Price Relief, Of Sorts
January 17, 2025 -- Investors were waiting for new inflation data this week, and based on the reaction in the markets were apparently expecting far worse news than what they received. Not that the news about price trends was all that great; it wasn't, but perhaps just somewhat better. Given this, it's hard to fathom why investors reacted so strongly to the data, most particularly to a core Consumer Price Index that wasn't all that improved from where it has been for some time. In all, equity prices pushed considerably higher and bond yields moved measurably lower.
The first report of the week was December's update on costs from a place somewhat upstream of consumers, if indirectly. The Producer Price Index climbed by 0.2% for the month, a deceleration from November's 0.4% clip. However, even with the end-of-year step downward, the annualized rate for PPI rose by 0.3% to 3.3%, the highest such figure since February 2023. Overall goods costs rose 0.6% largely due to higher energy prices; however, core goods costs were unchanged as were service-cost inputs, with those annualized components at 2.1% and 4.0%, respectively, continuing individual trends of pretty flat and still rising. As such, it doesn't appear as though the direction for costs here has suddenly shifted to a favorable one.
As a broader measure of how cost changes are filtering into the economy, the Consumer Price Index gets more attention, even though the Fed prefers to track a different measure of inflation. The CPI for December ticked higher last month, climbing by 0.4%, the largest monthly increase since last July. This increase due in large part to higher energy costs, which rose 2.6%, and food costs, which firmed up by another 0.3% to close 2024. This raised the annual rate of consumer inflation for 2024 to 2.9%, up two ticks from November, and as high as the annual rate of price increases has been since July.
Core CPI inflation -- a measure closer to what the Fed tracks, and one that excludes food and energy costs in its calculation -- came in with a 0.2% increase, a tenth of a percentage point deceleration from November and one that broke a four-month string of 0.3% increases. The modest improvement came from a settling of goods prices, which rose just 0.1%; service costs continued to cruise along with another 0.3% increase. Regardless, the modest change was enough to see the annual rate of core CPI slip to 3.2%, returning to where it was back in August. Digging into the annualized core measure revealed that goods prices are declining at a slower pace than they had been (now -0.5% over the last year) while annualized service costs eased by 0.1% to a 4.4% clip -- the slowest pace in since February 2022. Although modest, these improvements were good enough to buoy the spirits of investors, who seemed to be positioned for news of worsening inflation.
The CPI wasn't the final report on inflation this week, as the update for import and export costs for December was also released. A strong U.S. dollar has been helping to damp import costs and did so gain last month, as import prices rose by just 0.1% for a third consecutive month. Despite the mild monthly rise, the 12-month running rate for import costs leapt from 1.4% in November to 2.2% in December; as recently as September, import costs were still declining. Export prices also rose a bit more strongly last month, posting a 0.3% increase as the same strong greenback lifts prices for our trading partners. As with import costs, export costs popped higher, bouncing to a 1.8% annual rate, doubling November's rate and up considerably from the 1.8% annual decline of just four months ago. Overall, costs for imports and exports are higher and not exactly moving in the right direction, but also are still fairly benign even with recent firming. We'll need to wait to see effects of any new tariffs, should they be implemented.
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The economy was doing pretty well in the six weeks leading up to the end of December. The latest regional survey of economic conditions ("Beige Book") from the Fed noted that "Economic activity increased slightly to moderately across the twelve Federal Reserve Districts in late November and December." Employment conditions were described as having "ticked up on balance, with six Districts reporting a slight increase and six reporting no change," while inflation "increased modestly overall, with growth rates ranging from flat to moderate," depending on the district. However, expectations for higher costs in 2025 remained in place.
Consumers continued to open their wallets and pocketbooks in December, powering the economy higher. Retail sales rose by 0.4% for the month, perhaps a little shy of forecasts but plenty solid nonetheless. Core retail sales (no pricey autos or fuel included) increased 0.3% rate for the month, up a tick from November. Building materials and bars and restaurants were the only drags on the top-line figure, as all other categories saw gains. With just a bit more data to be incorporated, the Atlanta Fed's GDPNow model estimates that the running rate for fourth quarter GDP is now 3%; should this hold, it will make three consecutive quarters of above-potential GDP growth. Such strong growth can make it more difficult for inflation to ease toward the Fed's 2% core PCE goal. We won't see if any progress was made in this regard until the last day of January, after the January Fed meeting has long since closed.
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Despite adverse conditions and mortgage rates pressing to what is now about an eight-month high, the nation's home builders remain pretty optimistic. The National Association of Home Builders Housing Market Index edged another point higher in January to 47, still a bit below a breakeven par level, but the brightest review since April. Sales of single-family homes did improve, too, and at 51 was the highest since last May. High mortgage rates no doubt damped the six-month forward outlook, which dropped six points to a still-robust 60 even as traffic at sales offices and model homes remained low at 33. While still quite sub-par, it was the strongest traffic figure in ten months.
Builders were likely happier in January because they were busier in December. Housing starts last month rose by a stout 15.1%, reflective of a rebound and then some from the hurricane distortion of the early fall. The 1.499 million annual unit pace of residential construction last month was the highest since last February. Starts of single-family homes rose by 3.3% to a 1.050 million rate while multi-family unit construction ran at a 449,000 clip, up 61.5% compared to November. Permits for future projects were down by 0.7% overall to a 1.483 million annualized pace; single-family permits were 1.6% higher while multi-unit projects were 5% lower. More housing construction should eventually help provide some balance in the housing market, if affordability conditions manage to improve to at least some degree.
