Market Updates and Industry Insights

This week the Federal Reserve completed its eight and final meeting for 2024.  Concluding the meeting, the Fed again reduced the Fed Funds rate by 25 basis points, in line with market expectations, for its third consecutive rate cut totaling 100 cumulative basis points.  The written policy statement following the rate change was virtually unchanged from the prior meeting, however it is important to note that Cleveland Fed President Hammack voted in favor of leaving rates unchanged, marking the first non-unanimous vote in some time.  Speaking during the press conference Fed Chair Jay Powell reiterated the continued strength of the US economy and the feeling inside the Fed that the current level of rates is still in restrictive territory.  The Fed chair also noted that inflation remains somewhat elevated compared to long-run goal and that while unemployment is higher than it was a year ago it is still historically low and the Fed does not expect it to increase much in the coming years.  GDP growth has also remained strong, with the economy growing at 3.1% in the third quarter compared to 3.0% in the second quarter.  The strength of the economy will allow the Fed to be cautious with the pace at which it brings rates back to neutral; as current economic strength does not require accommodative Fed policy and the exact neutral spot is hard to judge.  As Powell noted “when the path is uncertain you go slower, like driving on a foggy night.”  Powell noted that activity in the housing sector has remained weak.  

In what may seem opposite to the desired effect, since the Fed started cutting rates in mid-September mortgage rates have risen.  The Fed does not directly set 30 year mortgage rates, but rather an overnight rate, and long-term mortgage rates are determined by the free market.  Long term rates are the result of expectations for cumulative of short term rates over the long term.  In theory a 10 year investment should yield the same return as a one year investment reinvested at current one year rates at the end of each year.  When the Fed reduces short term rates long term rates may or may not change immediately.  Prior to the Fed starting its cycle of rate cuts, markets were expecting far more rate cuts than we have seen and further the Fed has provided commentary that the pace and amount of cuts will be much slower than was previously thought.  Earlier this year markets were expecting up to six rate cuts in 2025, now the Fed has signaled it expects two cuts.  The shift in market expectations for rates over the next few years pushed 30-year mortgage rates to rise from nearly 6% to almost 7%.
Best wishes to everyone for a wonderful holiday season.

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

This week we’ll look at a recap of the 2024 themes and what the outlook looks like for 2025.  Heading into 2025 the main narratives related to the US Economy are largely that the US is in a period of strength.  In November the American people elected Donald Trump to return to the White House as President once again of the United States of America.  Expectation for the second Trump presidency include reduced regulation expectations and increased growth.  As such the stock market has continued its current rally, with continued record highs during 2024.  The below chart displays the 2024 history for the Dow Jones Industrial Average.

Since peaking in the middle of 2022, inflation has been a major focus of the Federal Reserve, and monetary policy aimed at slowing the economy in bringing inflation back to more normal sustainable levels has largely been successful.  The Fed has identified the Core PCE inflation measurement as its preferred gauge for inflation, with a 2% target for long-run sustainable level of price increases being supportive of a stable economy.  While not quite yet at the 2% level, as seen in the chart to the left, Core PCE inflation has been relatively stable under 3% for all of 2024.  Additionally, it is recognized that housing costs have had a large impact on annual price changes and the Fed does not directly have tools at its disposal to influence the price of housing.  Over the last 12 months the Fed should be able to relatively consider meeting its objective for stable prices – while they have been increasing at a slightly faster than desired pace, the pace has been fairly smooth and steady from month to month.  Looking ahead to 2025, the new presidential administration’s policy objectives, while positive for economic growth, are expected to put further pressure on inflation.  This is something that we, along with the Federal Reserve, will keep a close watch on.

Turning to the Fed’s other primary object of maximum employment we now look at the labor market.  As seen in the chart below, since the start of 2023 monthly job gains have been solid and relatively stable, averaging 223,000 over this period.  October of 2024 is the outlier, however the low job growth in that month is largely attributed to one-time factors of a large labor strike, and two intense hurricanes which disrupted markets for a short time – and will result in increased economic activity when considering clean up and rebuilding activities.  Wage growth has been strong, and is returning to a more sustainable pace around 4.0% gains over the prior 12 months.  With the Fed’s restrictive monetary policy intentionally slowing the economy there was much concern that the unemployment rate could spike as business investment and growth would slow due to the higher cost of borrowing capital to fund investments.  This has not transpired as was feared, and the unemployment rate has only risen modestly, from historic lows of mid 3% range to its current 4.2% level.  Looking ahead into 2025 economists expect the unemployment rate to modestly tick up into mid 4% levels, but nothing that would cause alarm and require the Fed to rapidly adjust easing policy.

Despite relative strength in the US economy, abroad there is much geopolitical concerns, which to date have not resulted in much turmoil within our borders.  The Russia and Ukraine crisis continues, now three years old.  The Israel and Hamas conflict is over a year old now and has spilled into Lebanon and Iran.  Syria is experiencing the overthrow of a dictator and internal strife.

