In the latest inflation update for January, the Personal Consumption Expenditures (PCE) Price Index recorded a month-over-month increase of 0.3%. On an annual basis, inflation according to the PCE Price Index moderated, with the rate declining from 2.6% to 2.4%. Meanwhile, the Core PCE Price Index, a critical measure for the Federal Reserve as it excludes volatile food and energy prices, rose by 0.4% within the month.

Over the year, the Core PCE inflation rate edged down from 2.9% to 2.8%, marking its nearest approach to the Federal Reserve's 2% inflation target in nearly three years. This development in PCE inflation metrics was in line with expectations and brought a sense of relief following higher-than-anticipated inflation readings in other January reports. Nonetheless, the 0.4% monthly uplift in Core PCE inflation poses questions about whether this is an isolated incident or the beginning of an inflationary trend.

Amid efforts to curb inflation, the Federal Reserve has pursued a policy of raising the Federal Funds Rate, aiming to sustain these elevated rates to cool economic activity. By increasing the cost of borrowing, the strategy seeks to dampen demand for goods, thereby applying downward pressure on prices and inflation. Since reaching peak levels in 2022, inflation has seen a decline, with headline inflation at 2.4% (down from a peak of 7.1%) and core inflation at 2.8% (reduced from 5.6%). Yet, whether these reductions in inflation are sufficient remains a question of debate.

Current financial discourse is heavily focused on inflation trends and the labor market's strength to predict any potential Federal Reserve rate cuts before the summer season. The likelihood of a rate cut in March dramatically shifted from a 90% probability to less than 9% within a span of 60 days, influenced by persistent inflation figures and a drop in unemployment rates.

Looking ahead, key economic indicators to monitor this week include:

• CoreLogic Home Price Index for January: A vital indicator for tracking housing market trends. Rising home prices may indicate a robust housing sector, potentially influencing Federal Reserve interest rate decisions.

• JOLTS (Job Openings) Report for January: Offers insights into the health of the labor market. A high level of job openings could signal a tight labor market, possibly leading to wage increases and influencing inflation and Federal Reserve monetary policy.

• ADP Employment Report for February: An early indicator of private sector employment growth, which could signal the overall economic strength and impact Federal Reserve interest rate considerations.

• Weekly Jobless Claims: Provides immediate data on the labor market's condition. Significant fluctuations in jobless claims could influence the Federal Reserve's economic outlook.

• Bureau of Labor Statistics Jobs Report for February: A comprehensive report detailing job creation and unemployment rates. Strong job growth and a low unemployment rate may lead the Federal Reserve to consider tightening monetary policy to control inflation, whereas weaker employment growth or an increase in the unemployment rate might prompt the Fed to maintain or lower interest rates. The anticipation revolves around an expected unemployment rate of 3.7% with 200,000 new jobs. Any deviation from these figures could influence mortgage rates.

Federal Reserve Chair Jerome Powell's semi-annual monetary policy testimony before Congress is highly anticipated, with expectations for updates on the U.S. economic outlook, inflation control progress, and potential future interest rate adjustments. Key points of interest will include the economic outlook, progress in controlling inflation, and guidance on future interest rate policies. Investors and analysts will be keen to decipher Powell's stance on when and how the Federal Reserve might adjust interest rates in response to evolving economic conditions and inflationary pressures. 

Last week, 13,000 more people applied for new unemployment benefits, bringing the total to 215,000. The number of people still getting benefits after their first claim, called Continuing Claims, also went up by 45,000 to 1.905 million. This is the second highest number since November 2021. Although fewer people are filing for unemployment for the first time, more people are having trouble finding new jobs after they are let go. This suggests that while companies are trying to keep their employees, it's getting harder for those who lose their jobs to find new ones. 

RATE CUTS IN JUNE 

A lot has changed since we saw headlines about 6-7 Fed rate cuts in 2024. That was only two months ago. This is a great lesson in why its important to understand the factors necessary in a decision cut rates. Today, the market is saying only 3 cuts will occur this year: a 25 bps cut in June (to 5.00–5.25%), another in July (to 4.75%-5.00%), and a final one in November (to 4.50-4.75%).  When the market was betting on 6 or more cuts, mortgage rates went from their peak of 8.03% down to 6.25%. After the inflation numbers and Jobs reports were announced in January, rates went back up to 7.09%. The data released in between Fed meetings are important. The details matter.  

