Weekend Talking Points - 'Wealthier'

Authored By:
Scott Bradley Brixen
John Smith
January 1, 2023
5 min read

The Fed meets on March 20 and is expected to keep rates on hold. If anything, the data over the last week (CPI, PPI, retail sales) gave the Fed more reason to be cautious about cutting too soon. Core inflation is coming down, but slowly.

A mixed bag from the February jobs report. The BLS report showed that the economy added 275,000 jobs in February, well above expectations of 200,000. But the “blowout” +353,000 jobs figure from January (which helped propel mortgage rates back above 7%) was revised down by 35% to +229,000! And the unemployment rate rose from 3.7% in January to 3.9% in February. [Bureau of Labor Statistics]

So was the January “blowout” just a fakeout? On its own, the February jobs “beat” would have sent bond prices down and mortgage rates higher. But for the first time in a while, the market actually paid attention to that chunky downward revision to the January number. (Over the past year, the BLS has almost always revised its initial monthly jobs figure downward, often significantly, but the market never seemed to care.)

Note: If you’re wondering how the number of jobs can go up and yet the unemployment rate can rise, you’re not alone. Without going into too much detail, the BLS report features two different surveys. The +275,000 jobs figure comes from the Establishment Survey. The 3.9% unemployment rate comes from the Household Survey. The two surveys often paint very different pictures of the labor market. Finally, if the labor force (denominator) grows faster than the jobs do (numerator), the unemployment rate rises.

Listings continue to rise. The latest weekly data from Realtor.com saw new listings rise 15.8% year-over-year and total active inventory climb 21.7% YoY. This is the best inventory situation we’ve seen since 2020…but before you get too excited, we’re still down 30–40% compared to 2017–2019 levels. [Realtor.com]

CPI lower but slower than we’d like. The “headline” CPI figure rose to +3.2% YoY in February, up from +3.1% YoY in January. Higher energy prices (gasoline, natural gas etc.) were the main driver of the increase. The “core” CPI figure (which excludes fuel and food prices), declined to +3.8% YoY from +3.9% YoY. The market had been expecting +3.7% for “core”. [BLS]

Reminder: The Fed cares more about “core” than “headline” inflation, and it cares more about PCE “core” (out on March 29) than it does CPI “core.” Either way, the decline in core inflation has been painfully slow, held up by housing costs, which according to the BLS “accounted for roughly two thirds of the total 12-month increase in the [“core” CPI] index.”

Climb in MBS Highway Housing Index paused in March. The strong, upward trajectory in the MBSHHI experienced over the prior three months paused in March 2024, as mortgage rates reversed course and moved back above 7%. There was significant regional variation, however, with the Northeast and Mid-Atlantic regions getting even hotter, while the Southeast and Southwest regions lagged. [More on this later.]

Wholesale inflation up on higher energy prices. PPI (Producer Price Index = inflation for businesses) rose to +1.6% YoY in February, up from +1.0% in January. That’s still very low, but the direction is somewhat concerning as PPI tends to lead CPI/PCE (inflation for you and me).

Still shopping. After declining 1.1% month-over-month in January, retail sales bounced back 0.6% MoM in February. Auto sales drove the recovery, reversing from -2.1% MoM in January to +1.6% MoM in February.

House proud. Over the course of 2023, the total home equity of mortgage holders rose 8.6% or $1.3 trillion. And the average home equity per borrower was $298,000. [CoreLogic]

Definition: Home equity is the market value of your home minus the remaining mortgage balance. So home equity goes up as: 1) your home price rises, and 2) you make principal payments.

Mortgage Market

This job is making me moody. Or maybe it’s just DST. Last week, I was excited to see the bond market finally paying attention to the consistently negative revisions to the BLS jobs growth numbers. This week, it’s Depressame Street again, with mortgage rates approaching 7% on data releases (CPI, PPI, and retail sales) that weren’t exactly “misses”, but weren’t “beats” either.

We already know that the Fed won’t do anything at its meeting next week. But we will get Fed members’ latest “dot plot” forecasts for where they think the Fed Funds Rate will be over the coming year. I have a bad feeling that they’ll change for the worse (fewer rate hikes, further out), although the market already seems to have already priced that in.

Current odds of a Fed rate cut:

  • March 20: 1% (down from 3% last week)
  • May 1: 4% (way down from 22% last week)
  • Jun 12: 63% (down from 69% last week)
They Said It

“For the 20th consecutive week, newly listed homes have surpassed levels from a year ago. This may be even better news for home shoppers than the overall growth in active inventory because a jump in new listings means fresh options — crucial for buyers with a specific must-have list. As the spring market picks up, more sellers tend to enter the market, and this early pickup could mean even more options for buyers.” — Realtor.com Weekly Update

“Buyers who can afford to may want to get serious about their home search now, as housing costs are unlikely to fall anytime soon. The uptick in listings should be another motivator for buyers: There’s more to choose from, and improving inventory may bring out more competition from other buyers as we get further into spring. Some buyers have already gotten the memo, with mortgage applications finally increasing after weeks of declines.” — Chen Zhao, Redfin’s Lead Economic Researcher

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