MBS Road Signs

Week of July 29, 2024 in Review

The Fed held rates steady but hinted that the time for a cut may be approaching. Plus, there were more signs that the labor sector is weakening while home prices hit a new high. Here are last week's headlines:

·         Fed Holds Rates Steady, Hints at September Cut

·         Weak July Jobs Report More Indicative of Real Picture

·         Private Payrolls Hit Lowest Level Since January

·         JOLTS, Jobless Claims Show Labor Sector Weakness

·         Home Prices Hit New Record High

·         Pending Sales Jump Higher in June

Fed Holds Rates Steady, Hints at September Cut

After eleven rate hikes since March 2022, the Fed once again left their benchmark Federal Funds Rate unchanged at a range of 5.25% to 5.5%. This decision was unanimous and marks the eighth straight meeting they held rates steady.

The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. The Fed has been aggressively hiking the Fed Funds Rate throughout this cycle to try to slow the economy and curb the runaway inflation that became rampant over the last few years.

What's the bottom line?

Cooling consumer inflation combined with signs that the economy and job market are slowing have led to growing calls for the Fed to begin cutting their benchmark Fed Funds Rate. While Fed Chair Jerome Powell did not commit to a rate cut at their next meeting on September 17-18, he said the Fed thinks that the time is "approaching and if we do get the data that we hope we get, then a reduction in our policy rate could be on the table at the September meeting."

Weak July Jobs Report More Indicative of Real Picture

The Bureau of Labor Statistics (BLS) reported that there were 114,000 jobs created in July, which was well below estimates of 175,000. Negative revisions to May and June shaved 29,000 jobs from those months combined. The unemployment rate rose from 4.1% to 4.3%, which is the highest level since October 2021.

What's the bottom line?

There were signs of labor sector weakness throughout this report. Not only was the headline job number (which comes from the report's Business Survey) well below estimates, the report's Household Survey showed an even lower number of job gains, at just 67,000. This latter figure is considered more real-time because it's derived by calling households, whereas the Business Survey is based on modeling and estimations.

In addition, the number of people employed part-time for economic reasons rose by 346,000 to 4.6 million in July. These are people who would have preferred full-time employment but were working part-time because their hours had been reduced or they were unable to find full-time jobs. The number of people who could only find part-time work rose by 51,000.

Regarding wages, average hourly earnings were below estimates while average weekly earnings declined.

Private Payrolls Hit Lowest Level Since January

Job creation among private employers slowed for the fourth straight month, per ADP's Employment Report, which showed employers added 122,000 new jobs in July versus the 150,000 that had been forecasted. Large gains in trade and transportation, construction, and leisure and hospitality were offset by losses seen in the information and professional and business services sectors.

Small businesses also continue to struggle, as those with fewer than 50 employees lost 7,000 jobs. This is compared to 132,000 new jobs added among medium and large companies combined.

What's the bottom line?

Job growth is clearly slowing, while annual pay gains also decelerated for both job-stayers (+4.8% from +4.9%) and job changers (+7.2% from +7.7%). The Fed is watching this closely, as it can help alleviate wage-pressured inflation. Nela Richardson, Chief Economist, ADP, noted, "With wage growth abating, the labor market is playing along with the Federal Reserve's effort to slow inflation. If inflation goes back up, it won't be because of labor."

JOLTS, Jobless Claims Show Labor Sector Weakness

The latest Job Openings and Labor Turnover Survey (JOLTS) showed that job openings fell slightly to 8.184 million in June, well below the high of 12 million hit in 2022. The hiring rate fell to 3.4%, which is the lowest level in ten years not including COVID, while the quit rate remained a low 2.1%. A low quit rate suggests there is less poaching from other companies and fewer people feel confident about finding new employment.

In addition, the latest week's reporting showed that the number of unemployment claims that were filed rose to the highest levels of the year. First-time filers as measured by Initial Claims totaled 249,000, while 1.877 million people are continuing to receive benefits after filing their initial claim.

What's the bottom line?

We continue to see more weakness in the labor market, with less hiring, fewer people quitting their jobs, and rising unemployment claims. The Fed will be closely watching upcoming labor sector reports as they weigh monetary policy and the timing for rate cuts this year, given their dual mandate of price stability and maximum employment.

Home Prices Hit New Record High

The Case-Shiller Home Price Index, which is considered the "gold standard" for appreciation, showed home prices nationwide rose 0.3% from April to May after seasonal adjustment, breaking the previous month's all-time high. Home values in May were also 5.9% higher than a year earlier, following a 6.4% gain in April.

The Federal Housing Finance Agency's (FHFA) House Price Index also reported that home prices were unchanged from April to May, with prices 5.7% higher than the previous year. Note that FHFA does not include cash buyers or jumbo loans, and these factors account for some of the differences in the two reports.

What's the bottom line?

National home values continue to set new all-time highs, and housing still proves to be one of the best investments and vehicles for wealth creation. S&P DJI's Head of Commodities, Brian D. Luke, confirmed, "The waiting game for the possibility of favorable changes in lending rates continues to be costly for potential buyers as home prices march forward." Luke added that Case-Shiller's home price index "has appreciated 4.1% year-to-date, the fastest start in two years."

Pending Home Sales Jump Higher in June

Pending Home Sales rose 4.8% from May to June per the National Association of REALTORS® (NAR), coming in well above estimates of a 1% rise. Sales were 2.6% lower than they were a year earlier, though this is an improvement from May's -6.6% year-over-year comparison. This report measures signed contracts on existing homes, making it an important forward-looking indicator for closings on these homes as measured in the Existing Home Sales report.

What's the bottom line?

The Pending Home Sales index reversed course after declining in April and May, with NAR's Chief Economist, Lawrence Yun, explaining, "The rise in housing inventory is beginning to lead to more contract signings. Multiple offers are less intense, and buyers are in a more favorable position."

Family Hack of the Week

It's National Peach Month and this easy and delicious Peach Crisp from Allrecipes is a perfect choice for a summertime dessert. Yields 8 servings.

Preheat oven to 350 degrees Fahrenheit. Evenly arrange 4 cups sliced peaches in an 8x8-inch baking dish. Mix 1/2 cup all-purpose flour, 1/2 cup brown sugar, 1/2 cup cold butter, 1 teaspoon cinnamon, and 1/4 teaspoon salt in a bowl using a pastry cutter until crumbly. Fold 1 cup rolled oats into flour mixture.

Sprinkle topping evenly over peaches, pressing down lightly. Bake until crispy and golden brown on top, around 30 minutes. Serve warm, topped with your favorite vanilla ice cream.

What to Look for This Week

A much quieter week is ahead, highlighted by the latest Jobless Claims on Thursday.

SOURCE: MBS Highway Marketing Newsletter (7/29/2024).