Your Mortgage Minute 6/7
Your Mortgage Minute
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What impacted rates this week:
Rates steadily improved throughout this week, but are likely to increase when rates update today after a much higher than expected jobs report this morning.
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Overall, the week was a mixed bag for the job market. On Wednesday ADP’s Employment report came in lower than expected, suggesting a continuing slowdown of the jobs market. Then Thursday we saw another uptick in initial jobless claims, a preview of what was to come today, where unemployment came in at 4% for the first time since January of ’22, higher than expectations. However the one report that undid all this improvement was the employment report that came in 85k higher than expected at 275k, suggesting that job creation is still extremely strong.
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Before today, the market had priced in a higher likelihood of a September rate cut?, which at one point had been a 50-50 projection (between a cut and pause). However, after today the likelihood of a rate pause in September has increased from 31% yesterday to 45% today. July is now viewed as a near certain rate pause, increasing from 78% to 91% today.
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Yesterday I put out a video about my expectations for the market (https://youtu.be/tUxz5A0erjU). Before today’s report I felt the likelihood of a rate pause in July was 65-70%, with two scenarios that I could see prompting a rate cut- either a worsening job market and decent inflation data, or the job market staying relatively flat and great inflation data. With today’s employment report I would bump that up to maybe 80-85% , and now can only see one realistic way we could get a July rate cut- two months of excellent inflation.
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Oh Canada, our rate cutting neighbor
While I don’t often discuss economic news of other countries, in this environment of ‘will we ever see a rate cut?’ I feel it’s worth looking at our northern neighbor. This Wednesday the Bank of Canada (their equivalent of the Fed) chose to cut interest rates ? point for the first time in this rate cycle. This was preceded by an inflation reading of 2.8% and a increase in unemployment to over 6%.
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On the inflation front it’s worth mentioning that unlike the US, where 2% inflation has been the stated goal since Alan Greenspan, Canada has a goal of 1-3% inflation so 2.8% is within that range. I would imagine the Bank of Canada would’ve loved to get inflation down further, but rising unemployment forced their hand. While Canada was never as low as the US in unemployment rate, between early 2022 and middle of 2023 they have been consistently in the low 5 to high 4% range. So an increase of 26% from the low point was clearly concerning enough to prompt a rate cut even with inflation still on the higher end.
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What does this mean for the US? Even with today’s higher than expected unemployment, we’re nowhere close to an equivalent rise in unemployment. Until we see unemployment creep into the high 4s, I think the only way we’ll see rate cuts if for inflation to come down. And next week will give a great picture of where we currently stand on inflation and the Fed’s expectations for the inflation this year. ?
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June 12th a pivotal day
Next Wednesday we have both the May Consumer Price Index (CPI) report and the Fed’s next rate decision.
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On the CPI front, I’ll be looking to see if shelter rebounds with a steeper decline after two months of minimal decline. Over the past 5 months year over year shelter has been pretty binary- either declining +0.3% or less than 0.12%. However, even a decline of 0.2% would be a good sign for me, knowing that the summer months should lead to steeper declines as renewed rents trickle into the data. In addition to CPI, we have a producer price index (PPI) on Thursday which could be a market mover if it comes in far from expectations.
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The Fed will once again choose to maintain their current rates, so that decision will not affect rates. What will is Jerome Powell’s comments in his press conference after the decision is announced, and the Fed member’s updated ‘dot plot.’ This is where each Fed member projects where the Fed funding rate will land in the next 4 years, along with where the Fed expects inflation to land by the end of each year (measured by core PCE). The Fed releases their dot plot every three months, and in March the most notable changes were a shift from a consensus 3 rate cuts in 2024 to a near toss up between 2 and 3 rate cuts, along with a higher expected inflation number by end of year from 2.4% to 2.6%. If the Fed shifts dramatically on either of these expectations I would anticipate rates will worsen.
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Overall, I don’t think there’s much that could happen next week to change my opinion of September being the first rate cut, but anything other than an exceptionally favorable CPI report will eliminate the likelihood of a July rate cut. For questions or personalized lock guidance please reach out to me directly at 617-620-0083.