Economic Data Points to A Stalemate - 12.6.24

by Ryan Schoen , Principal Market Analyst

Quick Hit

The latest economic developments point to a stalemate. Inflation isn't falling and the jobs market isn't contracting. This has led fed officials and market participants to remain cautious as they look for clarity around where the economy is headed. Until clarity is gained on the economy and the future probabilities of the direction for longer-term interest rates understood, the housing market will remain in an uphill battle.

Key Points & Stats

1. The Fed's preferred inflation metric, Personal Consumption Expenditures (PCE), increased 0.2% M/M to an annual rate of 2.3% in October. Meanwhile, core inflation, which excludes food and energy, came in even stronger with a 0.3% M/M increase to an annual rate of 2.8%. Both were in line with expectations.
2. Spending rose 0.4% M/M and personal income increased 0.6% M/M in October. These increases demonstrate just how strong the U.S. economy remains and that notion was further solidified when GDP came out showing a robust 2.8% annual pace in the third quarter of this year driven by strong consumer spending and a surge in exports fueled by expansion.
3. In October, there were 6.984 million unemployed workers and 7.744 million job openings which equates to 1.11 jobs available per unemployed worker in October, up slightly from September.
4. Existing home sales rose 3.4% in October to a seasonally adjusted annual rate (SAAR) of 3.96 million. However, new home sales declined by -17.3% to a SAAR of 610 thousand. In total overall home sales were able to grow by just 0.04% to 4.57 million.
5. The inventory of unsold existing homes expanded by 0.7% M/M to 1.37 million in October. Meanwhile, new home inventory surged by 4.24% M/M to 492 thousand. These developments place total housing inventory levels at 1.862 million, the highest level since November 2019 when inventory levels came in at 1.965 million. 
6. Existing home sales showed 4.2 months' supply and new home sales surged to 9.5. The increase in inventory levels, combined with a slowing pace of sales and a higher interest rate environment reducing affordability could put downward pressure on home prices.

Inflation Isn't Falling and Jobs Market Isn't Contracting

If you enjoy Thanksgiving conversations that turn into debates, which ultimately led to a stalemate with no clear "winner," then you'll understand exactly where we find ourselves today from an economic data standpoint. 

The two biggest market movers of inflation and the jobs market currently point to an economy that doesn't have a clear path going forward. 

Although inflation has largely continued to move towards the Fed's 2% target, some central bank officials have expressed concern over the timing of rate cuts. One of those officials is Fed Governor Christopher Waller, who summarized his feeling on the matter by stating, “Overall, I feel like an MMA fighter who keeps getting inflation in a choke hold, waiting for it to tap out, yet it keeps slipping out of my grasp at the last minute.” Looking at the latest PCE inflation reading that came out, we can clearly see why he feels that way. Simply put, improvements in the battle to get inflation to come down have stalled out.

Likewise, on the other side of the dual mandate, the contraction in the jobs market appears to have stalled out as well, as we have bounced around the 1.08 to 1.11 mark since July in job openings per unemployed worker.

Adding these two indicators together means that the Fed is likely to be cautious in their rate decisions going forward until more data reveals what's next for the economy.

The uncertainty playing out in the economic data points above are one key reason the 10-year treasury yield continues to be volatile as market participants battle daily with their thesis of how things will develop in the future. While many people will monitor higher time frames, such as hourly and daily fluctuations, if we zoom out and take a look at weekly movements from the 2020 swing low to the October 2023 swing high, we can gain a better understanding of possible scenarios playing out based on technical analysis. 

Using technical analysis as our guide, we see that the 50-period moving average has been a great support indicator since yields started to move higher and would you believe it, that's precisely where we sit today, another stalemate at the 4.18% mark.

If yields don't break through this mark and continue their upward trajectory, things could get interesting as the next indicator to watch is the downward trending top of the wedge pattern that has emerged. A break of this trend could spell a violent move to the upside, which would be bad news for mortgage rates. 

The other scenario in play is a move to the 23% Fibonacci retracement level, which would occur at the 3.91% mark. At this level, yields should find support before continuing the move higher or breaking down to test the bottom of the wedge pattern. In the short term, we should continue to bounce around inside this wedge pattern, but at some point, this long-standing pattern will need to exit the current stalemate we find ourselves in, and at that point, we will truly know where mortgage rates are headed.

Home Sales Decline as Inventory Picks Up, Price Pressure?

Over the last two weeks, we received updated indicators on the macro trends occurring in the housing market.

Home sales continued to disappoint growing by just 0.04% to a seasonally adjusted annual pace of 4.57 million. In October, existing home sales rose 3.4% to a seasonally adjusted annual rate (SAAR) of 3.96 million. However, new home sales declined by -17.3% to a SAAR of 610 thousand.

On the inventory front, unsold existing homes expanded by 0.7% M/M to 1.37 million in October. Meanwhile, new home inventory surged by 4.24% M/M to 492 thousand. These developments place total housing inventory levels at 1.862 million, the highest level since November 2019 when inventory levels came in at 1.965 million. Going forward the hope of market participants is that the worst of the downturn in home sales is over and that increasing inventory levels will ultimately lead to more transactions in 2025.

If increased inventory levels do not lead to increased transactions, then the likely scenario is that home prices will contract. As we can see in the two charts, months' supply continues to tick up for both existing and new home sales which is wading further and further into buyer's market territory. Given the strong historic correlation between months' supply and annual home price growth. The current trend favors a slowdown in home price growth.

In recent years, home prices have been supported by this reduction in supply despite a reduction in affordability. The coming year could be a turning point when the two collide.