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Market Minute Write-Up

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June 17, 2024 – With recent economic reports showing some promising signs that inflation could be cooling in a more sustainable fashion for the rest of the year, mortgage rates may moderate in coming months as the daily fluctuations in yields continue. Meanwhile, even though the Federal Reserve decided to hold rates steady in their latest meeting, the central bank is still expected to cut rates later this year but at a more moderate pace than previously anticipated. As such, home sales are projected to improve in the second half of the year, but the growth rate will be slower than what was projected earlier this year.

Federal Reserve takes its time and holds rates steady: The Federal Reserve kept its policy rate target range steady at 5.25% to 5.50% after its June meeting, as the central bank continued to wait for more evidence to suggest that inflation is moving sustainably down. While most participants at the meeting continued to project some reduction in the fed funds rate later this year, the outlook for rate cuts released in the latest Fed’s meeting was revised to just one in 2024. No participants at the meeting expected the fed funds rate to be raised before the end of the year and they projected a cut of 100 basis points in 2025. Fed chair Jerome Powell acknowledged that the restrictive monetary policy’s stance that the central bank takes is slowing inflation, but the Federal Reserve does not have the confidence to cut rates yet.   

Inflation eases more than expected in May: Inflation came in softer than expected in May as consumer price increases cooled during the month, with the May headline Consumer Price Index (CPI) remaining flat month-over-month and registering an increase of 3.3% year-over-year. Both measures came in lower than expected and the monthly increase was the lowest reading since July 2022. Falling energy prices and the modest increase in food prices both contributed to the slower-than-expected growth rate in the headline CPI. The Core CPI – inflation excluding food and energy – also surprised on the downside with prices in May climbing 0.2% month-over-month, the lowest level since June 2023. The latest inflation data is encouraging and suggests that the underlying price trend is indeed slowing. The Fed, however, will need to see at least two or three more reports like this one to feel confident enough to start cutting rates.  

Homebuyer sentiment dips as rates rise: Home Purchase Sentiment released by Fannie Mae declined in May as mortgage rates surged to the highest levels since December at the start of the month. Those who said that it is a good time to buy dropped six percentage points to 14% last month, reaching a survey low last seen in November 2023. The surge in rates throughout the second half of May is likely a contributing factor to the pessimism in the sentiment index.  Twenty-five percent of the survey respondents believed that rates will go down over the next 12 months, a slight dip from 26% recorded in April, but a sizable drop from 36% in January. The share of consumers who said it would be easy to get a home mortgage today also declined sharply by eight percentage points to 41% last month. Despite the loss in optimism in the latest survey results, the sentiment should improve in coming months as mortgage rates began to moderate in the past week as recent economic reports offer hope that inflation could be easing in a more sustainable fashion in coming months.

Homeowner equity rises nearly double digits from a year ago: Homeowner equity jumped again on an annual basis in Q1 2024 as home prices continued to rise in the past 12 months, according to the latest CoreLogic Homeowner Equity Insights report. Homeowners with mortgages in the U.S. have seen an aggregated increase of $1.5 trillion in equity since Q1 2023, a jump of 9.6% year-over-year. Mortgaged residential properties with negative equity declined 2.1% from Q4 2023 and 16.1% from Q1 2023. Roughly 1.8%, or one million, of all mortgaged properties were underwater, which was significantly below the peak of 26% observed in Q4 2009. On average, U.S. homeowners with mortgages gained $28,000 in equity last quarter compared to a year ago. California had the highest equity gain of all states in Q1 2024, with an average homeowner equity increase of $64,000 year-over-year in the latest quarter. The Golden State had a share of homes with negative equity at 0.7% in Q1 2024 and was the state with the smallest share among all states reported by CoreLogic.

Consumers more optimistic about the inflation outlook and their financial situation: Consumers expectations on inflation a year from now dipped in May, remained unchanged at the medium-term horizon, and increased at the longer-term horizon, according to the latest New York Fed’s Survey of Consumer Expectations. At the one-year horizon, the median inflation expectation registered at 3.2% last month, down slightly from April’s 3.3%, but dropped sharply below the 4.1% recorded in May 2023. Consumers were also more optimistic, in general, about their financial well-being. Their perceived probability of losing their job in the next 12 months, for example, decreased 2.7 percentage points to 12.4% in the latest reading. In addition, they expected their household income to grow in 12 months by 3.1%, an increase of 0.1 percentage points from April. 

Note: The weekly market minute report is updated every Monday by 6:00 PM PST.

Weekly Data for Week Ending 2024-06-15

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