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Weekly Update 07/26/24: Fed’s Preferred Price Gauge Continues to Trend in Right Direction

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Domestic Economic News

Existing-home sales in the US slumped to one of the slowest paces since 2010 in June, as sellers wait for mortgage rates to fall further and buyers balk at stubbornly high prices. Contract closings decreased 5.4% from May to a 3.89 million annualized rate, data released Tuesday from the National Association of Realtors showed. That marked the fourth straight decline and the rate trailed all estimates in Bloomberg survey of economists. The slowdown came as prices reached another record in June, with the median sales price up 4.1% to $426,900. Surprisingly, prices are growing even as more supply has hit the market in recent months, but inventory is still low by historical standards. In June, there were 1.32 million homes for sale, the most since October 2020 but still well below the 1.9 million that were listed before the pandemic in June 2019. That means at the current sales rate, it would take 4.1 months to exhaust that supply, the longest in four years. “Even as the median home price reached a new record high, further large accelerations are unlikely,” NAR Chief Economist Lawrence Yun said in a statement.

Buyers and sellers alike are eager for the Federal Reserve to start cutting interest rates after keeping them at a two-decade high for the past year. In recent months, inflation has shown more signs of cooling and unemployment has risen, boosting market odds to near-certainty that the Fed will cut in September and December. The trend has sent mortgage rates lower, with the 30-year contract rate down to 6.87% in the week ended July 12 from this year’s peak of 7.29% in April, according to Mortgage Bankers Association figures. However, that’s still twice their level from the end of 2021. About 65% of the homes sold were on the market for less than a month in June, compared with 67% in May, while 29% sold above the list price. Properties remained on the market for 22 days on average in June, compared with 24 days in May, NAR’s report said. While record-high prices hardly indicate that this is a buyer’s market, Yun said it’s slowly moving away from being a seller’s market. Fewer buyers are waiving inspections now compared to a year ago, and houses are taking a little longer to sell, but generally still moving swiftly, he said. Existing-home sales account for the majority of the US total and are calculated when a contract closes.

Sales of new US homes unexpectedly declined to a seven-month low in June as the mix of stubbornly high mortgage rates and prices deterred prospective buyers. Contract signings on new single-family homes decreased 0.6% to a 617,000 annual pace, following a nearly 15% drop in May that was the largest in two years, according to government data released Wednesday. The figure was weaker than all but two estimates in a Bloomberg survey of economists. The latest figures follow a topsy-turvy first half of the year, with sales gaining ground throughout the spring before slumping in May by the most in nearly a year. Thirty-year mortgage rates have dipped below 7% in recent weeks, but remain double what they were at the end of 2021, encouraging many builders to offer sales incentives such as buying down customers’ mortgages. Meantime, builders have continued to add supply, with inventory edging up to 476,000 homes in June, still the most since 2008. At the current rate of sales, that inventory would last 9.3 months, the longest since October 2022. The number of completed new homes that were for sale rose to 102,000 in June, remaining at the highest level since 2009. Builders “were hoping for robust demand, but the rise in home prices and rebound in mortgage rates combined to torpedo affordability, and homebuying demand has deteriorated,” Stephen Stanley, chief US economist at Santander Capital Markets, said in a note. “The result is that new home inventories have backed up noticeably.”

Interest Rate Insight and the Fed

The Federal Reserve’s preferred measure of underlying US inflation rose at a tame pace in June and consumer spending remained healthy. These were encouraging signs for officials looking to cool inflation without breaking the economy. The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.2% from May. From a year ago, it rose 2.6%, according to Bureau of Economic Analysis data out Friday. Inflation-adjusted consumer spending rose 0.2%, while May’s increase was revised higher. Treasuries rallied and stock futures remained higher as the inflation data came in mostly as expected, even as quarterly data Thursday suggested past figures might have been revised higher. May’s core PCE inflation reading was revised slightly higher but remained at 0.1% on a rounded basis. On a three-month annualized basis, core inflation cooled to 2.3%, the least since December. Friday’s report offers some encouraging evidence that the Fed’s tightening campaign is making its way through the economy without causing too much damage. While officials are widely expected to keep their benchmark interest rate unchanged at a two-decade high when they meet next week, investors are betting the first rate cut will come in September. “From the Fed’s perspective, cumulatively, we think the data show enough progress — on both inflation and labor market conditions — for policymakers to open the door to a rate cut in September,” Rubeela Farooqi, chief US economist at High Frequency Economics, said in a note. Policymakers pay close attention to services inflation excluding housing and energy, which tends to be more sticky. That metric increased 0.2% in June for a second month, according to the BEA.

The report showed inflation-adjusted outlays for services and merchandise each rose 0.2%. Housing and utilities led increases in services spending, while vehicles and recreational items propelled advances in goods. Signs of cooling in the labor market are starting to translate into less purchasing power. Wages and salaries rose 0.3% in June, half the prior month’s pace. On an inflation-adjusted basis, disposable income growth slowed to 0.1%. Here is what Bloomberg Economics said: “Details of the Personal Income and Outlays report for June indicate US consumers are getting stretched thin. Though spending continued to grow at a healthy, albeit slower clip, income growth slowed more rapidly. And with the labor market cooling, we think consumption growth will ease further in the second half of the year.” —Stuart Paul, Estelle Ou and Eliza Winger, economists

Impactful International News

Euro-area private-sector activity barely grew this month as its top economy unexpectedly slumped. S&P Global’s composite Purchasing Managers’ Index fell to 50.1 in July, according to data published Wednesday. While that’s above the 50 level that signals growth, it’s the worst reading since February and worse than economists had predicted in a Bloomberg survey, which saw the measure holding steady at last month’s 50.9. That shortfall can be attributed to Germany, which surprisingly contracted, dropping below the vital threshold for the first time since March. France also failed to grow, though its 49.5 reading outpaced all but one estimate in a survey of 11 economists. “It feels a bit like it as the euro-zone economy barely moved in July,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “The situation deteriorated significantly in the manufacturing sector and counteracted moderate growth in the services sector.” Industry has now been in contractionary territory for two years. It hit a seven-month low in July and de la Rubia also highlighted that “it’s unsettling how steadily companies in the manufacturing sector are slashing jobs month by month.” The data are among the first that European Central Bank officials are due to analyze over the coming months after leaving interest rates on hold last week. While policymakers acknowledged that growth had weakened, they are waiting for further confirmation that inflation remains on track to reach the 2% target next year. But input prices increased at a faster pace across the economy, according to the PMI data, and output prices fell only fractionally. That hints at persistent challenges in reaching the inflation goal, de la Rubia said. Here is what Bloomberg Economics has to say about it: “The euro-area PMI survey for July creates a downside risk to the GDP forecasts of both Bloomberg Economics and the ECB. However, we still think growth will remain buoyant, as the deceleration of inflation revives real incomes.” —David Powell, senior euro-area economist.

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