from +2.5% YoY to +2.0% YoY.

TP: Despite this, Cotality is still projecting 4.3% home price growth over the next 12 months, fairly similar to our MBS Highway forecasts. As a reminder, the latest Case-Shiller data showed prices up 3.4% YoY.

It’s “jobs week” again!
JOLTS: Surprise increase in job openings. The Job Openings & Labor Turnover Survey showed that total job openings had risen by about 200,000 in April to 7.391 million. Wall Street economists were expecting a decline. That said, both the hires rate (3.5%) and the quits rate (2.0%) remained low. In general, companies aren’t confident enough to grow headcount; and individuals aren’t confident enough to jump ship.

ADP: Even weaker job growth. A month ago, ADP reported that private employers added a very modest (60,000) jobs in April. Well, in May, that figure dropped to 37,000 (!!!) — far below Wall Street expectations of around 120,000. Looking deeper into the data, small companies (<50 employees) shed 13,000 jobs, and 5 of the 10 industry categories tracked by ADP saw net job declines.

TP: Remember, ADP is a giant payroll processing company. They KNOW how many people are employed because they write the checks for over 25 million employees! In contrast, the unemployment rate that we’re going to get from the BLS tomorrow is based on a survey of ~60,000 households.

BLS: What’s expected. The all-important BLS jobs report will be out on Friday, June 6. The US economy is forecast to have added 130,000 jobs in May, with the unemployment rate steady at 4.2%. Anything higher than 4.2% could spur Fed members to reevaluate the “pause.”

Inventory levels continue to rise. The May update of Realtor.com’s Residential Listing Database showed that active inventory (which excludes homes already under contract) had risen 31.5% YoY to 1,036,101 units. The last time we had over 1 million homes for sale was December 2019 — just before the pandemic spurred a massive inventory drawdown.

ISM services index dropped into contraction. In May, the ISM Services PMI dropped to 49.9 (<50 = negative), signalling the first contraction in the US services sector seen since June 2024. Driving the negative surprise was a significant drop in the New Orders Index to 46.4 (most likely due to tariffs) — the lowest level in that series in three years. [Institute of Supply Management]

TP: The US economy is dominated by the provision of services (rather than manufacturing), so this is important.

Rents are falling in two-thirds of metros. According to Redfin, asking rents (that’s new rents, rather than renewals) fell YoY in 28 out of the 44 largest metro areas. At the national level, typical rents are only down 1% YoY, but in some markets (Austin -9% YoY, Minneapolis -6% YoY) where new home supply has surged, the declines are more significant. [Redfin]

TP: Redfin also said that the national vacancy rate for multifamily units (buildings with >5 units) had risen to 8.2%, tied for the highest rate. Think about it. That’s like losing 1 month of rent on ALL multifamily units (1/12 = 8.125%).

Mortgage Market

This week, the combination of the weak ADP jobs growth and the ISM Services Index falling below 50 drove a solid reversal in US Treasury yields. The probability of Fed rate cuts rose (but the market is still only expecting 1–2 rate cuts this year), and mortgage rates drifted lower.

Of course, all this could change Friday if the BLS jobs report delivers a surprise.

Here’s what the Fed Funds Rate futures market is currently pricing in for rate cuts. Note that the current Fed Funds Rate policy range is 4.25–4.50%.

• June 18 FOMC Meeting: 99% probability that the policy rate will remain at 4.25–4.50% (no rate cut). This was 98% last week.
• July 30 FOMC Meeting: 70% probability that the policy rate will remain at 4.25–4.50% (down from 78% last week). 29% probability that rates will be 25 bps below current (up from 21% last week). This implies one 25 bps rate cut at this meeting.
• September 17 FOMC Meeting: 58% probability that rates will be 25 bps below current (up from 48% last week). This implies one 25 bps rate cut on either July 30 or Sept 17, but not both. 21% probability that rates will be 50 bps below current (implying a 25 bps rate cut at both the July 30 and Sept 17 meetings).

They Said It

“After a strong start to the year, hiring is losing momentum. Pay growth, however, was little changed in May, holding at robust levels for both job-stayers and job-changers.” — Nela Richardson, ADP’s Chief Economist

“Apartment construction in America has been hovering near a 50-year high, and even though renter demand is strong, it’s not keeping pace with supply. Many units are sitting vacant for months, which means renters have power to negotiate concessions and landlords have less leeway to keep rents high.“ — Sheharyar Bokhari, Redfin Senior Economist

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