The Federal Reserve, led by Chairman Jerome Powell, is currently in the process of easing from its restrictive stance on monetary policy, most notably in the form of lowering the Fed Funds rate.  Following its historic rate increasing cycle from March 2022 through July 2023 where the Fed raised rates by 525 basis points, the Fed has lowered rates by 75 basis points since September, with another 25 basis point reduction expected at the December 18th meeting.  Looking ahead to 2025, markets are expecting between 50 and 100 basis points of additional rate cuts.  The Fed is searching for a neutral rate at which monetary policy is neither restrictive nor overly accommodative towards growth and the strength of the US economy on its own can result in sustainable modest growth.  The Fed’s two goals have largely been met as of recently.  Presently markets are uncertain how much the Fed will be able to reduce rates by the end of 2025 with no individual rate making up for than a third of market expectations.  Forecasts adjust daily based on new economic data and expectations around the effects of the new presidential administration’s policies.

While there have been bright spots as highlighted above in 2024, the lending environment has proved to be challenging, particularly residential lending.  Many homeowners remain in their current homes due to low mortgage rates that we locked in during the pandemic historic low rate environment.  Traditional events that encourage home sale transactions such as trading up for a larger home, moving geographically and even downsizing are far more costly given current mortgage rates remaining three to four percent higher that most homeowners are locked in at currently.  2025 brings economic hope for a more stable and certain rate outlook with reduced volatility.  30-year fixed rate mortgage spreads over Treasury have remained elevated compared to historic averages due to uncertainty surrounding the rate environment.  Current levels are around 50-60 basis points higher than historical levels looking back to the 1990s.  With the combination of higher rates and higher uncertainty surrounding rates, sales of homes have trended lower, as shown in the chart to the right displaying Massachusetts single family sale transactions.  Typical seasonality is still quite evident; however the trend is noticeably in a lower trajectory.  Despite the slowing local market, Leader Bank has been able to increase its share of purchase transactions by focusing on delivering outstanding level of service to our clients along with consistently competitive interest rates.  Leader Bank has grown from a 4.35% market share for purchase transaction in 2023 to 5.63% in 2024 through the first 11 months.  Dedication to client obsession will continue to the factor that drives Leader Bank.

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

This morning brought us the latest insights into the labor market with the November jobs report.  Expectations were for a rebound from the low October job gains and the BLS report delivered on this.  In November the US economy added 227,000 jobs, stronger than expectations and much better than last month’s 36,000 tally, which had disruptions due to labor strikes and hurricanes.  The unemployment rate was little changed at 4.2%, an increase of 0.1% from the prior month’s rate.  Wages continued to growth at a solid pace, however not strong enough to be a concern on inflation, growing at a 0.4% increase from the prior month and 4.0% increase over the past 12 months.  The average work week remained relatively unchanged at 34.3 hours.  The prior two months’ job gains figures were revised higher by a combined 56,000 jobs.  This labor market report confirms remarks earlier this week from Fed Chair Jay Powell that the economy remains strong enough to allow the Fed to proceed cautiously with further rate cuts to better align the Fed Funds rate with the elusive neutral rate.  As such, following this morning’s jobs report expectations for a 25 basis point cut later at this month’s Fed meeting surged from 75% to 88%.  A cut at the December 18th meeting would be the third straight rate cut for a total of 100 basis points since September.  We expect a slower pace of cuts in 2025, with a likely outcome for quarterly cuts taking the Fed Funds rate to around 3.50% - 3.75%.

Recent weekly initial jobless claims data also confirms a solid labor market.  Weekly claims for the week ending November 30th were 224,000 with a four week average of 217,750 – marking continued low claims levels since the four week average dipped below 215,000 back in May.  Looking ahead to next week, Wednesday’s CPI print will bring us the most recent look at inflation, and no shockers are expected.  Continued flattening to slightly declining inflation moving back within range of the Fed’s target is expected.  Housing costs continue to be the main drivers of inflation, including both home prices and the cost to insure those homes.  Home insurance has been a hot spot recently with increased costs due to natural disasters.

Mortgage rates have reversed course recently with declining average rates for the past few weeks.  The Freddie Mac PMM Survey shows the average 30-year fixed rate at 6.69%, down from recent highs of 6.84% in November and nearly right back where the year started.  Locally in Massachusetts, homebuyers have seen some relief from increasing property values with October median single-family prices falling to $646,800, down 7.6% from the mid-summer peak in June of $699,900.  October single family transactions are up 12% from the prior year.  Recall that last fall was a time when rates peaked at their highest in recent years.
 

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

As we head into Thanksgiving week, I encourage us all to take a moment and reflect on the past year and all that we have to be thankful for, keeping in mind that this is likely different for everyone, but we all have things to be thankful for.  Has anyone ever eaten a chestnut roasted over an open fire?  If so, let me know what it tasted like.

