Rates Improved but for Unexpected Reasons
Mortgage rates fell slightly below 7% on weekly averages after a surprise report out of China. China announced DeepSeek, a competitor for OpenAI’s model ChatGPT, that they reportedly had created for a fraction of the cost, in a much quicker process, and using older chip technology. As we discuss every week, rates normally rise and fall with economic news focusing on employment and inflation. This market movement was caused by something different. This situation is called a “risk off” trade. This is where investors sell out of riskier investments like stocks and purchase safer investments like bonds. This is called a “flight to safety.” We saw technology stocks plummet with powerhouses like Nvidia down over 10%. This pushed the entire stock market down but caused rates to improve due to the increase in demand. This is a good reminder that stocks and bonds are alternatives and usually trade in opposite directions.
FHA and HUD: Mortgage Delinquencies on the Rise
The Federal Housing Administration (FHA) in the Department of Housing and Urban Development (HUD) put out a report on mortgage delinquencies. 30-day mortgage delinquencies rose to 6% in November 2024. 90+ day delinquencies also continued to rise. This could be an indication of weakness in the overall economy.
BLS New Tenant Rental Index: Good News for Lower Inflation
The Bureau of Labor Statistics (BLS) put out their quarterly New Tenant Rental Index. This index shows us if new rents are rising or falling. Remember, rent is a very large component of Shelter Cost. Shelter is one of the largest components of the inflation reports CPI and PCE that drive interest rates. Q4 2024 fell 2.4% year-over-year. This is a large drop after we already saw a 1.6% drop in Q3 2024. This dropping rental cost is great news for continued lowering of inflation in future reports.
Fed Keeps Rates Steady: Are Future Cuts on the Horizon?
Wednesday saw the end of the Federal Reserve Open Market Committee (FOMC) meeting. As was universally expected, they kept rates the same indicating that inflation was still higher than their target of 2% of Core PCE and that employment was still stable. It is going to take a drop in Core PCE or a jump in the unemployment rate (or both) to push the Fed to start to cut more aggressively. The good news, as we have discussed frequently, is that the lag in Shelter will soon catch up and allow inflation to drop. Also, there is definite weakness in employment if you do a deeper dive into the employment numbers, specifically looking at the demographics of the job gainers and the types of jobs being obtained.
As-Expected PCE Inflation Report: Next Month May Shake Things Up
Friday saw December’s Personal Consumption Expenditures (PCE) inflation report come out as expected. PCE is the Fed’s favorite measure for inflation, so it is important to monitor this each month.
Headline inflation rose .3% in December and increased 2.4% to 2.6% year-over-year.
The Core rate, which removes volatile food and energy prices, rose .2% in December and 2.8% year-over-year.
Next month’s report will remove the January 2024 numbers from last year in the yearly average. January 2024 had a large monthly increase in both Core PCE and the Shelter component. If we can get a modest number in next month’s report for January 2025, we may make some excellent progress down in Core PCE. This may free the Fed to continue their rate cuts.
Looking Ahead
Next week is Jobs week, with the following reports coming out:
Tuesday, February 3
- Job Opening and Labor Turnovers (JOLTS)
Wednesday, February 4
- ADP
Thursday, February 6
- Initial Jobless Claims
Friday, February 7
- BLS Jobs report
For some additional light reading I want to recommend this open letter from mortgage industry guru Barry Habib to President Donald Trump. In it he explains why it is important to have changes in the methodologies that are used by the government to calculate inflation. We have talked about these concerns in previous weeks, but Barry puts it very clearly and maybe it could lead to much needed changes.
The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 1/30/2025.