Spending is key.

Welcome to another edition of Sunrise Economix, where I’m sharing the freshest updates from the housing market, peppered with exclusive insights and valuable information tailored just for you.

This week really started off for the interest rate markets on Tuesday with the Producer Price Index (PPI) that measures wholesale inflation. Wednesday brought the very important Consumer Price Index (CPI) measuring consumer price changes. The market felt some pain on Thursday with Retail Sales coming in very strong. Friday saw Consumer Sentiment from the University of Michigan with a slight betterment.

PPI measures wholesale inflation. This is the inflation that is felt by producers before they sell goods to a consumer. Sometimes, these price changes get passed on to the consumer, but sometimes, they are absorbed by the producer in the form of smaller profit margins. July’s PPI numbers were very interest-rate friendly. The headline number rose 0.1%, which was cooler than the 0.2% expected. 

The Core rate which strips away food and energy prices, which can be volatile, came in at 0%, under the 0.2% expected. The Year-over-Year Core PPI actually fell from 3% to 2.4%, much lower than the 2.7% expected. Remember that the Federal Reserve (the Fed) has a target of 2% on Core Consumer Inflation. This is a wonderful movement in inflation, even if it is only wholesale. The Fed’s favorite measure to track consumer inflation is the Personal Consumption Expenditures (PCE) report. This PPI report shares many of the same components as PCE and is indicative of a possibly good PCE report later this month.

The big event of the week was CPI on Wednesday. The report came in close to expectations but slightly better for interest rates. Headline Inflation rose 0.155% for July, which was slightly under 0.25% expectations. Core inflation increased by 0.165%, beneath the 0.2% estimates.  Core year-over-year declined from 3.3% to 3.2%. One very interesting fact to realize is that if we look just at the last three months of readings and annualize them, the Core CPI rate would actually be 1.57%, well below the Fed’s 2% target. This means that if inflation remains at current levels, the rates will continue to decline significantly.  

Despite the slight betterment in this report, Shelter costs were still stubbornly high. Shelter costs are a very lagging indicator.  That means that changes in Shelter costs take months to reflect in the reported numbers. You don’t sign a new lease each month. It can take months for a lowering in rental rates to reflect in the new numbers.

Thursday brought a worsening to interest rates. This was due to a crazy high retail sales number of 1% from July. Economists were expecting a 0.3% increase. Spending is the lifeblood of our economy, with Core retail sales being an important component of Gross Domestic Product (GDP). Much of the improvement in retail sales was in the Auto and Gas sectors. One point of confusion is that state sales tax collections were reported as significantly down in July. This isn’t aligned from the retail sales numbers. These reports don’t need to always correlate exactly, but the sales tax numbers are typically very reliable and can indicate a slowdown in consumer spending and potentially the entire economy.

Looking Ahead: 

Next week will bring fewer economic reports but still some very important news:

• Wednesday: Meeting minutes from July’s Fed meeting, Fed meeting in Jackson Hole, Wyoming begins, 20-year bond auction
• Thursday: Existing Home Sales
• Friday: New Home Sales

With rates starting their descent, make sure you have a conversation with me to discuss the right time to lock your clients’ rates.