Weekend Talking Points - 'Tariffic'

A crazy week for politics and the markets saw 30-yr mortgage rates drift closer to the 6s. The recent trends in inflation (PCE) were encouraging, but the BLS jobs report could set the tone for bond yields and mortgage rates over the coming weeks.

“Core” PCE (inflation) flat at +2.8% YoY. While the “Headline” PCE did rise from +2.45% year-over-year in November 2024 to +2.55% in December (mostly due to higher fuel prices), “Core” PCE was flat at +2.79% YoY. But if you look closer, the monthly trend was very encouraging. [Bureau of Economic Analysis]

• Over the last 6 months, “Core” PCE has risen by 1.13%. If you annualized that (by multiplying by 2) you get 2.25%.
• Over the last 3 months, “Core” PCE has risen by 0.54%. If you annualize that (by multiplying by 4) you get 2.15%.
• The Fed’s target for inflation is 2.00%, and when they talk about that target, they’re referring to the “Core” PCE. In other words, we’re getting really close.

Well, that’s just tariffic. The week started with a bombshell: Trump slapping 25% blanket tariffs on Mexico and Canada, and an additional 10% tariff on Chinese imports. A major freakout ensued. Retaliatory tariffs were threatened and/or imposed. Canada got its own “Freedom Fries” movement. Would this tip MX & CN into recession? Wouldn’t this cause a spike in US inflation? What about the highly integrated auto industry? How about all the Canadian lumber that goes into new homes? Is my Kirkland Maple Syrup going to cost $20 now?

‍Making a run for the border. When both Trudeau and Sheinbaum agreed to send 10,000 more troops to the border, and to get serious about stopping drug trafficking and illegal entries, Trump pressed ‘pause’ on the tariffs — officially for a month, probably forever. Did he get what he wanted? Maybe. Was this all really necessary? You decide.

‍Mortgage rates briefly below 7%. Since hitting 7.25% in January, average 30-year mortgage rates have been drifting lower — and not necessarily because the inflation or jobs data has been supportive of higher bond prices (which means lower bond yields). Instead, we’ve had a ‘risk-off’ trade (from stocks into bonds), and most recently, comments from the US Treasury that helped allay bond supply fears. [Mortgage News Daily]

‍The new listings are coming! In January 2025, new listings rose 37.5% month-over-month (and 10.8% YoY) to 327K. While a chunky MoM increase does happen every year (following delayed new listings + delistings in December), this year the Dec/Jan swing was particularly large. [Realtor.com]

‍Nationwide inventory approaching pre-pandemic levels. While overall active inventory did dip 4.8% MoM in January (as it always does), that was still up 24.6% YoY. In fact, active inventory is now within 13% of pre-pandemic levels! [Realtor.com]TP:

If you’ve been reading Talking Points, you know that the inventory situation is very different from state to state. Nearly one-third of the active inventory is in three states: Florida, Texas, and California. 9 states have active inventory that is ALREADY above pre-pandemic levels. And many states in the Northeast and Midwest have active inventory that is still 40–70% below pre-pandemic levels.

It’s jobs week again!

Job openings fell significantly. The JOLTs report (Job Openings and Labor Turnover) revealed that total job openings had declined from 8.15 million in November to 7.60 million in December. The hiring rate was flat at 3.4%. The quits rate was also flat at 2.0%. In general, companies aren’t hiring much, and workers aren’t quitting much.

TP: The monthly job openings numbers can have big swings (remember, the US has almost 340 million people). The most important thing is to look at the long-term. As the graph below shows, the COVID-driven hiring frenzy has come to an end, with job openings nearly back to pre-pandemic levels. The quits rate, meanwhile, is already below pre-pandemic levels. Workers quit when there are more attractive opportunities out there (lots of job openings with higher pay).

Total job openings (JOLTs report)

Quits rate (% — JOLTs report)

But ADP sees strong job growth. Payroll processor ADP said that private employers added 183,000 jobs in January 2025 (well above expectations), and the November 2024 result was revised up by 50,000. Annual wage inflation for job stayers was +4.7% (near a multi-year low). Annual wage inflation for job changers was +6.8% (also near a multi-year low) [ADP]

TP: It’s always like this, isn’t it? One job report (JOLTs) suggests weakness, another (ADP) suggests strength. This makes it particularly difficult to forecast the most important jobs data — the BLS employment report, which is coming out Friday, February 7. Current estimates are for 170,000 jobs to be added in January 2025, with the unemployment rate stable at 4.1%.

Mortgage Market

If we could just get a good (lower than expected) January jobs report and/or a good (lower than expected) January CPI report, I’m pretty confident that average 30-yr mortgage rates would move back into the 6s — just in time for the spring selling season.

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%.

• March 19 FOMC Meeting: 86% probability that the policy rate will remain at 4.25–4.50%. In other words, that the Fed will stay on pause. 14% probability of a 25 bps cut (25 bps = 0.25% = a quarter percentage point) to 4.00–4.25%.
• May 7 FOMC Meeting: 59% probability that the policy rate will remain at 4.25–4.50%. 36% probability of a 25 bps rate cut.
• Basically, you’ve got to go all the way out to the June 18 meeting before the probability of rates being lower than they are today is >50%.

They Said It

“Home prices have remained flat since the housing market began seeing slower activity this past summer. Northeastern markets drove appreciation growth due to low inventories of homes for sale while Southern markets readjusted to higher inventories and increases in variable mortgage costs, such as taxes and insurance. Home prices are also cooling in the markets in Mountain West, which have been trying to find stability over the last year following the surge in mortgage rates and price declines from pandemic highs.

Despite the difficult housing market conditions in 2024, home prices still increased about 4.5% over the course of the year, a small acceleration compared to the 4.1% uptick in 2023. Going forward, with inventories slowly improving and mortgage rates remaining elevated, forecasts suggest a smaller overall increase in prices in 2025.” — Dr. Selma Hepp, CoreLogic’s Chief Economist