This week was quite a bit quieter than the past two weeks in terms of economic news.  President-elect Trump is continuing to assemble his administration’s leaders.  Initially there were rumors over Fed Chair Jerome Powell’s job, but that rumor mill has silenced down.  Weekly initial jobless claims continue to trend down, in a positive sign for labor market strength since peaking at 260,000 in early October.  The most recent reading for the week of November 16th was just 213,000, bringing the four week average to 217,750, the lowest since early May.  We’ll be watching the November jobs report closely to see how well aligned these two labor market indicators are.

Next week lenders will be closely watching for the FHFA House Price Index report for the month of September, which will be the indicator used to set next year’s conforming loan limits.  This week Redfin reported that it saw home prices rise by 5.9% year over year for the month of October.  This figure is well ahead of the most recent August report from the FHFA on House Price Index annual change which saw home prices increase by 4.2% from the prior year.  The FHFA report showed a strong 5.9% increase in the New England region.  The Case Schiller report also showed a 4.2% increase in home prices year over year for August.

As with the light week in terms of economic data releases, market volatility has been a bit more subdued than recently with the 10-year treasury, along with mortgage rates, moving in a narrower band for the week.  The Freddie Mac rate survey showed just a slight six basis point weekly increase in the average 30-year fixed rate, increasing to 6.84%.  Despite this rate being higher than the lows we saw this year in early September it remains 45 basis points lower than rates a year ago at this time.

With still a few more weeks until the next Fed meeting on December 18th markets remain unsure what the Fed will do and what direction Fed comments and the DOT plot will lead markets.  Currently, markets are fairly split on the Fed holding rates steady or cutting another 25 basis points in December.  Markets remain uncertain on the amount of rate cuts for next year with pricing indicators showing a range of cuts from current Fed Funds levels between 25 and 100 basis points.  Leading up to next month’s meeting we’ve still got a slew of economic data to digest including: FHFA quarterly House Price Index, PCE inflation, November jobs report and CPI and PPI inflation for November.  Additionally, with Ukraine now having capability to send missiles far into Russia the threat of geopolitical tensions has increased as this conflict continues.  
Have a great weekend!
 

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

CPI inflation readings for the month of October were released this week with headline CPI increasing by 2.6% over the prior year, and 0.2% from the prior month.  While CPI was up slightly from the prior month’s annual pace this was in line with expectations due to the price level of a year prior.  Core CPI, removing the more volatile food and energy prices, rose by 0.3% from the prior month and 3.3% from the prior year.  Energy prices have been declining recently, which is helping to lower the headline inflation readings, while housing costs are remaining high and keeping core inflation readings higher. Housing costs are up 4.9% over the past year, and expected to remain challenging as home prices and interest rates remain high.  Additionally, since the election results, the bond market has been moving to higher yields as the expectations around President Trump policies on tax cuts, tariffs and immigration while thought to be positive to economic growth are also likely going to put pressure on inflation.

October retail sales also were reported to the higher side of expectations this week, coming in at a 0.4% increase from the prior month and growing at a 2.8% increase over the past year, topping economists expectations.  September’s reading was also revised higher to 0.8% from 0.4%.  The American consumer is still displaying upbeat spending momentum, despite the accumulated runup in costs as items like grocery expenses are up more than 20% since prior to the pandemic.  Speaking this week Fed Chair Jay Powell noted “the strength we are currently seeing in the economy gives us the ability to approach our decisions carefully” and adding that “the economy is not sending any signals that we need to be in a hurry to lower rates.”  The Fed is balancing the risks to the labor market slowing along with balancing remaining too restrictive for too long or slashing rates too quickly and reigniting inflationary pressures.  Markets are largely mixed on current expectations for a rate cut at next month’s FOMC meeting on December 18th.  The Fed has been quite transparent with markets that it does not know the exact neutral rate target, but rather that current rates are too restrictive and it must gradually lower to find balance.  This has been evidenced this week with Fed speakers such as Kashkari (Minnesota), Logan (Dallas), Musalem (St. Louis) and Schmid (Kansas City) all noting that the path toward ultimate rate destination is unknown aside from everyone agreeing that neutral rate is lower than the FOMC’s current Fed Funds rate.  Boston Fed president Collins noted that a rate cut in December is “certainly on the table, but its not a done deal,” and further reminded markets that the Fed will continue to act data dependent. 

So what does this all mean? The market concern over the uncertainly of future policies from the incoming administration has driven up bond yields in a flight to safety.  Equity market excitement from last week has pulled back and equity markets are on pace for a weekly decline following the post election runup.  With economic data continuing to point to a strong economy its unclear how much stimulus the market needs via lower rates to maintain solid footing – there is little economic data to suggest rates should be lower (aside from struggling home affordability). 
 

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

As we head into Veteran’s Day I’d first like to take a moment to recognize all the brave men and women who have served our country protecting our freedom.  THANK YOU for your sacrifice!

This week our nation voted and elected Donald Trump back to the white house as the 47th President.  Additionally, Republicans have gained majority in the Senate and appear on track for a majority in the House as votes in some races for Congress are still being tallied.  The red sweep will greatly ease the ability for president-elect Trump to enact his policies once taking office in January including things like tax cuts, import tariffs, immigration changes and regulatory changes.

