A rough week of economic data stoked fears of a recession and further uncertainty about the Federal Reserve's next move. Jobless claims came in higher than expected, increasing by 5,000 to 245,000. Continuing claims also moved up by 61,000. Continuing claims measure the number of people who have already filed an initial claim and are continuing to file for unemployment benefits. 

As we've mentioned in previous blogs, the Fed has been working to cool down both inflation and the labor market as they go hand in hand. However, if it moves too quickly it could push the economy into a recession. It is very strange indeed to look at increased unemployment as a potential positive sign for the economy, but it is definitely something the Fed will take into consideration at its next meeting in the first few days of May. 

The other piece of economic data that influenced investors over the week was the Federal Reserve Bank of Philadelphia's Manufacturing Survey which came in well below expectations.The survey showed a drop from -23.2 down to -31.3—that is the lowest reading since May 2020 and its third consecutive decline. Any reading below 0 reflects a contraction in the manufacturing sector. 

Short-term bonds felt the brunt of the volatility dropping by about 10-basis points day-over-day after the release of the data. The 2-year yield opened Friday at 4.137%, a far cry from its peak 5.066% peak this year on March 7. The 10-year yield also fell on the day by roughly 6-basis points and remains about 60-basis points below the 2-year. We're nearing a full year of the two yields being inverted which is a very strong indicator of recession. The spread between the two yields has narrowed meaningfully, tightening from what once was a 100-basis point difference. 

HOUSING INDUSTRY IS HAVING A WEIRD MOMENT

The ongoing battle of home prices, mortgage rates and low inventory continues to stymie would-be homebuyers, but there are pockets of strong activity showing purchase demand is still there. The National Association of Realtors' monthly existing home sales report showed a 2.4% month-over-month decline from February to March. Year-over-year, sales are down 22%. But the NAR's Chief Economist, Lawrence Yun, said that doesn't tell the full story. "Home sales are trying to recover and are highly sensitive to changes in mortgage rates. Yet, at the same time, multiple offers on starter homes are quite common, implying more supply is needed to fully satisfy demand. It's a unique housing market.”

The NAR reports housing inventory is up 5.4% from this time 2022, which is good news, despite the unsold inventory going unchanged month-over-month at a 2.6-month supply. Yun added that another piece that highlights the unique makeup of this market is that “Home prices continue to rise in regions where jobs are being added and housing is relatively affordable. However, the more expensive areas of the country are adjusting to lower prices.” The median home price for all home types declined by 0.9% year-over-year to $375,700.

It is expected that activity will slow down for at least a week or so as rate-sensitive buyers digest increased volatility. Freddie Mac's 30-year fixed-rate mortgage average went up for the first time in over a month, inching up 12-basis points to 6.3% due to "shifting market expectations." Freddie Mac's report goes on to say, "Home prices have stabilized somewhat, but with supply tight and rates stuck above six percent, affordable housing continues to be a serious issue for potential homebuyers. Unless rates drop into the mid five percent range, demand will only modestly recover."