RISING HOME PRICES 

The Case-Shiller Home Price Index, which is highly regarded for measuring home value appreciation, reported a 0.2% increase in national home prices from November to December after adjusting for seasonal factors. Additionally, home values in December were 5.5% higher than the same month in the previous year. Brian D. Luke, the Head of Commodities at S&P DJI, noted that the index reached record highs for the seventh consecutive month in 2023, with ten out of twenty markets surpassing previous records. 

The Federal Housing Finance Agency's (FHFA) House Price Index also showed a slight increase in home prices, with a 0.1% rise from November to December and a 6.6% increase year-over-year. This index has been setting new record highs in home prices every month since February. It's important to note that the FHFA's report focuses on single-family homes with conforming loan amounts, which typically represent lower-priced homes. It also excludes cash buyers and jumbo loans, which explains some differences between the two reports. Last year, both indices showed strong appreciation, with the final numbers for 2023 indicating that home prices were up 5.5% according to Case-Shiller and 6.6% according to FHFA. Similar growth rates were reported by Black Knight (5.6%) and CoreLogic (5.5%). These indexes highlight that homeownership continues to offer opportunities for wealth building through real estate, as home prices have been consistently rising. In fact, US home prices have never been higher. Prices have increased 5.5% in 2023, which will be the 12th consecutive year of nominal gains. See the chart below.

 When stating that home values "always fluctuate up and down,” it's important to note that historical data tells a different story. Over the past 43 years, there has been only one significant period of decline in home prices, which occurred during the Great Financial Crisis. In contrast, during the remaining 39 years, home prices have consistently appreciated. This indicates that while there can be occasional downturns, the long-term trend for home values has predominantly been one of growth.

**Unemployment Benefits Claims See Increase, Indicating Job Market Challenges**

Last week, there was a notable rise in the number of Americans filing for new unemployment benefits, with an additional 13,000 applications bringing the total to 215,000. The data on Continuing Claims, which tracks individuals still receiving benefits after their initial claim, also showed an increase by 45,000, reaching 1.905 million. This marks the second highest figure since November 2021. While initial unemployment filings are lower, indicating efforts by companies to retain their workforce, the increase in Continuing Claims suggests growing difficulties for those seeking new employment post-layoff.

**Anticipated Federal Reserve Rate Cuts Adjusted**

Recent financial discourse has significantly shifted from previous expectations of up to 6-7 Federal Reserve rate cuts in 2024 to a more conservative forecast. Current market predictions now anticipate only three rate cuts throughout the year: a 25 basis point reduction in June (adjusting the rate to 5.00–5.25%), followed by another cut in July (to 4.75%-5.00%), and a final adjustment in November (to 4.50-4.75%). This revision underscores the importance of closely monitoring economic indicators such as inflation rates and employment statistics, which significantly influence rate cut decisions.

**Home Prices Continue to Rise**

The latest reports from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index reveal ongoing increases in home values, highlighting the enduring strength of the housing market. The Case-Shiller Index recorded a 0.2% rise in national home prices from November to December, adjusting for seasonal factors, with a year-over-year increase of 5.5%. Remarkably, this index achieved record highs for the seventh consecutive month in 2023, with significant price appreciation noted in several markets.

Similarly, the FHFA's House Price Index reported a modest month-over-month increase of 0.1% from November to December, with a substantial 6.6% rise on a yearly basis. It's important to note that the FHFA Index, focusing on single-family homes within conforming loan limits, often represents lower-priced market segments, excluding cash purchases and jumbo loans. This distinction can account for some differences between the two indices. Both reports, however, affirm the consistent growth in home values, with prices up 5.5% in 2023, marking the twelfth consecutive year of nominal gains in the housing market.

These indices collectively underscore the potential for homeownership to serve as a robust avenue for wealth accumulation, given the sustained upward trajectory of home prices. Despite the common belief that home values can fluctuate significantly, historical data over the past 43 years reveals a predominantly positive growth trend, with the exception of the downturn during the Great Financial Crisis. This long-term perspective offers a reassuring outlook on the stability and growth potential of real estate investments.