Meeting this week for the seventh time this year, the Federal Reserve continued its path toward normalizing interest rates away from a restrictive stance and lowered the Fed Funds rate by 25 basis points.  In doing so, Fed Chair Jay Powell signaled that the Fed continues to see a strong overall economy, inflation trending towards target [2.1% PCE inflation] and a solid labor market [4.1% unemployment rate].  When asked about how the election two days prior influences the Fed’s rate decision and thinking Chair Powell responded with the Fed’s political independence noting “In the near term, the election will have no effects on our policy decisions.”  This means that while the Fed does not act based on what policies it may think are coming from the administration change, or even what policies do from to fruition; what the Fed does respond to is the resulting economic data which is influenced by those policies.  Powell noted that the committee does not know exactly where the neutral rate is or how long and at what pace it will take for the Fed to get there, but the committee remains confident that the neutral rate is lower than the current rate.  Markets are currently pricing in another 25 basis point cut in December followed by a more gradual pace of rate cuts in 2025, possibly looking like cuts every other meeting, remaining dependent on the incoming data and economic forecasts.

While the Fed has been cutting rates, now a cumulative 75 basis points over its last two meetings, in attempt to ease monetary policy from its restrictive position mortgage rates have not been cooperating.  Since bottoming in mid-September just prior to the Fed’s last meeting mortgage rates, as measured by the Freddie Mac weekly survey, have increased by 70 basis points to a recent high of 6.79% and the 10-year Treasury has increased by nearly 65 basis points.  So what’s the disconnect?  The Fed doesn’t control mortgage rates, what it controls, via the Fed Funds rate, is a very short-term rate.  Longer term rates are the product of future economic expectations surrounding things like growth, inflation, global impacts and government debt issuance.  Leading up to the election both candidates’ proposals included increasing the federal deficit, which would mean increased debt issuance from the government.  Markets are viewing the Trump victory with expectations for tax cuts to add to the deficit while increasing economic growth and inflation.  Additionally increasing tariffs on imports is likely to add further pressure to prices and inflation.  Interest rates on longer term products like mortgage tend to fall when there’s economic struggle and rise when there’s economic strength.

WHAT DOES THIS ALL MEAN? Mortgage rates are likely stuck in a pattern higher than the recent lows we saw two months ago.  Economic strength in the data (labor market and slowing inflation) along with expectations for tax cuts and increasing deficit will mean steepening in the yield curve.

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

Lots on the calendar this week for economic news, heading into an even bigger week next week with the presidential election and the Fed meeting and rate decision.  First let’s take a look at what happened this week.  PCE Inflation headlined at 2.1% year over year increase in price levels.  The Core PCE, which is the Fed’s preferred measurement, came a bit higher at 2.7%.  Energy prices have been on the decline recently which is helping to lower the headline faster than the core.  While the year over year price gains are slowing, this doesn’t mean a reduction in prices, so many Americans remain frustrated with the cost for things like groceries, cars and other items.  It can feel like the hard work to earn a pay increase is quickly gobbled up with higher prices for the same goods and services.  Expectations and how reality aligns with expectations is a very powerful force!

The October Jobs report was an interesting one this morning.  The monthly BLS Employment Situation Summary is a combination of two surveys, the Establishment Survey showed that the US added just 12,000 jobs during the month, however the Household Survey showed the unemployment rate unchanged at 4.1%.  This is the first jobs report following the disruptions from hurricanes Helen and Milton, as well as strikes in the manufacturing sector.  The household survey counts those out of work temporarily for things such as weather or strike disruption as still employed – thus no change in the unemployment rate.  Healthcare and government sectors added 52,000 and 40,000 jobs respectively in October, while temporary help services and manufacturing (largely affected by the Boeing strike) declined by 49,000 and 46,000 respectively.  Year over year average hourly earnings growth remained steady at 4.0% while growing 0.3% from the prior month.  Wage growth has been decelerating, from the recent high pace of 5.9% seen in March 2022 as the market for workers is shifting and employees are not switching jobs as easily as was seen coming out of the pandemic.

Focus now shifts to the next week’s elections, for President, Congress and Senate.  A sweep in either direction will lead markets to start pricing in the expected effects of policies, however a divided government may mean continued struggle to get any major legislation passed.  Additionally next week the FOMC will conclude its seventh meeting for the year and a 25 basis point cut in the Fed Funds rates is highly expected, continuing the Fed’s path towards normalizing rates away from the current restrictive stance.  At this point markets are fully pricing this rate cut in as well as nearly 82% expectation for another 25 basis point cut in the December meeting.
 

