Weekend Talking Points - 'Brace Brace'

In a normal market, flat PCE (inflation), slower job growth and contracting GDP would have caused a rally in bond prices and a fall in bond yields (and mortgage rates). But with the market braced for widespread economic impact, pre-tariff data is being largely ignored.

Case-Shiller: Price growth slowed, but still strong. Case-Shiller’s national home price index rose 0.3% month-over-month in February, with year-over-year price growth decelerating to +3.9% (from 4.1% previously). [More on this later]

TP: In February, six of the big city indexes decreased month-over-month, up from just one (Tampa) in January. I’ll be watching this closely as the year progresses.

Pending home sales boosted by lower rates. In March, average rates on 30-year mortgages were 20–30 basis points lower than in February. That, together with more homes available for sale, was enough to lift NAR’s Pending Home Sales Index (“PHSI”) by 6.1% MoM to 76.5 — an index level consistent with existing home sales of 4.2–4.3 million SAAR.

TP: Of course it’s nice to see an increase. But keep in mind that the March PHSI was still down 0.6% year-over-year and that 4.2–4.3 million SAAR is still very low by historical standards!

1Q GDP contracts. Imports surged as companies rushed to get orders in before Trump’s new tariffs took effect. As a result, 1Q GDP dropped by 0.3% quarter-over-quarter. That’s the first GDP decline since 1Q 2022.

TP: The standard formula for GDP treats imports as a negative item. As you no doubt know, we import more than we export (since 1975). Therefore, the net exports (X-M) term is almost always negative for USA GDP.

C + I + G + (X-M) = GDP

C = Private Consumption

I = Private Investment

G = Government Spending

(X-M) = Exports less Imports

Jobs week off to a weak start!
JOLTS: Job openings down significantly. In March, the total number of job openings fell 4% MoM to 7.2 million (-11% year-over-year) as hiring stayed subdued and the quits rate remained low. [BLS]

ADP: Just 62,000 jobs added in April. That was about half of what the market was expecting, and is the lowest monthly figure in nearly a year. Large companies (>500 employees) only added 12,000 jobs, and three of the nine census regions saw net job losses. [ADP]

BLS: 130,000 jobs expected for April. That would be roughly in line with the 3-month moving average. The unemployment rate (“UR”) is expected to be flat at 4.2%. Even a small move higher in the UR (to 4.3%, for example) would likely send bond prices higher (and bond yields lower). The BLS report will be out Friday.

PCE (inflation) for March shows flat prices. When the Fed talks about its 2% inflation target, it’s referring to the “core” PCE (Personal Consumption Expenditures) index. In March, both “headline” and “core” (ex-food & fuel prices) PCE indexes were flat month-over-month, which allowed annual “core” inflation to drop from +3.0% YoY to +2.6% YoY. We’re oh so close! [BLS]

On the Case (Shiller)

The Case-Shiller index is the gold standard for measuring home price growth because it uses the repeat sales method (looking at ‘pairs’ of transactions for the same home) to more accurately gauge true appreciation. However, this accuracy comes at a cost: a nearly two-month time lag.

Overall, the February 2025 results were solid but showed a general deceleration of home price growth. The SA (seasonally-adjusted) national index rose 0.3% month-over-month (vs. +0.6% in January). Still, if you annualize the last 3 months of price growth, you get 5.2% — not bad at all.

As we do each month, we looked at the 20 big city indexes in detail. Here’s what we found:

• The biggest MoM increases came from Charlotte (+0.78%) and New York City (0.75%), while the highest YoY growth came from New York City (+7.7%) and Chicago (+7.0%).
• Six cities saw their seasonally-adjusted price indexes go backwards in February (Dallas, Denver, Phoenix, Portland, San Diego & Tampa). In January, only one city saw a decline (Tampa).
• Tampa’s index has declined in 9 out of the last 12 months. Still, with the Tampa index having risen 69% between end-2019 and end-2024, giving back 1–2% is hardly a disaster!
• There are 6 cities that still haven’t yet fully recovered from the 2H 2022 price falls: San Francisco (-5.0% from peak), Denver (-1.2%), Phoenix (-0.8%), Dallas (-0.7%), Seattle (-0.6%), and Portland (-0.6%). Notably, most of these cities saw their indexes decline in February. In other words, they are getting farther away from setting new highs.

Mortgage Market

With uncertainty (and volatility) at unprecedented levels, average 30-yr mortgage rates have been hovering around 6.8% for several weeks. It is virtually impossible to handicap the full impact of tariffs (inflation up or GDP down?) or the Fed’s reaction. Additionally, new trade “deals”, tariff exemptions, delays, or outright walk-backs could easily flip the script.

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%.

• May 7 FOMC Meeting: 94% probability that the policy rate will remain at 4.25–4.50% (up from 90% last week)! 6% probability of a 25 bps cut (25 bps = 0.25% = a quarter percentage point) to 4.00–4.25%.
• June 18 FOMC Meeting: 33% probability that the policy rate will remain at 4.25–4.50% (about the same as last week). 64% probability that the policy rate will be 25 bps below current (in other words, a 25 bps rate cut at this meeting). 3% probability that rates will be 50 bps below current (a 50 bps rate cut at this meeting).

They Said It

“Unease is the word of the day. Employers are trying to reconcile policy and consumer uncertainty with a run of mostly positive economic data. It can be difficult to make hiring decisions in such an environment.” — Nela Richardson, ADP’s Chief Economist

“Home buyers are acutely sensitive to even minor fluctuations in mortgage rates. While contract signings are not a guarantee of eventual closings, the solid rise in pending home sales implies a sizable build-up of potential home buyers, fueled by ongoing job growth.” — Lawrence Yun, NAR’s Chief Economist