Weekend Talking Points - 'Wrong Way'

The January CPI report was just what we DIDN’T need, with inflation rising on higher home rental, oil and food costs. Unless something changes, the Fed might not cut again for several months.

Mixed messages from BLS jobs report. Weak or strong? The 143,000 jobs added in January was below Street expectations. But the unemployment rate (“UR”) declined from 4.1% → 4.0% — the lowest it’s been since May 2024. However, significant population adjustments (~2 million people) and other revisions were made that make apples-to-apples comparisons difficult. [BLS]

TP: After climbing from 3.5% in July 2023 to 4.2% in July 2024, the UR has been drifting lower. Historically, that kind of rise in the UR almost always means that a recession is coming (or that it’s already here). But obviously that hasn’t happened so far. The latest GDP number was 2.3% — quite robust for an economy as large & mature as the US is.

Cooler than last year. MBS Highway’s National Housing index rose five points in February 2025 to 41, much cooler than the 12 point rise (to 54) seen in February 2024. [More on this later.]

Rents are falling in 45% of the largest metros. While national rents are down a very modest 0.1% YoY, many cities are seeing much larger drops, such as Austin (-16% YoY) and Tampa (-8% YoY). [Redfin]

Jerome Powell is in no hurry. This week, Fed Chair Powell had to endure two days of statements posed as questions by Congress members. (This used to be called the Humphrey-Hawkins Testimony.) I actually felt sorry for the guy. Here are a couple of direct quotes:

“Inflation has eased significantly over the past two years but remains somewhat elevated relative to our 2 percent longer-run goal.”

“We do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation.”

TP: The CPI report discussed below came out on the second day of Powell’s testimony.

CPI went the wrong direction (for rate cuts). January “Headline” CPI (Consumer Price Index = inflation for you and me) rose to +3.0% YoY (from +2.9% YoY in Dec 2024). “Core” CPI also climbed to +3.3% YoY (from 3.2% YoY). While “Shelter” (rent) cost growth did slow, it was still high at +4.4% YoY — and remember, the index weighting for Shelter costs in “Core” CPI is 44%! [BLS]

TP: I’m not going to lie. This was a big disappointment, especially after the rather encouraging December PCE report a few weeks ago. Higher energy (oil & gas) and food (eggs!) prices drove the headline higher, while Shelter costs didn’t improve as much as I had expected. [More on this later.]

Mortgage rates rebound. In response to the disappointing CPI report, US treasury bond and mortgage backed securities prices fell (which means that their yields rose), helping to push average 30-year mortgage rates back above 7.1%. How long will we have to wait for the next rate cut? The Fed Funds Rate futures market is now only pricing in a greater than 50% chance of a rate cut in… October!

TP: Looking at transaction volumes over the last two years, the “magic” 30-yr mortgage rate seems to be 6.5%. Below that rate, both buyer and seller activity seems to pick up markedly.

Housing sentiment improves slightly. Fannie Mae’s HPSI (Home Purchase Sentiment Index) rose slightly to 73.4 in January 2025 (from 73.1 in December 2024). The majority of consumers still think it’s a “Bad Time to Buy”, but expectations for both home price growth and rental rate growth are rising. [Fannie Mae]

Gimme (Lower) Shelter

If you’ve been reading Talking Points regularly, you know that growth in Shelter costs has been the biggest factor keeping the inflation figures (PCE, but especially CPI) high. I wanted provide a refresher on why:

• Huge Weighting: In “core” CPI, Shelter costs have a 44% weighting and were growing at 4.4% year-over-year. Multiply those two numbers together and you get 1.9%. In other words, that is the MINIMUM that the overall “core” CPI can be without the prices of other products going backwards (deflating)! Or, alternatively, if everything else in the latest CPI report was the same, we’d need Shelter to be growing at 1.5% YoY (vs. 4.4% YoY currently) for “core” CPI to come in at 2.0% YoY.
• Long Lags: The way in which Shelter costs are collected and calculated by the Bureau of Labor Statistics results in very long time lags (1–1.5 years!) between the real-time turning points in rental rates and when those inflection points show up in the CPI Shelter data. Real-time rent trackers from Apartment List and others have been showing national rents FALLING for most of the last 1.5 years. But CPI still shows Shelter costs growing 0.4% MoM and 4.4% YoY!
• Fundamental Concerns: You’d be forgiven for thinking that the Shelter cost component is all about rents. But it isn’t. That’s because around 65% of households in the US own their own homes (they might pay a mortgage, but not rent). So the Shelter component has two main sub-categories: Rent (9% weighting in “core” CPI) and Owner’s Equivalent Rent (32% weighting in “core CPI”). How do they get that OER figure? By calling people up and asking them what they think their house could rent out for! Do you know what your house could rent for? I don’t.

Mortgage Market

Last week I wrote: “If we could just get a good (lower than expected) January jobs report and/or a good (lower than expected) January CPI report, I’m pretty confident that average 30-yr mortgage rates would move back into the 6s — just in time for the spring selling season.”

Well, we got neither of those. And, as you’d expect, mortgage rates moved up after both data releases. Powell’s “we’re in no rush” comments to Congress didn’t help either.

The Fed Funds Rate futures market is now only pricing in a >50% chance of a rate cut in October! In other words, the market expects ZERO rate cuts from the Fed right through the spring/summer high season. Let’s hope Scott Bessent (the new Treasury Secretary) can work some magic to get long rates down.

Here’s what the Fed Funds Rate futures market is currently pricing in for rate cuts. Note that the current Fed Funds Rate policy range is 4.25–4.50%.

• March 19 FOMC Meeting: 97% probability that the policy rate will remain at 4.25–4.50% (was 86% last week). In other words, that the Fed will stay on pause.
• May 7 FOMC Meeting: 90% probability that the policy rate will remain at 4.25–4.50% (was 59% last week). 10% probability of a 25 bps cut (25 bps = 0.25% = a quarter percentage point) to 4.00–4.25%.
• June 18 FOMC Meeting: 66% probability that the policy rate will remain at 4.25–4.50% (was 59% last week). 31% probability that the policy rate will be 25 bps below current (a rate cut on either May 7 or June 18). 3% probability that rates will be 50 bps below current.

They Said It

“The MBS Highway National Housing Index improved for the third-straight month, as real estate professionals geared up for the spring selling season. But things are still a bit cooler than they were at the same time last year. Near-term trends in inflation show that we’re approaching the Fed’s 2% target (for “core” PCE), but the bond market remains skeptical, only pricing in 1–2 Fed rate cuts during 2025” — Barry Habib, MBS Highway’s Founder and CEO

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