House Price Index Up And Consumer Confidence Falls Before Crucial Fed Interest Rate Decision

Key takeaways

• The US Housing Price Index rose by 0.5%, but it was expected to fall by 0.2%
• Consumer confidence dipped to a nine-month low as the jobs market bites
• Economic data continues to paint a mixed picture for the Fed, whose interest rates decision will be announced at the start of May

House prices jumped unexpectedly and consumer confidence continued to fall, making the Fed’s impending interest rate decision a bit harder as the mixed data baffles analysts and investors.

Ahead of a key announcement from the Fed due in just a few days, these are some of the last pieces of data we’ll see on the economy’s health before the big decision is made. We’ve got the analysis of what the data shows, how it fits into the wider landscape and what the Fed might be thinking right now.

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What’s the latest economic data?

As soon as you think you can predict what might happen in the economy, a new curveball arrives. This time, it was house prices.

February’s housing market data from the US Federal Housing Finance Agency came in hotter than expected. House prices rose by 0.5% for the month when they were predicted to fall by 0.2%. Compared to January’s data, where there was a 0.1% increase, the housing market has unexpectedly accelerated.

Another key housing data set, the S&P CoreLogic Case-Shiller data, painted a similar scene. The index rose 2% for national house prices compared to last year, the slowest growth rate since 2012, but monthly prices increased by 0.2%, breaking a seven-month decline streak and up from January which saw a 0.2% fall.

What does this mean? It’s good news for anyone trying to sell their home at the moment, especially as spring is a traditional house-selling bonanza, but housing is one of the key inflation drivers. If we’re still seeing house price growth, it could dampen the Fed’s plans to drive down inflation.

As for consumer confidence, the Conference Board said its index fell to a nine-month low of 101.3 in April, down from 104.0 in March. Analysts had predicted the April figure would stay the same. It’s the third time it’s fallen since the start of the year as fears of an impending recession and declining jobs market have American households tightening their belts.

It’s yet another mixed picture – and we don’t envy the Fed right now.

How does the other data look?

Last week’s Philadelphia Fed manufacturing index revealed a worse-than-expected outlook for the sector, dropping -31.3 instead of the anticipated -19.2. Treasury yields fell at the news, as it signaled a deeper economic contraction than previously thought.

As for the jobs market, unemployment claims have been rising in the last few weeks. The week ending 15 April saw claims reach the 245,000 mark, up 5,000 from the week before. However, monthly unemployment data remains historically low, hitting 3.5% in March.

There was a further sign of resilience in the economy with new data from the Commerce Department showing demand for long-lasting consumer goods like appliances and computers still being in demand, despite a fall in business spending on these items.

As for the Fed’s battle against inflation, the March figures showed signs it was slowly winning the fight. Inflation rose 5% on a yearly basis, down from the 6% seen in February. There are also signs the amount of money in circulation is drying up: data for M2, which measures money supply, showed a -4.05% growth rate compared to the previous year, a record decline for the index.

We’ve got two more pieces of data due this week: the latest GDP update on Thursday and the personal consumption expenditure price index due on Friday. The latter is the Fed’s preferred inflation gauge, so it could all but cement its decision on what to do in May.

The Fed’s interest rate decision looms

These latest two data sets are some of the last the Fed will see before their meeting on whether interest rates should go up by another quarter point or stay the same. There’s been a lot riding on these meetings of late, as rampant inflation has stubbornly persisted, but now all eyes will be on whether it’s time to price in some interest rate cuts by the end of the year or not.

The housing data was a surprise amid an otherwise sluggish market. Interest rate increases have made mortgages more expensive, and banks have tightened their lending criteria.

March mortgage data showed a 10% fall in home purchase applications, but inventory is still relatively low, buoying house prices. As for consumer confidence, it was bang in line with what we’re seeing happen on the jobs front.

The Fed needs to be careful. First Republic’s Q1 earnings reported a 40% drop in deposits, as a direct result of the banking crisis last month. Further interest rate hikes could pressure the already struggling regional banking sector, or even trigger another Silicon Valley Bank-style bank run.

Investors anticipate a quarter-point interest rate hike with no further rises for the rest of the year. There’s no consensus on whether we might begin to see interest rates cut by the time 2024 arrives, but it’s not off the table.

The bottom line

As always, the data needs context. House prices are up, but mortgage lending is still down, thanks to higher interest rates. Consumer confidence falling is a good thing for the long-term fight against high inflation, even if households feel the pinch and unemployment figures are rising.

But the final decision lies with the Fed, who must balance the financial sector’s health with cooling inflation off further. It’s likely the Fed wants to give inflation a final whack on the head and then let the consequences of its actions play out, but with the data still so murky, there’s room for a surprise on the cards.

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