Friday Market Update: January 13th 2023

Is Inflation Starting To Calm Down?

Happy Friday! Brian Manning here with the weekly update. I am super pumped to be back. Took a little time off, well needed vacation, and just ecstatic to be back, bringing you another update starting off the new year.

So in this update, I actually want to go back to last week because there’s some important information from last week that we want to look at as well. So, specifically, last Thursday, we got the ADP report. So, ADP is the largest provider of private payrolls in the US. I think they have a record count of like 25 million people across the US. So, they really have their finger on the pulse of what’s happening with employment across the country.

For the month of December, it was 235,000 new jobs that were created. So, that’s actually a really strong number. If you look at it really closely, most of the jobs were in leisure and hospitality. I’m not surprised to see that. You know, if anyone’s gone out to dinner over the last year or so, you know that restaurants have struggled as an example under hospitality. And we’re starting to see some people comeback into these jobs, which is really good.

We also got the Fed minutes. So, the Fed minutes show that they’re actually really concerned about the strong job market. And ADP kind of played into it. And it’s kind of crazy for me to hear that from the Fed and look at it, because over the last two years, they dumped $5 trillion of stimulus packages into the United States economy with the hopes of bringing back the job market. And now here they are freaking out about the job market. So, it’s interesting to see the Fed kind of backpedaling on the work that they did.

Last Friday, we got the BLS. The BLS is the Bureau of Labor Statistics. The first Friday of every month, we get an employment report for the prior month. So, again, this was also for the month of December. This is a strong report that showed 233,000 jobs created in the month of December. So that’s what’s called an establishment survey. So, they use a lot of modeling for that. One thing they look at is what’s called the birth-death ratio. So, they look at how many companies opened in the United States, and based on the company that opened and the industry that they’re in, on average, how many people would they hire? And they looked at how many companies went out of business and based on the company that went out of business and the industry that it’s in, how many people would they lay off? So, they do a lot of modeling there, and they came up with 233,000 jobs for the month of December.

Then, there’s what’s called the household survey. The household survey is when they call 60 to 70,000 people across the country, and they come up with some numbers there. Household survey showed that there were 700,000 jobs created for the month of December, which is kind of a staggering number. So, the unemployment rate moved from 3.7% down to 3.5%, which is actually a very strong move. And the reason why that unemployment rate moved down because the household survey came back with 700,000 new jobs created in the month of December. But if you look really closely at that household survey, all of those jobs were part-time work.

So, if you look at the month of December, you had people that had multiple jobs for the holidays. They had part-time work they took on over the holidays. So, potentially, not as strong of a report as it seems like when you really dissect it. Something very important to look at from that report was wage growth. So… On a year-over-year basis, wage growth went from 4.8% down to 4.6%. This is important because there’s a thing called wage pressure inflation. So, as wages are increasing, they’re kind of fuel on the fire for inflation in the economy. So, the Federal Reserve is going to look at this wage pressure inflation very carefully. And this is going to be one of the contributing items that they’re going to look at when they’re starting to think about what they should do with interest rates. So, seeing wage growth on a year-over-year basis, go from 4.8 to 4.6 was really good. And the Federal Reserve is going to watch that.

Monday this week, we had a quiet news day. Not much to talk about there. Tuesday this week, we had a speech from Jerome Powell. Wasn’t very meaningful. So, there’s not much to talk on there.

Wednesday pretty quiet news day and then Thursday, we got CPI. So CPI is the Consumer Price Index. This is really what we think is one of the most accurate gauges of inflation because it takes into account housing, which is a little, skewed. We’ll actually talk about that in a minute. About housing and out-of-pocket medical expenses. So, the CPI headline number on a year-over-year basis moved from 7.1% to 6.5%. So, we’re definitely seeing inflation move in the right direction. The core rate that strips out volatile items such as food and energy, core rate moved from 6% down to 5.7%. Probably, these inflationary numbers would have moved significantly more, but the shelter costs are extremely high right now, which I’m not going to fully believe. We’ll look at that in a second. And the shelter costs really skewed this number.

So, let’s take a look at the shelter costs from this report real quick. So, if you look at a CPI for shelter costs, we got the highest shelter print since 1985. So after November, you started to see housing costs come down, which is exactly what we expected. You saw home prices stabilize, you saw rental costs come down. How is it possible that in the month of December, you had the highest shelter print on record since 1985? I don’t believe this. I think they dream this stuff up. I have no idea where this came from. Part of the challenge is that this is an average and a lagging report.

So, on average, the shelter costs are averaged over the last six months. So, if you look at this, you had in the month of December, home prices down a half a percent. Not bad. That’s a stabilized number. I’m not worried about that. Rental cost, rental price is down month-over-month basis, 8/10th of a percent. How is it possible when home prices are down a half a percent and rental prices are down 8/10th of a percent ,that the shelter costs that go into calculating the inflationary number for the month were up 8/10th of a percent? This is mind blowing. I can’t believe it. So… I will tell you what you really have to watch out for is the date of May 10th. The reason why I say May 10th is this, as you look at the inflation data that we’re going to continue to receive, shelter makes up about 39%, 38, 39% of the CPI number.

So, as you look at the inflationary data and shelter is averaged and it’s a lagging expense, we’re really not going to see the shelter cost turnover in this CPI report until May 10h. So, we’re going to continue to get good inflationary numbers. Everywhere we look, we’re seeing costs come down, which is really great to see. We’re going to see good inflation numbers January, February, March, April; they’re all going to be solid.

But May 10th is going to be the one to circular your calendar for. I think that’s going to be the most impactful for inflation. That’s going to end up being the most impactful for mortgage interest rates. Because as we talked about before, inflation is the arch enemy of interest rates. And as inflation comes down, mortgage rates will come down as well. So, May 10, we’ll continue to talk about that. For today, not much to talk about. Pretty quiet news day leading into the holiday weekend.

I’m available all weekend, including the holiday and Monday. If you have any questions, give me a call. If you want to go through our strategic buyer consultation, reach out to me. You need to update a pre-approval, call me on my cell phone, text me.

Happy Friday. Super stoked to be back. Have a great day!



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