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Walmart’s CEO Doug McMillon Reflects on Consumer Trends and Deflation Impact

Avatar photo Alice Blake on December 6, 2023

In the bustling realm of retail, Walmart stands as a colossal force, drawing in holiday shoppers seeking both groceries and gifts. In an insightful interview with Sara Eisen on CNBC’s “Squawk on the Street,” Walmart’s CEO, Doug McMillon, delves into the enigmatic landscape that extends beyond the pinnacle of the shopping season. While the retail giant has experienced an unexpected surge in consumer resilience this year, McMillon anticipates challenges on the horizon, particularly in light of the profound impact of deflation on the retail panorama.

The Unpredictable Consumer Landscape:

McMillon articulates his uncertainty regarding the trajectory of future sales, underscoring the potential challenges posed by higher credit card balances and diminishing household bank accounts. Despite exceeding initial expectations in consumer resilience this year, predicting post-peak shopping season behavior remains a complex task, hinting at the intricate dance between consumer sentiment and economic factors.

The Deflation Dynamic:

A critical facet of McMillon’s discourse revolves around the transformative influence of deflation, particularly in the realm of general merchandise. This category, encompassing electronics, toys, and various nonfood items, has witnessed a noteworthy decrease in prices—approximately 5% lower than the preceding year. To exemplify, Walmart’s holiday offerings include 25 toy items priced under $25, featuring a Hot Wheels car available for a mere $1.18. The tangible impact of deflation on consumer choices comes to the forefront in this era of shifting economic tides.

Food Price Stability and Nonfood Sales Rebound:

In navigating the economic currents, McMillon notes the relative stability of prices in food categories compared to the previous year, acknowledging the inherent volatility in fresh food prices. The CEO points to a resurgence in the volume of nonfood sales, attributing this rebound in part to the back-to-school shopping season. The coming year promises to be intriguing, especially for general merchandise, as the gravitational pull of lower prices reshapes consumer preferences and purchasing behavior.

Walmart’s Resilience Amid Retail Challenges:

Walmart emerges as a beacon of resilience amidst the tumultuous waves of the retail industry. Fueled by its robust grocery business and a steadfast reputation for offering low prices, the company has weathered the challenges of the past year. While presenting a conservative full-year forecast, Walmart projects growth, with consolidated net sales anticipated to rise between 5% to 5.5%, underscoring the company’s strategic positioning in a competitive market.

Challenges of Deflation:

McMillon candidly addresses the multifaceted challenges posed by deflation, emphasizing that a continual decline in prices necessitates a heightened effort from companies to stimulate sales. Yet, amidst these challenges, he expresses unwavering confidence in Walmart’s capacity to drive growth, recognizing the importance of alleviating budgetary pressures on consumers, thereby fostering a symbiotic relationship between affordability and consumer satisfaction.

Takeaway:

As Walmart stands resilient amid uncertainties, the interplay of consumer trends and the profound impact of deflation on retail dynamics emerge as focal points. Doug McMillon’s strategic outlook not only reflects the company’s commitment to navigating challenges but also underscores its adaptability in leveraging lower prices and fostering growth within an ever-evolving market.

Analyzing U.S. Consumer Price Inflation Trends

Avatar photo Jerry Cooper on December 4, 2023

In a recent release from the Bureau of Labor Statistics, the dynamics of consumer price inflation in the United States have undergone a significant shift. This comprehensive analysis aims to delve deeper into the intricacies of the report, shedding light on the multitude of factors influencing inflation rates and their implications on both the economy and everyday lives.

Overview of October’s Consumer Price Index (CPI):

The Consumer Price Index for the 12 months ending in October exhibited a notable decline to 3.2%, down from the preceding month’s 3.7%. This marks the lowest annual rate since March 2021, bringing about a positive turn for U.S. households and catching the attention of the Federal Reserve.

Market Reaction:

The unexpected cooling of consumer price inflation had a substantial impact on the stock market, with the Dow surging by over 500 points, the S&P 500 witnessing a 2% gain, and the Nasdaq Composite adding 2.3%. These figures signal the most positive market movement in several months, indicating a collective sigh of relief among investors.

Monthly Insights:

Delving into the monthly data, it’s noteworthy that prices remained unchanged for the first time since July 2022. This defied economists’ expectations of a 0.1% increase, underlining the unpredictability of economic trends. Energy prices experienced a significant drop during October, but this decline was counterbalanced by a continued rise in shelter costs.

Sector-wise Analysis:

  • Shelter Costs: Despite a 0.3% increase in shelter prices for the month, it was a notable decrease from the 0.6% spike witnessed in September. This nuanced analysis provides a more in-depth understanding of the forces at play within the housing market.
  • Food Prices: While food prices saw a slight acceleration in September, annual inflation in various food categories dropped, reaching the lowest levels since 2021. This sector-wise breakdown offers a more granular perspective on the intricacies of food-related inflation.

Core Consumer Price Index (Core CPI):

Turning attention to the Core CPI, which excludes volatile food and energy categories, there was a 0.2% monthly increase, contributing to a 4% annual rise. This marks the lowest yearly increase since September 2021, aligning with the Federal Reserve’s ongoing efforts to address concerns surrounding inflation.