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

Headlining the economic news for this week was the CPI report for September which came in top line a bit hotter than anticipated, however likely not enough to derail the Fed from plans to continue cutting rates in 2024.  CPI grew at a pace of 0.2% from the prior month and 2.4% from the prior year.  Both of these figures were 0.1% higher than economists were expecting.  The annual pace was 0.1% lower than the previous month’s reading.  Core CPI rose by 0.3% from the prior month and 3.3% from the prior year.  Core CPI ticked up by 0.1% compared to last month’s annual pace, however this is more due to the price levels of a year ago than anything in the current levels.  While the pace at which prices are increasing has been declining, as can be seen in the graph to the left, prices are still rising, and the cumulative effect remains quite painful for many Americans.  The price level for the CPI basket of goods is 22% higher in September 2024 compared to January 2020.  The cumulative price gain for the four years prior to this was just 9%.

Among Fed speakers this week was Atlanta’s president Raphael Bostic – commenting that he was in full support of the 50 basis point cut at September’s meeting and that he is currently undecided if one or two additional 25 basis point cuts would be most appropriate to finish out 2024.  Bostic noted “It’s a journey to get to neutral and the nuance of, ‘Do you move 25 basis points here?  50 basis points there?’  I don’t think those are as consequential.”  Markets are penciling in two 25 basis point rate cuts for the Fed at each of the following meetings for 2024.  
Also this week the weekly initial jobless claims was a surprise to the downside in regards to the strength of the labor market.  Claims spiked up to 258,000, up 33,000 from the prior week and increasing the four week average by 7,000.  This week’s data is likely influenced by isolated events such as the dock workers strike and hurricane Helene, however now hurricane Milton will also disrupt economic activity in much of Florida.  Also, this will take a toll on property insurance providers as this now is two expensive hurricanes in the span of only a few days. 

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

Payroll numbers are in for September and the release is much stronger than expectations. Economists were calling for 150,000 jobs gained in September and the unemployment rate remaining steady; but actual results are much stronger, showing a gain of 254,000 jobs and the unemployment rate falling to 4.1%. Additionally there were positive revisions to prior months with the prior two months of job creation being revised higher by a combined 72,000.

This now marks four consecutive months of increases in job creation and the unemployment rate declining for the second consecutive month. The labor force participation rate remained unchanged at 62.7% and the employment to population ratio was little changed at 60.2%; both measures relatively stable all year. Average hourly earnings increased by 0.4% from the prior month and by 4.0% from the prior year. The annual rate is a slight increase from the prior month’s annual pace. At last month’s Fed meeting, Chair Powell noted that the Fed’s rate cut is the start of the process to recalibrate monetary policy closer to neutral. Markets took today’s labor market data as a chance for a recalibration of their own, with the bond market moving noticeably toward higher yields with the 10-year Treasury up 10 basis points. Over the past two and a half weeks, the benchmark yield is now up by 30 basis points. The Fed’s next meeting concludes with rate decision on November 7th, just two days after the Presidential election and less than one week after the next monthly jobs report. While the 25 bps or 50 bps debate was starting to heat up, this morning’s jobs report has markets shifted to nearly full expectation for just 25 bps of cuts, with currently 95% expectations priced in as measured by the CME Fed Funds futures. Mortgage rates are up 0.25% today compared to yesterday, and are up 0.375% from where they started the week.

WHAT DOES THIS ALL MEAN? The overall US economy remains solid. The labor market is not falling apart as some worried a few months ago. Uncertainty remains over the pace and timing of Fed rate cuts, however at this point it seems the likely path is for 25 basis point cuts at each of the remaining meetings for 2024. While the trend should still be toward lower rates on the short end of the yield curve, the longer end remains more uncertain. The market has been wrong for most of this year, pricing far more rate cuts than the Fed was planning for and far more than have materialized so far. The rate path forward may be a bit bumpier and slower than some hoped. There remains excess spread in mortgage rates over treasury yields than we have historically seen; as market volatility continues to dissipate this should return to more typical levels which would bring rates lower without any underlying economic changes. Additionally, falling mortgage rates should bring more housing on the market as homeowners who have been sitting on ultra-low interest rates are no longer quite as far below current market rates. Additional supply in the market will help to ease affordability and the need to significantly bid up home valuations.

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

Markets have now largely returned to their pre-Fed cut levels (down ~30 basis points from the intra-day highs) after digesting the mega 50 basis point cut from the Fed along with Chair Powell’s commentary in the press conference.  Below is this meeting’s written statement indicating changes from the previous statement.  Notably also the vote was not unanimous this time, with one Fed governor voting for only 25 basis points of cut.  Common themes noted by Jay Powell in the spoken remarks include:

•    The Fed is now “recalibrating” policy levels to more neutral rates
•    This meeting’s 50 basis point cut should not be viewed as the new pace of rate cuts to be expected at future meetings
•    The Fed remains data dependent to determine the future path of rate cuts
•    The Fed considers its responsibility to the American people to support a strong economy, not to influence any political election
•    Chair Powell is happy with how the Fed has held rates to this point while other central banks have been cutting rates and thinks that the Fed is in a strong position currently to support the economy

