Newsletter - 05/16/2022
Week of May 9, 2022 in Review
Inflation remains hot on both the consumer and wholesale levels. Here are the key stories to note:
- Consumer Inflation Near 40-year Highs
- Wholesale Inflation Remains Elevated
- Initial Jobless Claims Rise for Second Straight Week
- Small Business Expectations for Better Business Conditions Hits 48-year Low
- Fed Chair Jerome Powell Confirmed for Second Term
Consumer Inflation Near 40-year Highs
The Consumer Price Index (CPI), which measures inflation on the consumer level, rose 0.3% in April, just above the expected 0.2% gain. On an annual basis, CPI eased slightly from March’s reading of 8.5% (the hottest reading in 41 years) to 8.3%. While the year over year figure did decline, it was hotter than the 8.1% expected. Core CPI, which strips out volatile food and energy prices, rose by 0.6%, coming in hotter than the 0.4% gain expected. Year over year, Core CPI decreased from 6.5% to 6.2% but was higher than the 6% anticipated.
What’s the bottom line? Not only does inflation lead to higher costs of goods, but it is also the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise as we’ve seen this year.
Real Estate Impact by Liza Alley: Mortgage loan rates are closely aligned with government bond returns. So keep an eye on the bond rates of return as a leading indicator for consumer mortgage rates.
Wholesale Inflation Remains Elevated
The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 0.5% in April. On a year over year basis, PPI declined from 11.2% (the highest level on record since the methodology for collecting data was changed in 2010) to 11%. Core PPI, which also strips out food and energy prices, came below expectations with a 0.4% increase in April. The year over year figure decreased from 9.6% to 8.8%.
What’s the bottom line? Producer inflation remains elevated, which often leads to hotter consumer inflation levels, as producers pass those higher costs along to consumers.
Initial Jobless Claims Rise for Second Straight Week
Initial Jobless Claims rose by 1,000 in the latest week, as the number of people filing for unemployment benefits for the first time was reported at 203,000. The previous week’s level was also revised higher by 2,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell by 44,000 to 1.34 million. This is the lowest number of Continuing Claims since January 1970.
What’s the bottom line? Unemployment claims are extremely low and the labor market remains tight. But once we start to see claims pick up, especially initial claims, this could be a signal that the economy is slowing. Even though the latest increase in initial claims is minor, they have risen over the past two weeks.
Real Estate Impact by Liza Alley: Low unemployment keeps money in real estate markets and should ensure demand stays relatively stable in the short term.
Small Business Expectations for Better Business Conditions Hits 48-year Low
April’s National Federation of Independent Business Small Business Optimism Index was unchanged from March, with the index overall remaining at its weakest level in two years. Inflation remains an issue for small business owners, with 32% reporting it’s their biggest problem at present. Though companies that expect higher selling prices fell 2 points to 70%, this follows the highest reading in the survey’s history of 72% in March.
What’s the bottom line? Owners expecting better business conditions over the next six months fell 1 point to a -50%, which is the lowest level in the 48-year history of the survey. Given that we have experienced several recessions, a housing bubble and the COVID pandemic over the last 50 years, the fact that owners are feeling so negative right now could be yet another indicator that we may be headed for a recession.
Real Estate Impact by Liza Alley: The real estate market can be sensitive to a recession, with both buyers and sellers affected. These things can be hard to predict and its always best to consider your personal situation more so than larger market forces when making buying/selling decisions.
Fed Chair Jerome Powell Confirmed for Second Term
Fresh off the heels of being confirmed as Fed Chair for a second term in a 4 to 1 vote, Jerome Powell said in an interview with Marketplace that he couldn’t promise a “soft landing.” This means he can’t promise that the Fed can slowdown or tighten the economy in their attempt to bring inflation under control while avoiding a recession.
Powell said, “So it will be challenging, it won’t be easy … Nonetheless, we think there are pathways … for us to get there.”
What’s the bottom line? This is a big shift in tone from previous statements he’s made. Originally, Powell indicated that there’s a good chance to achieve a soft landing. He also previously considered inflation “transitory.”
Real Estate Impact by Liza Alley: From a Real estate perspective, this translates to “buckle your seatbelts”!
What to Look for This Week
A plethora of housing reports will be released, beginning Tuesday when the National Association of Home Builders Housing Market Index will give us a read on builder confidence this month. April’s Housing Starts and Building Permits will be reported on Wednesday, while Existing Home Sales follows Thursday.
Mortgage Bonds continue trading in the middle of a wide range, with a double ceiling of resistance comprised of the 101.656 level and the 25-day moving average, and the 0% Fibonacci level at 100.56 as support. The 10-year Treasury is still battling a ceiling at 2.92%. A bounce lower from this level could potentially be positive for Mortgage Bonds.
Real Estate Impact by Liza Alley: As noted before, mortgage bond yields are closely followed by Mortgage rates, especially the 10-year Treasury. Keep an eye on this if you are looking for indicators of Mortgage rates coming back down.
Weekly Review by Mark Hedman
Homebridge Financial Services - Sales Manager, Mortgage Loan Originator
Real Estate Impact by Liza Alley