They Don't Know The Fannie Mae Home Purchase Sentiment Index® (HPSI) released this week jumped…
We Understand Better How Little We Understand…
“We Understand Better How Little We Understand Inflation” – Jerome Powell
Three days ago, Fed Chair Powell made this shocking statement at an ECB-sponsored forum on inflation. Let’s face it, the man kind of stuck his foot in his mouth. The Fed is doing a lot right now, they started late, but trying to make up for it. Question is… did they need to do more or less? They don’t know and they are admitting it. This is their job. In fact they only have two jobs.. how do you fail at one of them? Providing jobs for those who want them and controlling the cost of things American’s buy.. that’s it. I constantly remind my amazing husband he only has one job.. of course that job changes every time I bring it up, but still.. just one job. 😉 We are relying on their decades of experience and deep knowledge to adjust monetary policy to provide stability.. not the see saw we’ve all be through the first 6 months of 2022.
So maybe even Powell was surprised to see the bond market’s movement yesterday… I personally was pleasantly surprised!
The PCE (Personal Consumption Index) inflation numbers came out on Thursday with a headline of 6.3%, the same as April. The Core PCE (striping out food and energy) is where the good news was. This showed inflation dropped to 4.7% from 4.9% year over year. But wait a minute? Didn’t the CPI (Consumer Price Index) just come out 3 weeks ago 1% higher than April at a whopping 40 year high of 8.6%. They both measure May, don’t they?? Yes, while the CPI measures the change in the out-of-pocket expenditures for you and me, the PCE index measures the bigger picture change in goods and services consumed by all households.
So, three weeks ago, on a Friday when the CPI numbers came out, our markets reacted with the 30-year fixed mortgage jumping from 5.5% to 6.25% from Friday to Tuesday. NOW… the same data set calms the bond market dropping the 10 year treasury from closing at 3.13% on Thursday to 2.88% on Friday, dropping our 30-year mortgage rates to 5.49%! For a hot minute we were locking clients at 5.375% yesterday.
The real number that caught the attention of the market was not that Headline PCE was flat or even the Core PCE was down slightly; but consumer spending was HALF of expectation. Why? Because consumer spending is 70% of the GDP. Based on this information, the Atlanta Fed revised it’s 2Q22 GDP prediction from a 0% growth to a -1% growth. It’s ultimately up to NBER (the National Bureau of Economic Research) to call the start and end of a recession. But as a consuming American.. we are feeding a self fulfilling prophecy. Whether or not we are in an officially declared recession, we are starting to spend/not spend like we are in one.
What happens to housing in a recession? We keep our values as interest rates go down as economies slow. Our rates don’t go down if the Fed drops their Fed Rate.. in fact, if they raise their Fed Rate fast enough to control inflation, our rate will come down as the economy slows with the higher cost of money and the softening of inflation (the arch enemy of bonds).
[author] [author_image timthumb=’on’]https://www.theruethteam.com/wp-content/uploads/2020/11/testimonial_image.jpg[/author_image] [author_info]Nicole Rueth has been passionately advising clients on their wealth building and home financing strategies for over 17 years. Her path has been non-conventional and it is a benefit to her clients. www.TheRuethTeam.Com.[/author_info] [/author]
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