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}

The August Jobs Report is in! Lets take a look at the numbers and see what this means. The headline numbers are 142,000 jobs gained in August and a slim decline in the unemployment rate to 4.2%. These figures themselves are largely in line with expectations. Digging a bit deeper we see the report also included a cumulative reduction in job creations for the prior two months amounting to a combined 86,000 which pushes the August number to the highest since May. August’s gain of 142,000 is well below the average of 202,000 over the prior 12 months. Average hourly earnings increased by $0.14 or 0.4% from the prior month and have increased by 3.8% from a year ago. This is largely in line with inflation – meaning that Americans have gained nothing in terms of purchasing power despite seeing nominal wage gains. The largest sectors for job gains were leisure/hospitality, construction and healthcare with 46,000, 34,000 and 31,000 new jobs respectively. The government sector added just 24,000 jobs for the month. The manufacturing sector showed some weakness, with a decrease of 24,000 jobs during the month. The weekly initial jobless claims data has also been steady over the past month with weekly claims ranging from 227,000 to 234,000. Nothing particularly stands out in today’s jobs report that should shift markets (or the Fed) one direction or the other. Today’s report shows that there continues to be mild slowdown in the labor market; but nothing signals the need for emergency stimulus, in the form of a large rate cut, from the Fed. On the release of the jobs report markets are moving towards marginally lower yields, but this new data is largely a non-market mover. Yields continue trending lower over the past month, with 10-year Treasury and 2-year Treasury at or near 52 week lows. Additionally, the yield curve inversion continues to reverse with markets recently showing a flat or even more normal risk premium of one or two basis points for longer out on the curve.

How should markets be trending and what will happen at the September 18th Fed meeting? With last week’s PCE inflation data and today’s jobs report largely in line with both expectations and prior month readings I don’t see a reason for the Fed to cut more than 25 basis points this month. We’ll still get August CPI next week prior to the Fed’s meeting, but decisions on the economy and size of rate cut will likely already be finalized prior to that data. In Jackson Hole last month Fed Chair Jay Powell was clear that the Fed views the time has come to start to normalize policy, but I don’t see a 50 basis point cut in September as needed to begin the normalizing process. A cut this large would signal concern over the strength of the labor market and that the Fed feels they are too late in starting to reduce rates. The Fed has maintained their data dependence in making decisions and based on my interpretation of the data a 25 basis point cut is all that is warranted currently, followed by a pause to continue to review future economic data and trends. Speaking today Fed Governor Christopher Waller echoed Powell’s remarks, stating “I believe the time has come to lower the target range for the federal funds rate at our upcoming meeting.” The Fed is in search of the elusive and theoretical “neutral rate” for Fed Funds at which risks in the economy become perfectly balanced and interest rates are neither stimulative nor restrictive.

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Friday morning Fed Chair Jerome Powell took to the podium at the Federal Reserve’s Economic Symposium from beautiful Jackson Hole Wyoming with the backdrop of the Grand Tetons.  Speaking with his typical gentle and measured approach Powell cemented in a Fed rate cut for the September meeting.  “The time has come” said Chair Powell.  In summarizing current economic conditions Chair Powell noted, “The labor market has cooled considerably from its formerly overheated state…rising unemployment has not been the result of elevated layoffs, rather the increase mainly reflects a substantial increase in the supply of workers and a slowdown from the previously frantic pace of hiring.  The cooling in labor market conditions is unmistakable.”  Regarding inflation Chair Powell noted that the Fed has greater confidence that inflation is trending toward its target, noting that recent inflation readings are only 2.5%.  While a rate cut in September seems certain at this time what Powell left open for market debate remains how big the cut will be and what the future pace and timing of additional possible cuts will look like.  “The timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks” noted the ever-steady Powell.  Speaking with the reassurance of an economic sage, the Fed Chair brings a composed presence to such delicate matters that often elicit strong emotional moves in financial markets.  

Transitioning to a rate cutting cycle at this point, given the current 5.25%-5.50% range where Fed Funds is currently, the Fed will have ample room to cut rates while observing adjustments in economic data readings as a result of lower rates.  Current expectations for the September 18th rate decision are two thirds for a 25 basis point cut and just one third for a larger 50 basis points cut.  Through the end of 2024 the Fed will have three more FOMC meetings at which to adjust rates, with the most recent upcoming meeting in September.  Markets are largely expecting 100 or more basis points in rate cuts by the end of the year, which would seem to be quite drastic given the continued strength of the US economy.  Unemployment, while it has risen from lows earlier this year, remains historically low, and inflation is nearly under control back within close proximity to the Fed’s 2% target.  Additionally, 100 or more basis points in rate cuts over just three meetings requires a cut of larger than 25 basis points at one or more of the meetings – which markets could interpret as the Fed seeing additional weakness in the economy above the mild slowdown that it has communicated thus far.  Based on Fed Chair Jay Powell’s remarks a more measured and slower pace of rate cuts seems appropriate as the Fed makes decisions for each meeting based on the totality of economic data at the time and its views of current and futures risks to the economy.

