Inflation Right on Target
There were no major surprises in the economic reports released last week. In particular, the latest read on inflation was right on target. As a result, mortgage rates ended a quiet week with little change.
Costs Up on Services
The PCE price index is the inflation indicator favored by the Fed. In March, core PCE, which excludes food and energy to reduce volatility, was up 4.6% from a year ago, matching the consensus forecast, and down from an annual rate of 4.7% last month. The cost of services continued to increase more than prices for goods.
Fed Warns Inflation Battle Will Be Difficult
The annual rate of increase in Core PCE remains far above the Fed’s target level of 2.0%. After peaking in September, many investors thought that it would continue to ease every month, but the actual path has been bumpier. Fed officials have been warning repeatedly that the inflation battle will be difficult, with both ups and downs along the way, and there has been no net progress for several months now. This is particularly relevant because how quickly their aggressive monetary policy tightening will bring down inflation has enormous implications for financial markets.
Early GDP Growth Continues to Weaken
Gross Domestic Product (GDP) is the broadest measure of economic activity. During the first quarter, GDP rose at an annualized rate of just 1.1%, well below the consensus forecast and down from 2.6% during the fourth quarter of 2022. Strength was seen in consumer and government spending, while business and residential (housing) investment were sources of weakness. A significant drawdown in business inventory levels also reduced economic activity. Due to tighter monetary policy and troubles in the banking industry, early forecasts are for GDP growth to continue to weaken during the second quarter.
New Home Sales Show Surprise Increase
In housing news, sales of new homes in March posted a surprisingly large increase of 10% from February to their highest level since March 2022. In contrast to sales of previously owned homes which are down more than 20% from a year ago, new home sales are only slightly lower than last year at this time. The median new-home price of $449,800 is 3% higher than a year ago.
Major Economic News Due This Week
The next Fed meeting will take place on Wednesday and most people anticipate another 25 basis point increase in the federal funds rate. Investors are hoping that Fed officials will elaborate on their plans for future monetary policy. The next European Central Bank meeting will take place on Thursday. The key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be some of the most highly anticipated economic data of the month. In addition, the ISM national manufacturing sector index will come out on Monday and the ISM national services sector index on Wednesday.