Manufacturing is trying to find more traction, but it's a mixed bag on that front. We learned a couple of weeks ago that national activity improved in December, but it probably still isn't an across-the-board kind of lift. At least that's what can be gleaned from two local reports on manufacturing activity in the districts served by the Federal Reserve Banks of New York and Philadelphia, which told wildly different tales this month. After a couple of hopeful months, manufacturing conditions in New York turned down again, posting a 14.7-point decline from a +2.1 in December to a -12.6 to start the year. New orders also slumped, with a 12.9-point fall leaving this component at -8.6 for the month. Despite this, employment conditions firmed up a little, with a 7.8 point rise enough to lift this measure to a +1.2, while the inflation-metering "prices paid" portion firmed up again after a December fade.
Just next door there was apparently a party going on. The FRB/Philadelphia's similar barometer started 2025 with a bang, with a 55.2-point rise from -10.9 in December to a +44.3 for January. It was the second largest increase in the 57-year-old Philly series, bested only by the reopening after COVID shutdown in mid-2020. The measure of new orders lifted from -3.6 in December to +42.9 for January, employment conditions strengthened by 7.1 points to 11.9, a six-month high, while prices paid firmed up to about the same degree as they did in the New York report -- firmer but not worrisome. It may be that annual revisions and new seasonal factors lifted the figures here to some degree, but even so, the report showed a burst of activity at factories in this Fed district.
Industrial output powered 0.9% higher in December, a stronger kick than was expected, and November's initially-reported 0.1% decline was revised to +0.2%, so conditions in late fall improved relative to the early portion of it. Manufacturing production rose for a second month in a row, increasing by 0.6%; mining production leapt from a 0.5% decline in November to a 1.8% gain to close 2024, and output by utilities rose 2.1% as stronger activity and more seasonable weather increased calls for power and heat.The overall increase in output lifted the percentage of industrial production floors in active use back up to 77.6%, the most usage in four months, although still a level that is well below that which might contribute to inflation-goosing production bottlenecks.
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Labor markets continue to see few changes, but in the full week of 2025, initial claims for unemployment benefits ticked a little higher. The Department of Labor noted that there were 217,000 new requests for benefits in the week ending January 11, an increase of 14,000 but certainly in line with the low levels now seen since the mid-point of December. Like the week of the 11th, this week is also a five-day week, and so we'll see if there's any continued shift in claims when the next report comes. After that, distortion from the MLK-day holiday may muddy things a bit again.
After weeks of holiday lull and despite ever-higher mortgage rates, a burst of mortgage activity was seen in the first full week of 2025. The Mortgage Bankers Association reported that in the week ending January 10, requests for mortgages rose by 33.3%, lifted by a 26.9% rise in those for loans to purchase homes, but also by a 43.3% jump in those to refinance existing mortgages. Before you start to think this is some kind of boom in mortgage activity, consider that despite these huge percentage gains that purchase applications have only returned to the soggy levels seen at the end of November, and refi requests only to about mid-December levels. Any improvement here is better than none, but it's not much of a surge and probably won't be sustained, given the present level of mortgage rates.
Current Adjustable Rate Mortgage (ARM) Indexes
| Index | For The Week Ending | Year Ago | |
|---|---|---|---|
| Jan 10 | Dec 13 | Jan 12 | |
| 6-Mo. TCM | 4.25% | 4.33% | 5.22% |
| 1-Yr. TCM | 4.19% | 4.22% | 4.77% |
| 3-Yr. TCM | 4.34% | 4.12% | 4.05% |
| 10-Yr. TCM | 4.68% | 4.28% | 4.00% |
| Federal Cost of Funds |
3.767% | 3.834% | 3.848% |
| 30-day SOFR (daily value) | 4.43799% | 4.59690% | 5.34140% |
| Moving Treasury Average (MTA/12-MAT) |
4.686% | 4.747% | 5.081% |
| Freddie Mac 30-yr FRM |
6.93% | 6.72% | 6.60% |
| Historical ARM Index Data | |||
It's not always clear what incites investor spirits to move in one direction or another, and this week was a reasonable example of that. Certainly, the overall inflation picture didn't change materially, nor did the chances that the Fed will be making a move to cut (or increase) rates anytime soon. In general, the economy remains quite strong and inflation firm along with it, little different this week than it has been in previous weeks. That said, we're all for any combination of news and emotions that can help lower mortgage rates, or in this case help to at least stall a rise in them that has seen them run up by nearly a half percentage point in the last five weeks alone (and nearly a full percentage point from when the Fed first began cutting rates in late September).
If there's a good-news-bad-news scenario at the moment, it's that it appears that mortgage rates seem poised to erase most if not all of this week's climb that put them at about eight month highs. The bad news is that while encouraging, the expected decline still feels tenuous, like it needs reinforcement to become something more solid, or to continue. Unfortunately, there's little in next week's coming data to provide this, with the next chance for any (if any) coming after the next Fed meeting.
Based on the way investors reacted after the CPI report Wednesday, mortgage rates have stopped rising and started to retreat a little bit. For the coming week, we expect to see a 7-9 basis point decline in the average offered rate for a conforming 30-year fixed-rate mortgage as reported by Freddie Mac next Thursday.
With the outlook changing for Fed policy and amid stubborn inflation, what's likely to happen with mortgage rates this winter? Why not check out our latest Two-Month Forecast for mortgage rates to see what we think.
See our new 2025 Mortgage and Housing Market Outlook, covering mortgage rates, housing conditions, the Fed and lots more.
Also, for a really long-run outlook, you'll want to review "Federal Reserve Policy and Mortgage Rate Cycles".
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