Also this week, existing home sales rose for the month of July for the first time in five months, rising 1.3%; despite being lower than July sales in the prior year by 2.5%.  New home sales also surged for July, up 5.6% nationally, to the highest since May 2023.  Closer to home the Massachusetts Association of Realtors reported that Massachusetts single family sales for the month of July were 10% higher than last year, with 4,216 transactions closed.  Condo units were slightly higher than prior year, up just 1%.  In positive news looking ahead, single family new listings were 12% higher than prior year for single family homes, and 5% higher for condos.
 

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An action packed week comes to a close with a quiet Friday in terms of economic news releases.  This week we had CPI, PPI, Initial Weekly Jobless Claims and Retail Sales.  Data this week has calmed markets and shifted expectations around what the Fed will do in September.  CPI Inflation came in at 0.2% month over month and 2.9% year over year, in line with expectations for the month of July.  The annual pace is down 0.1% from the prior month’s reading, providing the Fed with another data point toward confidence that inflation is sustainably trending to target.  Core CPI also declined by a tenth of a percent to a 3.2% annual pace.  The Producer Price Index, or PPI, which measures input prices came in slightly lower than expected, with a 0.1% increase from the prior month and 2.2% increase from the prior year.  

Another welcome sign that the pace of price gains is slowing.  Retail sales for the month of July showed a surprise 1% increase, which was more than double expectations and signals that the American consumer remains healthy and is still spending.  This was the highest retail sales monthly increase in over two years.  The final major piece of economic news came in the form of the now closely watched weekly initial jobless claims.  Recall that the August 2 jobs report for the month of July was a big miss on expectations and sent markets into a wild freefall.  Panic ensued that the Fed should have already been cutting rates and now was too late.  There were even calls for emergency action from the Fed for a between meeting rate cut.  Since the recent peak at the end of July, weekly new unemployment claims have slowed substantially to put fears at ease regarding the strength of the labor market.  With this recent barrage of economic news, along with the Fed’s last meeting just two days prior to the July jobs report, market expectations for the magnitude of Fed cut in September as seen in the chart above have been quite fluid.  Leading up the jobs report a 25 basis point cut seemed all that was needed; after it appeared there were major cracks in the labor market a more substantial 50 basis point cut was priced into markets.

As additional data came forth this week, markets cooled and again reversed course, now implying a 25 basis point cut.
As it appears we’re on cusp of a shift in monetary policy and heading into a cycle of the Fed cutting rates, long-term rates have responded favorably.  The 10-year treasury has fallen over 50 basis points from its recent cycle July 1 highs, and mortgage rates also now sit at their lowest in over a year, down more than a full 1% from highs seen last fall.
 

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Following last week’s jobs report for the month in July coming in weaker than expected along with the ripple effect through global markets from the Bank of Japan unexpectedly raising rates this week has been chaos in markets as traders and economists try to predict the direction of the economy and how quickly the Fed will intervene. The 10-year Treasury yield has been quite violent in its volatility, as has MBS pricing and equity markets. The 10-year treasury yield as seen in the chart to the left has fallen sharply from its 2024 high of 4.70% near the end of April to an intraday low of 3.66% this past Monday to climbing back to 4.00% on Thursday, and now hovering slightly at 3.94% this Friday morning. Looking over a shorter period of time, from the July 31st Fed meeting day close of 4.10% over the next 3 trading sessions the yield fell some 44 basis points to its low point; followed by an increase of 34 basis points. Equity markets also tumbled over this stretch with the DOW off a record high level of 41,000 falling more than 5% in just a few days to a low of 38,700; only to be followed up with the largest single day gain of the year once markets calmed down. What does all this volatility mean? Expectations for the near term future are uncertain; what seemed for sure to be the smooth soft landing for the economy from the decades high inflation now seems more in jeopardy as last month’s jobs data showed the labor market may have weakened. Rates are on the decline, but it may be a bumpy ride. However, we needn’t jump to conclusions too quickly over a single data point.

Chicago Fed President Austan Goolsbee reminded markets, “Is it going to stop there? Or is it going to keep getting worse? To me, that’s not one you can answer with one month’s number…we gotta to watch it for a lot more than just once month.” To this end markets, and the Fed, are paying closer attention to the weekly intitial jobless claims as reported every Thursday morning by the US Department of Labor. The chart to the right shows the weekly initial claims along with trailing 4-week average trend, which helps to smooth out some outlier weekly readings which can be caused by one-time events such as weather or strike related spikes in claims. As seen in the trend line, since the start of the year claims have been on the rise, however this week’s closely watched report showed 233,000 initial jobless claims, a decline from the prior week and also lower than the four week average.

Also making headlines this week, the Freddie Mac weekly survey on mortgage rates reported that the 30 year fixed rate mortgage averaged 6.47% as of August 8th, the lowest of the year, and the lowest going back till May 2023. A reduction in mortgage rates could help to fuel late summer buyer demand as lower rates help buyer affordability, but as rates still remain well above the rates for the majority of current home owners this current downward move is unlikely to help bring additional housing supply to the market.

