When 2025 began, many investors were optimistic that the domestic economy would deliver results that would continue to push markets higher.
It hasn’t happened yet. There’s been a lot of political turmoil with the arrival of the new Trump administration.
However, there’s a chance the news will be better this week.
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Maybe not because growth is exploding. Rather, the news will be more that things will start to improve.
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The domestic economy has started 2025 with challenges, including:
- Higher than expected interest rates.
- Stubborn inflation rates.
- Uncertainty about how tariffs might affect consumer prices.
- Uncertainty about the impact of federal job cuts on the overall economy.
The biggest challenge has been those interest rates. In fact, when the Federal Reserve cut its key federal funds rate on Sept. 18, the 10-year Treasury yield had already started rising from a low of 3.61% on Sept. 11. The yield wouldn’t peak until it reached 4.793% on Jan. 14, within a week of President Trump’s inauguration.
The 10-year yield counts because of its enormous influence on mortgage rates. According to Freddie Mac’s weekly rate survey, the rate on a 30-mortgaged bottomed at 6.09% in the period ending Sept. 19 and didn’t top out until Jan. 16 at 7.04%. The rate has drifted since and is now at about 6.9%.
The correlation is clear. And this was the practical effect.
If you were buying a house for $300,000 with 20% down, your mortgage would be $240,000. At 6.09%, the monthly principal and interest payment would be $1,452.84. At 7.04%, the payment would be $1,603, a monthly increase of $150 or 10.3%.
(Taxes and insurance premiums add another 10% to 15% to the monthly payment.)
Freddie Mac (FMCC) is a government controlled company that buys mortgages from lenders and bundles them into securities for investors. The idea is to replenish the lenders’ cash so they can make more loans.
Inflation pressures may ease this week
Not a lot, perhaps, but easing would be welcome.
If the easing appears, it will be most visible Friday in the January report of the Personal Consumption Expenditures Price Index.
This is the Fed’s preferred inflation gauge because it mostly measures how consumers are spending and how they may react to price changes. It’s derived from the Commerce Department’s monthly report on consumer spending.
The overall index was up 2.6% year over year in the December report. Economists believe the year-over-year change in January will be 2.5%. Core PCE, which strips out food and energy prices, will be up 2.6%, lower than the December level of 2.8%.
Markets may react two ways. If stocks are rising all week expecting these numbers, they may not rise much more. A big jump in the PCE may prompt more selling.
The report is that big a deal.
Housing numbers will matter
The week includes three widely watched housing numbers:
- S&P CoreLogic Case-Shiller Home Price Indices, due Tuesday. This measures home-price changes in 20 markets and is more specific than national reports.
- New-home sales. Due Wednesday from the U.S. Census Bureau. The consensus is for an annualized rate of 678,000 homes, down 20,000 from December.
- Pending home sales for January. Due Thursday from the National Association of Realtors. This offers a snapshot of what’s happening in the total U.S. market.
Slipping mortgage rates may boost the sales numbers which have been softer than expected in this the early part of the year.
Stocks of home improvement retailers Home Depot (HD) and Lowe’s Companies (LOW) are down 10.7% and nearly 13%, respectively, since their peaks after the Nov. 5 election.
More Economic Analysis:
- Retail sales tumble in January, testing Fed rate cut forecast
- CPI inflation shock hammers Fed rate cut bets for 2025
- Rate cuts and tariffs will weigh on economic reports
Another look at consumer confidence
Friday’s big selloff was prompted in large part by a dismal report from the University of Michigan’s widely watched Consumer Sentiment Index. What Michigan researchers were hearing was unhappiness about inflation, tariffs and government job cuts.
The Conference Board weighs in on the question on Tuesday. The organizations have lately been at odds with each other’s conclusions.
Markets showing rebound signs
Futures trading Sunday evening eastern tome afternoon suggests that some investors are buying into the “Maybe the Data will be better” scenario.
Trading in futures tied to the S&P 500, Dow Jones Industrial Average and the Nasdaq-100 Index were all moving smartly higher.
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