CHM Blog

Mixed bag of economic news keeps prospects for lower interest rates at a standstill

Fish gotta swim. Birds gotta fly. And inflation gotta inflate, according to Realtor.com’s David Umberti, who reports on how, although the U.S. economy grew at a slower pace, stubbornly high inflation continues to dash investors’ hopes that the Federal Reserve will begin slashing interest rates in the coming months.

The GDP expanded at a 1.6% seasonally- and inflation-adjusted annual rate in the first quarter, the Commerce Department said Thursday, a pullback from last year’s quick pace and lagging behind the 2.4% projected by economists polled by The Wall Street Journal.

The result? Americans face stiff price pressures across the economy as the continued inflation sparked a selloff in bonds while the Dow Jones Industrial Average slid more than 600 points in morning trading. This is all despite strong years of hiring and wage growth. “Spending on healthcare, insurance and other services continued to grow,” the Commerce Department said. “Measures of underlying demand remain robust,” says Uberti.

He quotes Raymond James’ chief economist Eugenio Alemán: “The domestic economy is doing well. Prices were a little bit over the top, but not by much.” In the meantime, a slowdown in spending on goods such as cars and gasoline weighed down overall growth along with shifts in business inventories and international trade. But that’s not all bad according to Teresa Ghilarducci, an economics professor at the New School for Social Research in New York City. “A decrease in inventories can be really good news for the economy,” she said “That bodes well for a spurt of investment next quarter,” adding that it’s way too soon to mourn for the economy.

Americans are not holding back, however. Excluding volatile food and energy prices, the personal consumption expenditures price index rose 3.7% in the first quarter at an annualized rate, above expectations of a 3.4% increase. “The increase implies that price pressures were stiff again in March and that brisk inflation readings for January and February may get revised higher when the Commerce Department releases its March inflation figures on Friday,” says Umberto.

He points out that Thursday’s snapshot comes after a string of federal data in recent weeks suggesting the American economy continues to power through the highest interest rates in 23 years, with employers adding staff at rates outpacing Wall Street’s projections. Umberti explains, “An influx of immigrants is boosting growth and tax revenues, economists say, even as it strains some governments’ resources. Credit card companies have recently reported that customers are spending more than they did last year.”

How does that “trickle down?” Many businesses’ earnings seasons kicked into high gear this week with GM upgrading its profit guidance after strong demand for gas-powered trucks and sport-utility vehicles propelled year-over-year growth in first-quarter retail sales, and Lockheed Martin cranking out new missiles, air-defense systems, and space hardware in part to fill a backlog from wars in Ukraine and the Middle East.

Some industries have also continued to shell out for data centers and capital-intensive projects around the country despite higher borrowing costs, such as steel producer Nucor, who said it would boost such spending this year with investments in mills in West Virginia and North Carolina. Several experts are translating news like this into near-term resilience on a macro level, but the continuing growth has also contributed to price pressures inflation may settle closer to 3% than the Federal Reserve’s 2% goal.

Signs the economy may be cooling come in the form of low-income Americans saving far less than they did pre-pandemic and mortgage rates recently bouncing higher. Home sales in March posted their biggest monthly drop in more than a year, and average hourly earnings in March rose at their slowest annual pace since June 2021.

Umberti concludes: “Many economists still believe that those cracks will widen—slowing inflation—if and when the labor market loosens.”

Realtor, TBWS

How Rates Move:

Conventional and Government (FHA and VA) lenders set their rates based on the pricing of Mortgage-Backed Securities (MBS) which are traded in real time, all day in the bond market. This means rates or loan fees (mortgage pricing) moves throughout the day, being affected by a variety of economic or political events. When MBS pricing goes up, mortgage rates or pricing generally goes down. When they fall, mortgage pricing goes up. Tracking these securities real-time is critical. For more information about the rate market, contact me directly. I'm among few mortgage professionals who have access to live trading screens during market hours.

Rates Currently Trending: Neutral

Mortgage rates are getting a little support today. The MBS market worsened by -4 bps last week. This was not enough to increase mortgage rates or fees. The market experienced high volatility last week.

This Week's Rate Forecast: Neutral

Three Things: These are the three areas that have the greatest ability to impact rates this week. 1) The Fed, 2) Jobs and 3) Manufacturing.

1) The Fed: We will get the Fed's latest Interest Rate Decision and Policy Statement on Wednesday. While the markets are not pricing in any rate change at this meeting, we will be keen to see if the tone of the FOMC statement and Fed Chair Powell's liver presser is more "hawkish." This is not one of their meetings where they release their Economic Projections.

2) Jobs: We will end the week with Big Jobs Friday but will have lots of job and wage related data all week long with Employment Cost Index, ADP, JOLTS, Challenger Job Cuts, Initial Weekly Jobless Claims, Unit Labor Costs, Non Farm Payrolls, Unemployment Rate, Average Hourly Earnings.

3) Manufacturing: We will get the bellwether Chicago PMI and the national ISM Manufacturing and ISM Services this week. All will be closely watched.

This Week's Potential Volatility: High

This morning markets are getting some mild support. Volatility has started low but will pick up later in the week.

Bottom Line:

If you are looking for the risks and benefits of locking your interest rate in today or floating your loan rate, contact your mortgage professional to discuss it with them.

Richard Sardella has been actively managing and providing services in the mortgage industry for over 30 years. Richard serves on the board of directors as President of Colorado Home Mortgages Inc.

All information furnished has been forwarded to you and is provided by thetbwsgroup only for informational purposes. Forecasting shall be considered as events which may be expected but not guaranteed. Neither the forwarding party and/or company nor thetbwsgroup assume any responsibility to any person who relies on information or forecasting contained in this report and disclaims all liability in respect to decisions or actions, or lack thereof based on any or all of the contents of this report.

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