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The Federal Reserve held interest rates steady at the 5.25%-5.50% range as was largely expected, in a unanimous vote by the committee members.  Markets are widely expecting a 25-basis point rate cut at the Fed’s next meeting in September and while Chair Powell would not specifically agree to a cut at the next meeting, he made little comments during the press conference to dissuade from that.  Cue up Earth, Wind & Fire as it looks like we’ll be Dancing in September!  What will it take for the Fed to cut in September?  It seems the more proper question to be what it would take for the Fed to not cut.

Fed Chair Jay Powell clearly expressed that if economic data between now and the September 18 Fed meeting continues trend with recent data, or at least not getting worse, that the Fed will have enough confidence in the economy to start pulling back on its restrictive monetary policy, aka lowering rates.  Chair Powell said numerous times that the Fed looks at the totality of economic data and trends towards the goals of its dual mandate for price stability and maximum employment and will make policy decisions with this view.  Between now and the next Fed meeting we’ll get PCE inflation, two CPI inflation readings and two months of jobs data.  The Fed views that the risks to the economy of high inflation is now largely balanced with the risk of the labor market slowing too quickly.  For the past 12 months inflation risk has been the Fed’s primary concern.  The Fed noted the current economic landscape shows economic activity continues to expand at a solid pace, wage growth has eased over the past year and growth in consumer spending has slowed but remains solid.  Jay Powell and the Fed seem on track to give the market what it is looking for in a September rate cut.

From the US Bureau of Labor Statistics the labor market added 114,000 jobs during the month of July and the unemployment rate increased to 4.3%.  These figures are a disappointment to the labor market which has remained the strength of the economy for the past few years and finally is starting to show signs of decline in the face of the Fed’s tighter monetary policy.  The 114,000 job gains during the month is the lowest monthly figure since December 2020’s negative figure and is well below the average of 215,000 over the prior 12 months.  The 4.3% unemployment rate is the highest since October 2021’s 4.5% rate.  The unemployment rate is now 0.8% higher than it was a year ago, and the number of unemployed has increased from 5.9 million up to 7.2 million currently.  Gains in government jobs were muted in July, adding just 17,000 jobs compared to 70,000 added in June.  As previously noted, I do not view government job gains as sustainable real growth in the labor market.  Too many government jobs are really just another form of stimulus.  July average hourly earnings increased by 0.2% from the prior month and 3.6% from a year ago.  Job gains in the prior two months were revised lower by a cumulative 29,000 with a 27,000 lower revision to June’s previously reported gains.  This jobs report further supports the argument that the economy is slowing, and current monetary policy is overly restrictive.
 

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Today brought the final major piece of economic data to the markets prior to next week’s Federal Reserve meeting and rate decision.  Another month of inflation data pointing to slowing price gains.  As reported by the Bureau of Economic Analysis headline PCE inflation grew by 2.5% from the prior year, which is a tick down from the prior month’s 2.6% annual pace.  Removing the more volatile food and energy prices, Core PCE grew by 2.6% over the past 12 months, which is the same pace of growth seen last month and slightly higher than expectations.  On a monthly basis the headline PCE gained 0.1% and Core PCE gained 0.2%.  Despite the slowing rate of price increases consumers are still feeling the pinch from cumulative years of gains in prices since the pandemic.  Also in the release this morning we saw that personal income is slowing, gaining just 0.2% from the prior month, half the gain seen in May, and personal spending came in at a 0.3% gain while the prior month was revised up to 0.4% from previously reported 0.2%.

Earlier this week the BEA also reported on US GDP growth for the second quarter of the year.  In this first estimate reported, GDP grew at 2.8% from the prior quarter, double the rate of growth seen in the first quarter.  GDP increased due to increases in private inventory investment along with an acceleration in consumer spending.  In line with the income and spending figures noted above in the PCE release, the GDP report showed that they personal savings rate slowed to 3.5% in the quarter from 3.8% in the prior quarter.
Also making headlines this week the NAR reported on home sales across the country.  New Home sales in the month of June slipped by 0.6% from the prior month and are 7.4% lower than the prior year.  Existing home sales rose to a new record price of $426,900 in June, the second consecutive month of a new record high and a 4.1% increase in the price levels seen a year ago.  However, the number of sale transactions declined by 5.4% from the prior year.

Looking ahead to the following week the FOMC rate decision comes Wednesday afternoon.  All expectations are for the Fed to hold rates at this meeting while setting the stage for a rate cut in September and outlining the path for future rate cuts.  Markets are currently pricing in these expectations, so we don’t see mortgage rates falling outside of a major market surprise from Fed Chair Jay Powell, who is famously cautious about his word choices.
 

^{The content of this publication is provided for informational purposes only and is not intended to recommend any financial decision or course of action.  Any financial and investment decision should be made in consultation with your financial advisors and representatives and should be evaluated at your own risk.}