Weekend Talking Points - 'Bang'

It’s been a tough week for homebuyers, with stronger September jobs growth sending bond prices lower and mortgage rates higher.

“Jobs week” ended with bang. The US added 254,000 jobs in September (purple line in the chart below), far above expectations and a big jump from the roughly 150,000 jobs added in each of the prior two months. The unemployment rate, meanwhile, dropped to 4.1% (from 4.2% in August and 4.3% in July). [Bureau of Labor Statistics]

TP: The strong jobs report boosted “soft landing” hopes, but it hit the bond market hard. The market is now predicting 25–50 bps of additional cuts over the next two FOMC meetings. Previously, odds were reasonably high for at least one additional 50 bps cut.

Then CPI came in hotter. September “headline” CPI (Consumer Price Index = inflation for you and me) rose 0.2% month-over-month, bringing the year-over-year figure to 2.4% (down from 2.5% YoY in August). “Core” CPI rose 0.3% MoM, with the annual figure rising to 3.3% (from 3.2% in August).

TP: Overall, this wasn’t a great result. The MoM figures were both 0.1% higher than expected. However, it was heartening to see the Shelter component (which has a 37% weighting in the “headline” CPI and a 46% weighting in “core” CPI) drop to 4.9% YoY growth. As Shelter inflation declines, it will continue to provide a strong tailwind for lower overall figures.

So mortgage rates climbed again. The much stronger-than-expected September jobs figure had the market reevaluating future rate cut expectations. The average rate on 30-year, fixed-rate mortgages jumped to 6.62% on Thursday and is now nearly 50 basis points (half a percentage point) above where it was BEFORE the Fed cut rates.

Yet, encouraging signs continue. Every month, Fannie Mae surveys consumers about their views on the economy and the housing market. In September, optimism about lower rates helped FNMA’s Home Purchase Sentiment Index rise 1.8 points to 73.9, the highest level since February 2022. Note: 81% of respondents still said it was a “Bad Time to Buy”, they’re just a bit more hopeful about the future.

Mortgage Market

As it turned out, buyers had just one month to enjoy mortgage rates between 6.1% and 6.25%. We’re now closer to 7% than 6% on 30-year mortgages. And oddly, the turning point was the Fed’s 50 basis point rate cut! It will be very interesting to see how these (relatively) lower rates impacted existing home sales in September.

More recently, the probabilities of larger rate cuts have dropped significantly as a result of the September BLS jobs report and the hotter than expected September CPI.

Note that the current Fed Funds Rate policy range (AFTER the 50 bps cut) is 4.75–5.00%.

• Nov 5: US presidential election.
• Nov 7 FOMC Meeting: 86% probability of a 25 bps cut, 14% probability of no cut. Last week there was a 35% probability of a 50 bps cut!
• Dec 18 FOMC Meeting: 84% probability that rates will be 50 bps below current levels (a 25 bps cut in each of the Nov 7 and Dec 18 meetings). 15% probability that rates will be 25 bps below current levels (one 25 bps cut and one ‘do nothing’ meeting).

They Said It

“The combined impact of high prices and high mortgage rates kept a lid on price growth, with annual gains falling to the lowest level in a year and the monthly gain falling well below what is typically observed in August. Price gains in August were driven by areas in the Northeast but brought down by softening markets in Texas and Florida.” — Dr. Selma Hepp, CoreLogic’s Chief Economist

“Inflation is way down from its peak. Indeed, for multiple months, it has actually been coming in at the 2% target — and expectations data suggest the market doesn’t think it’s going back. The unemployment rate at 4.2% is at the level many consider sustainable full employment. Basically, we would love to freeze both sides of the Fed’s dual mandate right here.

But as we’ve gained confidence that we are on the path back to 2%, it’s appropriate to increase our focus on the other side of the Fed’s mandate — to think about risks to employment, too, not just inflation. And given the through line on economic conditions, that likely means many more rate cuts over the next year.

If we want a soft landing, we can’t be behind the curve. Of course, getting the timing right at moments of transition is maybe the hardest challenge a central bank faces. It’s especially hard at a moment like this where conditions are so different from previous cycles. But knowing that labor markets tend to deteriorate quickly when they turn and that monetary policy takes time to act, it’s just not realistic to wait until problems show up.” — Austan Goolsbee, Chicago Fed President speaking at the National Association of State Treasurers Conference (9/23/2024)

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