In The Know – June 28, 2024

At Financial Issues, we help you stay in the know about the financial issues of the day. We keep you updated on what’s happening in the economy and the markets, helping you understand how these developments impact your own personal finances. For the week ending today, June 28, 2024, here are the key economic news and data points.

Pending home sales came in lower than expected, and unemployment was higher than expected. There were no surprises with PCE, the Fed’s preferred measure of inflation. Personal income was better than expected, while personal spending was worse than expected. To dig into the details a little bit, pending home sales in May fell 2.1% month over month after a sharp 7.7% fall in April. This was below the expected increase of 0.5%. This index has now fallen below the April 2020 COVID shutdown collapse level and is at the lowest point since the survey began in 2001.

We have some real issues in the housing sector, including high mortgage rates and the “golden handcuffs” we often talk about. Nobody wants to trade in their 3%, 4%, or 5% mortgage for a 7% mortgage. As a result, we have a supply shortage and soaring home prices. Through April 2024, the S&P CoreLogic Index measured home prices up by 48%. That’s huge as it relates to the inflation numbers that we get. Rents, which are only up 23%, are used in the CPI and PCE inflation measures. So, while home prices are up 48%, rents are up 23%. Could you imagine what the inflation number would be if home prices that are up 48% were used in the CPI calculations instead of rents? If home prices were used, CPI would have likely been in double digits at its peak last June.

Despite the dismal reports, the National Association of Realtors is singing a positive tune, predicting more inventory. I guess that could come about as more baby boomers downsize, as most of them don’t have the golden handcuffs because they don’t have a mortgage at all. They would likely be cash buyers. The National Association of Realtors, like everyone else, is relying on the hope of lower future mortgage rates. Lower mortgage rates would generate more turnover in the housing markets, which is really what we need—significantly lower rates.

On the labor front, initial jobless claims came in at 233,000, which is 2,000 less than expected, but last week’s figure was revised up by 1,000. The four-week moving average rose to 236,000 from 233,000. This is the highest level since last September. Also noteworthy, continuing claims rose by another 18,000 to over 1.8 million, the most since November 2021.

The BLS report showed that personal income rose 0.5% for the month, stronger than the 0.4% expected. However, consumer spending increased only 0.2%, weaker than the 0.3% forecast. Lower and middle-income consumers still don’t have much financial breathing room.

On the inflation front, PCE, or the personal consumption expenditure price index, which is the Fed’s preferred gauge of inflation, was unchanged in May from April 2024, marking the smallest change in six months following a 3% rise. This may also mark the lowest annual rate. The PCE stands at 2.3%, which is the first time in this economic cycle that inflation actually topped the Fed’s 2% target. Additionally, the super core PCE increased by only 0.1%. These developments certainly make a September rate cut even more justifiable for the Fed.

Traders are currently pricing in a 59.5% chance that the central bank will lower rates in September. I think the odds are higher, but there could be a fly in the inflation ointment, and we might need to prepare for inflation not to moderate as much as some are hoping.

I’ve been following shipping container prices for the last few months. The Shanghai to Rotterdam route saw a price increase of another $455 week over week. The cost to ship a container on that route now stands at $7,322. This is higher for the 10th straight week and up 144% over this time frame. This compares with the pre-COVID cost of $2,000 and the beginning-of-the-year cost of $1,667. That is a huge increase. The trip from Shanghai to LA saw a price increase of $232 week over week for the 8th straight week of increases. The cost to ship a container from Shanghai to LA is now $6,673. That has doubled over the past two months. It started the year at $2,100. The current cost is again $6,673. This is a significant inflationary issue for the goods sector, especially as retail stores are about to start stocking up for the holiday shopping season. Air cargo rates have also jumped in response to this.

Additionally, there are issues in the Middle East with the Houthis attacking container ships, causing them to change their routes. Higher fuel prices and backups at ports are causing a shortage of shipping containers. This is something we are watching closely.

So how are the markets responding? On Thursday, the major indices began the day muted in the midst of a few inflation reports. By the end of the day, all three indices ended slightly positive. Taking a step back for a broader view over the last week: the Dow is flattish, up only 0.03%, the S&P is up almost a quarter of a point, and the Nasdaq is up over three-quarters of a point. The pre-market, after the May inflation number came in this morning as expected, was in positive territory, indicating a positive open, and I suspect it’s still there.

So what’s coming next week? The first week of the month brings big numbers for the labor market. Next week, we get the JOLTS report for May, the ADP numbers from the private ADP payroll processor, which handles payroll for over a million companies. At the end of the week, we get the government’s labor market numbers, including an update to the unemployment rate. It will be a big week, but also a short one due to the Fourth of July celebrations.

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