Also sprach Zarathustra (I mean Chairman Powell).

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.

Thus Spoke Zarathustra became iconic as the opening music to Stanley Kubrick’s 2001: A Space Odyssey. It is based on Frederick Nietzsche’s philosophical novel of the same name that describes Zarathustra’s speaking the world into existence and always ending his discourses saying, “Thus spoke Zarathustra.” Much like Zarathustra’s final word on the matter of everything, Friday saw Federal Reserve (Fed) Chairman Powell create no doubt in the Fed’s next and future moves. Rates are headed lower.

Chairman Powell’s speech took place at the Kansas City Federal Reserve’s annual Jackson Hole Symposium. He didn’t equivocate in this speech saying “the time has come for policy to adjust. The direction of travel is clear…” That direction is to cut interest rates to help reduce the restriction on the markets. Inflation is very close to the Fed’s 2% target and, as we have previously discussed here, is only stubbornly high due to Shelter Costs being very slow to catch up within the inflation reports. Employment is going to be the Fed’s focus for the next couple of months. We are going to see the next Bureau of Labor Statistics (BLS) Jobs report on 9/6/2024. That will be an extremely important date as it will give the Fed jobs data before their September meeting and rate cut.

The market is currently expecting the Fed to cut their benchmark rate by 0.25% in September. There is a strong likelihood of this. There is a lesser likelihood of a 50% cut as well.  It is expected that we will see 100bps (1.00%) of cuts in the remainder of 2024 and an additional 125 bps (1.25%) for 2025. That would be a total of 2.25% in cuts. That would still have the Fed Funds rate over inflation. This would mean it would still be restricting the economy and they may have additional cuts to get to a more accommodative position.  

As we have discussed previously, a Fed rate cut isn’t a mortgage rate cut. Mortgage rates are set by the supply and demand of Mortgage-Backed Securities. Like the stock market, they trade based on expectation of what will happen in the future. As such, we are already seeing rates decline because the rate cuts are expected. Any data that gives an expectation of more cuts will be good for rates.  

Speaking of employment data, on Wednesday, the BLS released its annual job data revisions from March 2023 to March 2024. This showed a downward revision of 818,000 jobs. Take that in for a minute. In one year of economic data that comes out in monthly Jobs reports, and, after the BLS revises each of those monthly figures 2 additional times, they then came back and revised the entire year down 818K jobs. Imagine if that had been accurately reported in the BLS Jobs reports. It is quite likely that the Fed would have cut rates months ago and that mortgage rates would have been significantly lower already. These economic reports are very important. They have a real effect on businesses and families and lives.

Looking Ahead: 

Next week is “inflation week,” with the Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE):

• Monday: Durable Goods Orders
• Tuesday: Case Shiller and FHFA home appreciation reports, Consumer Confidence
• Thursday: Initial Jobless Claims, Q2 GDP (second reading), Pending Home Sales
• Friday: PCE

The week should be fairly calm until Friday, but overall rates won’t do too much until we get to the 9/6 Jobs report.