Vital Statistics:
Stocks are higher this morning on no real news. Bonds and MBS are up.
It looks like a government shutdown has been averted, and the government should be funded through 2025 at 2024 levels. Defense gets a small increase, while non defense spending gets a small cut. The Fed had toyed with the idea of suspending quantitative tightening while the budget was getting hammered out.
The CPI and PPI inflation reports were better than expected, so that should mean further rate cuts this year, right? Not so fast, according to some Wall Street strategists. They note that the PCE Price Index is the Fed’s preferred inflation gauge, and it has a slightly different methodology than CPI and PPI. They argue that the PCE Price Index may not reflect the positive surprises we saw the other indices, and YOY PCE growth may increase 0.1% in February.
One of the more pessimistic takes: “In short, progress on inflation has started off 2025 on the wrong foot,” Bank of America economist Stephen Juneau said in a note. “Our forecast for PCE inflation reinforces our view that inflation is unlikely to fall enough for the Fed to cut this year, especially given policy changes that boost inflation. We maintain our view that policy rates will stay on hold through year-end unless activity data really weakens.”
Citi on the other hand, sees a potential negative surprise in PCE as a one-off and expects March will be much more benign. They see the Fed possibly cutting rates in May.
Notwithstanding the inflation numbers, consumer spending is looking weak, and retailers are sounding the alarm. Companies like WalMart, Dollar General, and McDonalds are all seeing consumers buy smaller sizes and pulling back on discretionary goods. Indeed, the weak retail sales numbers caused the Atlanta Fed GDP Now Model to predict an economic contraction in Q1. Tariff noise probably isn’t helping either, although we have yet to see the effects translate into actual economic data yet.
New home purchase mortgage applications rose 0.3% MOM and fell 6.9% YOY, according to the MBA. “New home purchase activity strengthened in February, in line with seasonal patterns, as higher housing inventory and declining rates supported growth,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “However, applications to purchase newly built homes were lower than a year ago for the second straight month. The FHA share of applications reached its highest share in the survey, accounting for almost a third of applications. The average loan size declined, indicating that first-time homebuyers remain active in the new home purchase market.”
Added Kan, “MBA’s estimate of seasonally adjusted new home sales increased for the second consecutive month to its highest pace in three months.”
The existing home inventory problem is easing, according to data from Realtor.com. The number of for-sale homes increased 27.8% compared to a year ago, while list prices are down 0.2%. Much of this is due to product mix – there are a lot more smaller homes on the market. On a price per square foot basis, listing prices are up 1.2%.
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