LIVE MARKETS-Fed day data duet: Employment costs, mortgages

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FED DAY DATA DUET: EMPLOYMENT COSTS, MORTGAGES

It's a lovely day for a Fed decision, and investors are all a-flutter in advance of what many are predicting will be a hawkish rate cut.

CME's FedWatch currently sets that probability at 89.6%, despite the data-dependent Fed having seen very little official data since its last meeting, in October, owing to the big, beautiful government shutdown.

But as the hawks bicker with the doves as the clock ticks toward 2pm EST, one fairly stale official indicator, which addresses both sides of the central bank's dual mandate (inflation and employment), has landed.

The Labor Department's employment cost index USEMPC=ECI rose by 0.8% in the third quarter on a quarterly annualized basis, a tad cooler than analysts anticipated and a teensy slowdown from the 0.9% second-quarter growth rate.

Wages and benefits costs also grew at an 0.8% rate.

While the data appears to confirm a 3.6% increase to employment costs for the full year, Oliver Allen, senior U.S. economist at Pantheon Macroeconomics says "much weaker wage growth likely lies ahead."

"A raft of indicators ... suggests that the further loosening of the labor market this year will start to weigh far more heavily on underlying wage growth soon," Allen adds. "We think that clearer progress on inflation, along with ongoing weakness in the labor market, ultimately will push the FOMC to follow up a 25bp easing later today with three more 25bp cuts by next September."

On the subject of interest rates, while the cost of financing home loans heated up just a smidge last week, that failed to dissuade would-be refi borrowers from filling out mortgage applications, according to the Mortgage Bankers Association (MBA).

MBA's average 30-year fixed contract rate USMG=ECI gained one single basis point, to 6.33%.

As a result of that minuscule move, demand for loans to purchase homes USMGPI=ECI - among the housing market's most leading indicators - dampened by 2.4%. On the other hand, refi applications USMGR=ECI, which accounted for a growing 58.2% of total mortgage activity, somehow enjoyed a 14.3% surge.

Taken together, total mortgage demand rose by 4.8%.

"Conventional purchase applications were down for the week," said Joel Kan, MBA’s deputy chief economist. "Overall purchase applications continued to run ahead of 2024’s pace as broader housing inventory and affordability conditions improve gradually.”

The 30-year fixed rate currently sits 34 basis points below where it was during the same week a year ago.

Over that same period, purchase applications have increased by 17.2%, while refi demand has spiked 87.8%.

(Stephen Culp)

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