Mortgage rates have more room to fall according to 2 new economic reports – Inman

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Federal Reserve policymakers said Wednesday they want more evidence that inflation is easing before cutting interest rates. A day later, they received some.

Two reports released Thursday showed jobless claims in May rose to their highest level since August 2023 and wholesale prices fell unexpectedly last month.

According to the Department of Labor, approximately 242,000 workers filed initial unemployment insurance claims during the week ending June 8, an increase of 13,000 from the previous week and nearly 20,000 more claims. than predicted by economists.

First increase in unemployment claims

“Initial claims have been rising for some time, but this week’s sharp increase makes the uptrend much harder to dismiss,” Oliver Allen, senior U.S. economist at Pantheon Macroenomics, said in a note to clients.

Olivier Allen

“High long-term rates, tight credit conditions and gradually slowing demand are starting to put more pressure on businesses, and particularly small businesses,” Mr. Allen said. “More layoffs will likely mean the job market will start to look a lot weaker very soon, especially when you add in the significant slowdown in gross hiring suggested by most business surveys.”

Thursday’s wholesale price report, officially known as the Producer Price Index (PPI), tracks demand, prices and profit margins for goods ranging from diesel fuel to eggs and services like freight and transport of goods.

The final demand PPI fell a seasonally adjusted 0.2% in May, the Bureau of Labor Statistics reported Thursday. Economists expected the headline PPI to moderate from April’s 0.5 percent increase, but predicted the index would still manage to generate 0.1 percent growth in May.

Bond market investors – who had already pushed mortgage rates lower on Wednesday after the latest consumer price index reading showed inflation slowing in May – kept the rise going on Thursday, pushing yields lower of the 10-year Treasury by 6 additional basis points.

Mortgage rates tend to fall

Rates on 30-year fixed-rate mortgages, which are largely driven by investor demand for mortgage-backed securities, fell 14 basis points Wednesday, to 6.84%, according to lock-in data. rates tracked by Optimal Blue. One basis point is one hundredth of a percentage point.

That’s down 43 basis points from the 2024 high of 7.27% on April 25, and mortgage rates are expected to continue falling relative to 10-year Treasury yields, a barometer of mortgage rates. An index published by Mortgage News Daily showed that rates on 30-year fixed-rate loans fell again Thursday, but only by a single basis point.

Key Fed Inflation Gauge Set to Fall on June 28

But mortgage rates are now down nearly half a percentage point from this year’s highs — and could be on the verge of another big drop when the Federal Reserve’s favorite inflation gauge, the Personal Expenditures Price Index (PCE), will be updated on June 28.

The CPI and PPI are key components of the PCE price index. Now that the latest CPI and PPI figures are out, forecasters at Pantheon Macroenomics have calculated what the core PCE – which excludes food and energy costs – might look like when the May figures are released in two weeks.

Fed policymakers put some momentum into the CPI-fueled bond rally Wednesday when they released economic projections indicating they plan to cut rates just once this year, by 25 basis points. The Fed wants more evidence that inflation is moving closer to its 2% annual target before cutting rates more drastically, Chairman Jerome Powell said.

The Fed’s latest forecast implies that it expects core PCE to rise at an average pace of 0.19% each month from May to December, Pantheon Macroenomics chief economist Ian said on Thursday. Shepherdson, in a note to his clients.

But Pantheon’s mapping of PPI and CPI data suggests that core PCE rose just 0.11% in May, a drastic slowdown from the average 0.32% increase over the first four month of 2024.

Ian Shepherdson

“We don’t know what policymakers have specifically planned for May, but our estimate suggests a significant downside surprise,” Shepherdson said. “Meanwhile, prospects for slower rent rises, lower wage inflation and margin compression at retailers suggest that the core PCE deflator will continue to rise more slowly than the Fed predicted this week, thus laying the foundations for the first rate cut to come in September. and multiple relaxations this year.

At the last update, the full PCE index was up 0.26 percent between March and April and 2.65 percent from last year. This is much closer to the Fed’s 2% inflation target than in June 2022, when inflation peaked at 7.12%.

Forecasters at Pantheon Macronomics predict that the Fed will ultimately cut the short-term federal funds rate by 1.25 percentage points this year, starting with a 25 basis point cut in September, followed by 50 basis points in November and December.

While that’s more aggressive than many forecasts, futures markets tracked Thursday by the CME FedWatch tool put the chance of at least two Fed rate cuts by the end of the year at 71%, against 53% on May 13.

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Email Matt Carter