Overview: The economic data released this week suggested that inflation remains on a downward path and the labor market is loosening. This was positive for mortgage markets, and rates ended the week lower.
The Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Federal Reserve. In October, core PCE, which excludes food and energy to reduce short-term volatility, was up 3.5% from a year ago, matching the consensus forecast. This was down from an annual rate of 3.7% last month and the lowest level since May 2021. While the trend remains downward, it is still far above the Fed's target of 2%.
The Job Openings and Labor Turnover Survey (JOLTS) report suggested looser conditions in the labor market. At the end of October, there were just 8.7 million job openings, far below the consensus forecast of 9.3 million and the lowest level since March 2021. Since a lower number of openings suggests that companies have less need to raise wages in order to hire enough workers, this favorable news on inflation was good for mortgage rates.
Two other significant economic reports released this week from the Institute for Supply Management (ISM) revealed no major surprises. The ISM Services Index rose to 52.7, while the ISM Manufacturing Index was just 46.7, close to the lowest level since May 2020. Since readings above 50 indicate an expansion in the sector and readings below 50 indicate a contraction, this data continues to highlight the consumer preference for services over goods this year. Of note, this was the 13th straight month of readings below 50 for the manufacturing sector, the longest streak in about 15 years.
Shortly after one Fed official unexpectedly suggested that monetary policy already is sufficiently tight and that it would be reasonable to see the Fed begin cutting rates if inflation continues to slow over the next three to five months, investors were eager to hear whether Chair Jerome Powell would deliver a similar message on Friday. However, Powell’s comments were very similar to his other recent speeches. He said that the Fed will remain data dependent, additional tightening could not be ruled out, and it is “premature” to speculate on the timing of rate cuts. Despite this, investors now anticipate that there will be multiple rate cuts next year, with the first likely taking place in March or May.
Core PCE (annual % change)
Consumer Price Index (CPI)
Federal Reserve meeting