July 5th Newsletter

Week of June 27, 2022 in Review

Consumer inflation remained near a 40-year high and home purchase activity stayed strong in May. Home prices also continued to rise in April. And with first quarter GDP reported at -1.6%, May’s lower than expected Personal Spending report was especially significant. Here’s what you need to know:

• Consumer Inflation Remains Near 40-Year High
• Home Purchase Activity Still Standing Strong
• Home Price Appreciation Remained Hot in April
• Final First Quarter GDP Reading Sparks More Recession Fears
• Keeping an Eye on Jobless Claims

Consumer Inflation Remains Near 40-Year High

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.6% in May, which was slightly below the estimates of 0.7%. The year over year reading remained near a 40-year high of 6.3% but did not increase like many expected. Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, rose by 0.3%, also one tenth beneath expectations. Year over year, Core PCE decreased from 4.9% to 4.7%.

What’s the bottom line? Remember that the main tool the Fed uses to curb inflation is hiking its benchmark Fed Funds Rate, which is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. Counterintuitively, when the Fed hikes its benchmark Fed Funds Rate, this can be good for mortgage rates because it curbs inflation.

At its June meeting, the Fed hiked the Fed Funds Rate by 75 basis points due to high inflation, which was the largest increase since 1994. The Fed has stated that depending on the data, they will hike another 50 or 75 basis points at their meeting on July 26-27 and investors will be closely watching what actions the Fed takes later this month.

Home Purchase Activity Still Standing Strong