Vital Statistics:
Stocks are flattish this morning on no real news. Bonds and MBS are flat.
Donald Trump demanded that the Fed cut rates: “I’ll demand that interest rates drop immediately,” Trump said. “And likewise, they should be dropping all over the world. Interest rates should follow us all over.” Don’t forget that we saw this movie before in his first term in 2019, before the Fed started cutting rates as GDP was falling.
Monetary policy is still quite tight, with the Fed Funds rate at least 100 basis points above the neutral rate. It is looking like the pause in disinflation last year might have been a blip, and the path is back downward.
Ultimately the main problem with inflation is shelter, which is easing as a glut of apartments hit the market. If the Fed cuts rates further, will we see an acceleration in home price appreciation? I don’t see it, given that we are bumping up against affordability constraints.
Existing home sales rose 2.2% in December, according to the National Association of Realtors. This was the strongest pace since February of 2024. The median home price rose 6% YOY to $404,400. This was primarily due to outperformance at the top end. “Home sales in the final months of the year showed solid recovery despite elevated mortgage rates,” said NAR Chief Economist Lawrence Yun. “Home sales during the winter are typically softer than the spring and summer, but momentum is rising with sales climbing year-over-year for three straight months. Consumers clearly understand the long-term benefits of homeownership. Job and wage gains, along with increased inventory, are positively impacting the market.”
The first time homebuyer accounted for 31% of all home sales, up from 30% in November. FWIW, the Spring selling season is just around the corner and this report is encouraging.
Consumer sentiment declined in January, according to the University of Michigan Consumer Sentiment Survey. “Consumer sentiment fell for the first time in six months, edging down 4% from December. While assessments of personal finances inched up for the fifth consecutive month, all other index components pulled back. Indeed, sentiment declines were broad based and seen across incomes, wealth, and age groups. Buying conditions for durables softened but remained about 30% better than six months ago amid persistent views that purchasing now would avoid future price increases. Despite reporting stronger incomes this month, concerns about unemployment rose; about 47% of consumers expect unemployment to rise in the year ahead, the highest since the pandemic recession. January’s data closed on Inauguration Day, and consumers of all political leanings will continue to refine their views as Trump’s policies are clarified and implemented.”
Unfortunately, inflationary expectations increased, with the short term (one year) rising from 2.8% to 3.3%. Longer-run inflationary expectations also increased from 3% to 3.2%.
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