Redfin Economists’ Weekly Take: All Eyes on Inflation Data Ahead of Expected Fed Rate Cut

Last Week In A Nutshell 

Weak labor market data indicates that the economy is at risk of a recession, meaning the Fed needs to start cutting rates next week. But the bottom hasn’t fallen out of the economy yet, so the Fed can afford to take it slow, avoiding outsized 50 bps cuts.

This Week’s Attractions

• Inflation:
  • Producer Price Index (Wednesday 9/10) – Core PPI is expected to come in at 0.3% month over month, down from last month’s 0.9% reading. PPI is often seen as a leading indicator for CPI, but empirically it is very noisy and often not a good predictor of CPI.
  • Consumer Price Index (Thursday 9/11) – Core CPI is expected to come in at 0.3% month over month and 3.1% year over year, consistent with last month’s data. Analysts expect upward pressure from airfares, tariff-exposed categories, and new/used car prices, but a flat reading on the all-important shelter category. If CPI and PPI come in as expected, the Fed’s inflation metric, core PCE, should come in at 0.3% month over month, still elevated above the Fed’s target, but not increasing.
• Annual benchmark revisions for nonfarm payrolls (Tuesday 9/9)
  • • This is a very wonky event, but it can be market-moving when revisions paint a different picture of the strength of the labor market. Every February, the BLS does a benchmark revision of their estimate of the number of jobs in the country (“nonfarm payrolls”) based on the more comprehensive but slower to come in Quarterly Census of Employment and Wages, which is derived from state unemployment insurance records. This week, they will publish a preliminary estimate of the size of next February’s revision. Analysts expect that the revision will show about half a million to a million fewer jobs created over from April 2024 to March 2025. But that preliminary estimate of the revision itself is likely very overstated because the QCEW data misses illegal immigrants, still an important contributor to job growth during this time period, and the QCEW itself has been persistently revising upward. So the final revision in February is expected to be much smaller.
• University of Michigan Consumer Sentiment (Friday 9/12) – both sentiment (58.0) and 5-10 year inflation outlook (3.5%) are expected to come in roughly flat.

Last Week’s Highlights

• Labor market – all of the labor market data last week came in weak, leading to a week of falling mortgage rates, as investors became more optimistic regarding Fed rate cuts
  • JOLTS – Job openings dropped to 7.18 million, well below economists’ expectations of around 7.38 million. It also declined from June’s revised 7.36 million, marking one of the lowest levels in the past year.
  • Nonfarm Payrolls – Only 22,000 jobs were created in August and, based on revised data, 13,000 jobs were lost in June. Over the past three months, fewer than 30,000 jobs were created each month suggesting that the labor market is slowing much faster than economists had expected after tariffs were announced on April 2 (“Liberation Day”).
  • Unemployment rate – The unemployment rate also increased, but only marginally from 4.248% to 4.324%. This is more in line with weekly unemployment insurance data that show little increase in UI claims.
• Institute of Supply Management Index – In August, the ISM services index rose more than anticipated. This increase in business activity and imports is partly due to efforts to get ahead of further price hikes in preparation for the holiday rush. Tariffs are currently a major factor in decision-making, as noted by respondents.

Diving a Little Deeper

• Jobs report/Fed rate cut outlook
  • The labor market data has investors anticipating an increase in the number—and speed—of rate cuts. Tempering these expectations is the empirical fact that over the last 15 years, the median revision to the initial August jobs print is an increase of 60,000. That means the report we got on Friday is likely more negative than the reality, but bond market participants are aware, so it should be priced in.
  • It’s striking that the job creation number is falling much faster than the unemployment rate is rising. These two data points come from different surveys that have been diverging for years. But the discrepancy is also because of the recent immigration slowdown, which means that the breakeven rate of job creation has fallen. Finally, it also seems likely that employers are simply both slow to hire and slow to lay people off.
• Housing market – Here are a few highlights from Redfin’s housing market reports the last two weeks:
  • Number of Buyers/Sellers
    • There are an estimated 1.43 million homebuyers in the U.S. housing market—the lowest level in records dating back to 2013 aside from the start of the pandemic.
    • That’s making sellers skittish; the number of sellers has dipped by roughly 14,000 since May, falling for the first time in two years.
    • Still, there are 36% more sellers than buyers—the largest gap in records dating back to 2013. That means buyers hold the cards in most markets, especially Texas and Florida. There are only five remaining seller’s markets.
  • Q2 Investor Report 
    • In the second quarter, investor purchases of U.S. homes fell to their lowest springtime level since 2020. The decline was especially big for condos. But investor market share held steady from a year earlier, signaling that declining investor activity reflects the overall housing-market slowdown.
  • Homeownership Report
    • The number of homeowner households fell 0.1% year over year in the second quarter—a small decline, but the first since 2016.
    • Meanwhile, the number of renter households rose 2.6%—one of the biggest increases in recent years.