This Week In A Nutshell: Three months in, the Iran war is still driving rates more than economic data. There are a few important economics reports this week, but markets will remain focused on how close we are to a deal that reopens the Strait of Hormuz.
Upcoming Attractions
This is a short holiday week, but Thursday is busy. We’ll get April PCE inflation, personal income and spending, durable goods, the second estimate of Q1 GDP, jobless claims and new home sales. Core PCE is expected to rise 0.3% month over month and 3.3% year over year, while headline PCE is expected to rise 3.8% from a year earlier. PCE is the Fed’s preferred inflation measure, but it usually does not move markets as much as CPI because most of the underlying components are already known.
There will also be a full slate of Fed speakers, including Waller, Logan, Williams, Paulson, Schmid, Daly and others. The key question is whether more officials join the push to remove the Fed’s easing bias–meaning they start to signal that a hike is possible as the next move.
Last Week’s Highlights
Last week’s economic data was mostly stable, but markets continued to react to a Fed that seems increasingly likely to hike. The April FOMC minutes showed that a majority of participants thought some policy firming could become appropriate if inflation stayed persistently above 2%. Waller also said he supported removing the implicit easing bias from the Fed’s statement. Markets are now pricing in more risk that the next move is eventually a hike rather than a cut.
Diving a Little Deeper
Forecasters have become increasingly divided on where inflation goes from here.
- Energy is the biggest unknown. If the Strait of Hormuz reopens soon and oil prices normalize quickly, inflation risk will cool and the Fed can breathe a sign of relief. If the closure drags on or oil prices remain elevated even after reopening, higher energy prices could cause supply chain issues that bleed into core inflation, which keeps mortgage rates higher for longer.
- AI-driven software inflation is another major issue. There is real inflation here: the AI boom is creating huge demand for software, cloud computing, chips and related technology. But there are also data quirks and methodological issues that may be overstating this part of inflation. Correcting for those issues could bring measured software inflation down 5%-15%. That matters because software has 30 times the weight in PCE as it does in CPI, so it can have an outsized effect on the Fed’s preferred inflation measure.
- Tariffs are the third issue. Some forecasters think tariff-driven inflation could reverse and take as much as 0.7 percentage points off inflation this year. But it is hard to know when that reversal happens. It is even harder because tariff policy is still unsettled after the Supreme Court ruled that IEEPA does not authorize the president to impose tariffs, and the administration has not yet announced a durable replacement policy.
This is all happening against the backdrop of a transition at the Fed. The new chair, Kevin Warsh, has signaled a desire to do things differently, but it’s unclear if he’ll get what he wants.
Redfin Housing Market Reports
Home Purchase Cancellations Are No Longer on the Rise As Demand Ticks Up
- Contract cancellations declined slightly in April as homebuyers and sellers gained a clearer sense of the housing market after years of volatility, and as demand picked up.
- Homebuyers were most likely to back out of deals in Atlanta, San Antonio and other Sun Belt metro areas that are big-time buyer’s markets.
- Contract cancellations were least common in San Francisco, where the AI boom is fueling a hot housing market.
Prices Drops Are Becoming Slightly Less Common As Housing Market Stabilizes
- The share of home sellers cutting their asking prices has fallen from its peak as buyers lose a bit of negotiating power, but price drops are still much more common than in years past.
- Redfin Early Access, which allows sellers to test the market via “coming soon” listings, can help homeowners price accurately from the start and avoid price cuts.
- More than half of home sellers are cutting prices in San Antonio, Austin, Dallas and Phoenix, which remain strong buyer’s markets.
- Sellers are least likely to cut prices in San Francisco, which recently shifted to a seller’s market amid the AI boom.
U.S. Home Prices Rose 0.2% in April
- Improving homebuyer demand could fuel further price gains in the coming months.
- Montgomery County, PA saw the biggest price gain, followed by Cleveland and Nassau County, NY. The biggest declines were in Oakland, CA, Newark, NJ and Phoenix.
