All eyes are on next week’s Federal Reserve Open Market Committee Meeting as the consumer data out this week shows significant support for a rate cut by the Federal Reserve this year.
The Labor Department released its data for the Producer Price Index (PPI) and the Consumer Price Index (CPI) over the last two days. Both reports show soft inflation rates, well below the benchmark 2% growth desired by the Fed.
The PPI for May rose by 0.1% month over month, with the core PPI (which excludes gasoline and other volatile products) advancing by a stronger 0.2% month over month. This data point measures prices for sellers. Taking a broader look, producer prices in May were up just 1.8% year-over-year. That is considerably lower than the 3.4% rise we saw last summer.
The CPI showed similar results with the core CPI rising by 2% against an expected 2.1% gain, year over year. The month-over-month data saw a similar rise with core prices also missing expectations. For the fourth straight month, core prices have gained just 0.1%.
These reports, along with the continued saga of the trade war with China, caused equities to fall on Wednesday ending their longest winning streak in two months. Stocks rebounded Thursday and are now up on the week. We would expect equities to trade in a range for now until we get more out of the Fed next week. According to Bloomberg, these factors combine to indicate odds of “almost a quarter point easing in the next two months.”
As senior economist at Toronto-Dominion Bank, Leslie Preston, observed “It gets harder and harder to dismiss the benign inflation on any one factor or any month-to month swing.”
Director of the National Economic Council, Larry Kudlow, took a bit of a different perspective. He said this week that despite all the noise of trade talks and soft inflation, “I think we’re in very good shape and I think we’ll maintain a 3% growth pace this year.” He added that the growth is not reliant on a trade deal being reached with China. Instead, he says, “What has changed is lower tax rates, massive deregulation, opening up the energy sector and various trade reforms.”
Jobless claims rise
Adding to the paltry jobs report last week from the Labor Department, weekly jobless claims also rose against expectations for a decline. Initial claims for state unemployment went up by 3,000 when economists had expected them to go down week-over-week.
Further indication that inflation is becoming further subdued was data showing that import prices fell by the most in five months in May. That piece of data only furthers the support for the Fed to cut interest rates next month.
A U.S. economist at Oxford Economics in New York, Jake McRobie, said, “Combined with increased business uncertainty from rising trade tensions and slowing domestic growth, softer inflation should prompt the Fed to ease policy by year end.
Oil prices jump after attacks
The price of oil saw a 2% jump this week due to attacked on oil tankers in the Gulf of Oman. Initially prices soared by 4% but settle back down as Thursday went on. It was not immediately clear who was responsible for the attacks. Secretary of State Mike Pompeo blamed Iran for the attacks, however, which caused prices to jump 3%.
Before news of the attack, oil prices had dropped to five-month lows. And on Wednesday evening before the attacks, futures had fallen by 4% because of supply increases. This will be something to watch over the next few months as geopolitical concerns have been a driving force behind market sentiment.
Mortgage applications surge
After weeks of declines, mortgage rates have settled at a two-year low. Easing of trade tensions with Mexico helped to stabilize the markets, keeping rates a steady 3.82% for a 30-year fixed-rate mortgage, according to Freddie Mac.
U.S. consumers seem to have finally gotten comfortable with rates and the market and are really jumping into the housing game. In just one week, mortgage applications went up by nearly 27% with refinances jumping by 47% week-over-week and a whopping 97% annually, according to the Mortgage Bankers Association.
Right now, volume is up by more than 40% compared to this time last year. Joel Kan, the MBA’s associate vice president of economic and industry forecasting, said rates have been “pulled down by trade tensions with China and Mexico, the financial markets reacting to more bearish communication from several Fed officials, and weaker than expected hiring in May.”
When you break it down, mortgage applications to purchase a home, not just refinance, finally showed signs of significant growth, going up by 10% weekly and annually. Kan speculates that there is still a little restraint from some buyers due to continued economic uncertainty as well as a very tight market for first-time homebuyers.