Back to the Basics

We’ve now passed the important Federal Reserve (Fed) meeting and the first rate cut of the cycle. Now that this event has passed, we can get back to looking at the economic reporting that influences mortgage rates. The Fed has indicated that inflation is on target to meet their 2% core inflation goal. They are also concerned with employment stability and will be monitoring all the job reports coming out. Next week we will see the September Bureau of Labor Statistics (BLS) Jobs report. This week we saw the Fed’s favorite measure of inflation, the Personal Consumption Expenditures (PCE).

There are two main inflation numbers that come out in the PCE report: Headline and Core. Inflation reports look at many goods and services and track their changes in price. It is like having a giant spreadsheet to track how much gasoline, housing, milk, bread, insurance, etc. change month-to-month. Out of all the items tracked, the Fed knows that it has very little control over the cost of food and energy, as these are very volatile items. Think of how often you see gasoline prices change at the pump – up and down. To get a better idea of prices in the economy, the Fed focuses on the Core inflation number that strips out these volatile items of food and energy. 

This month’s Headline PCE showed an increase of 0.091%, which produced a drop in the year-over-year numbers of 2.45% (2.5% rounded), dropping to 2.24% (2.2% rounded). Core PCE increased slightly more month-over-month to 0.130%, or yearly a slight rise from 2.64% (2.6% rounded) to 2.68% (2.7% rounded). The year-over-year (YoY) numbers are averages, and each month “replaces” that month from the previous year. Last year’s August PCE rates were very low, so the Fed and the market were expecting an increase in the YoY inflation rate. Despite this expectation, these numbers were even lower than expectations, and the mortgage rates rallied. If you look at an average of just the most recent 4- and 6-month periods and annualize it, you will get a 1.77% and 2.37% inflation rate, respectively, which shows that we are definitely on track for the 2% target the Fed has established.

Another aspect of the PCE report is the personal income, spending, and savings rates. All of these items showed weakening. This also bodes well for mortgage rates and tough times for the economy.

Looking Ahead:

Next week is “Jobs week” and will have several influential reports:

• Tuesday: Job Opening and Labor Turnovers (JOLTS), ISM Manufacturing
• Wednesday: ADP Employment Report
• Thursday: Initial Jobless Claims, ISM Services, Challenger Job Cut Report
• Friday: The big BLS Jobs report

There could be some volatility in the rate markets next week.