Federal Reserve’s Perspective:

Acknowledging the progress made, economists emphasize that inflation has not yet reached a low or moderate level. The Federal Reserve, engaged in a monetary tightening and rate-hiking campaign, continues to closely monitor core inflation. Despite these improvements, the Fed remains cautious about prematurely declaring success in curbing inflation.

Challenges and Future Outlook:

While the data hints at a potential slowdown in discretionary spending, a crucial factor in influencing inflation, economists highlight the persistent challenges. These challenges include high inflation and interest rates, which could impact consumers’ financial health. This more extensive examination provides a holistic view of the obstacles and opportunities on the horizon.

Takeaway:

In conclusion, the October Consumer Price Index report provides invaluable insights into the evolving landscape of inflation in the U.S. While positive trends are evident, the challenges persist, necessitating a nuanced and strategic approach in managing both short-term and long-term implications.

Economic Sentiment Sours as Challenges Mount

Avatar photo Scarlet Logan on December 4, 2023

Pervasive Economic Sentiment

The persistent decline in economic sentiment among Americans, spanning the last four months, is gradually shaping a narrative of economic unease. This pervasive pessimism finds its roots in the palpable surge in interest rates and the looming anticipation of an economic slowdown. The University of Michigan’s latest consumer sentiment index, unveiling a 5% downturn in November, starkly contrasts with the positive trajectory witnessed during the summer months. This emerging trend not only demands attention but also prompts a critical examination of the factors contributing to this sustained decline.

Varied Impact Across Demographics

A nuanced exploration into the dynamics of this economic downturn uncovers intriguing variations across different demographic segments, offering valuable insights into the multifaceted nature of the current economic landscape. Young adults and individuals with lower incomes stand at the forefront of this decline, experiencing a notable dip in sentiment at the onset of the month. In contrast, the top tercile of stockholders witnessed a commendable 10% uptick in sentiment, aligning with the recent upward swing in equity markets. This divergence among demographics adds layers to the understanding of how economic challenges manifest differently across various segments of the population.

Inflation Expectations on the Rise

Compounding the prevailing economic apprehension are escalating concerns about inflation, both in the short and long term. Projections for inflation rates in the upcoming year have surged to 4.4%, a significant leap from October’s 4.2%, reaching the highest levels recorded since November 2022. Equally disconcerting is the upward trajectory of long-run inflation expectations to 3.2%, a figure not witnessed since 2011. This unfolding scenario poses formidable challenges for the Federal Reserve, demanding a nuanced approach to effectively manage and control inflation in the midst of economic uncertainty.

Federal Reserve’s Conundrum

Against the backdrop of this sustained economic unease, Federal Reserve Chair Jerome Powell’s recent cautionary remarks introduce a layer of uncertainty to the unfolding narrative. Powell openly acknowledged the lingering uncertainty about whether inflation is on a trajectory aligning with the central bank’s 2% goal. His emphasis on the potential necessity for a slowdown in demand to effectively control inflation adds complexity to the Fed’s strategic considerations. While recognizing the strides made over the past year, Powell’s remarks underscore the delicate balance the Federal Reserve seeks in navigating the evolving economic landscape and addressing the concerns that linger among the American populace.

Market Response and Future Considerations

As the economic landscape evolves, the response from financial markets to Powell’s cautionary stance becomes a pivotal aspect. Recent shifts in stock indices and Treasury yields following Powell’s remarks indicate the sensitivity of the markets to the ongoing economic narrative. These market dynamics, coupled with evolving inflationary pressures, set the stage for a complex interplay of factors that will likely influence the Federal Reserve’s future decisions and strategies.

Strategic Moves in Volatile Markets: Investors Seek Refuge in Short-Term U.S. Government Bonds

Avatar photo Brandon Foster on December 4, 2023

In the midst of turbulent financial markets, savvy investors are finding solace in an unexpected haven, as highlighted by Goldman Sachs. This strategic shift centers on short-term U.S. government bonds, offering shelter from the storm of fluctuating long-term yields. In this article, we delve into this investment phenomenon and explore the rationale behind this strategic move.

Seeking Stability Amidst Market Uncertainty:

Investors, both institutional and affluent individuals, are flocking to short-term U.S. government bonds, driven by a desire to weather the ongoing turbulence resulting from surging long-term yields. Lindsay Rosner, the Head of Multi-Sector Investing at Goldman Sachs Asset and Wealth Management, sheds light on this noteworthy trend.

Surging Demand for 1-Year Treasury Bills:

The most compelling evidence of this shift is the recent auction of 52-week Treasury bills, which garnered remarkable attention. These short-term securities, boasting a 5.19% rate, experienced an astounding 3.2 times oversubscription, marking the highest demand witnessed this year. Rosner underscores the significance of this surge in demand, emphasizing, “They’re saying, ‘I’m now being afforded a lot more yield in the very front end of the curve in government paper.'”

Navigating the Long-Term Interest Rate Surge:

This strategic move represents a pivotal response to the escalating long-term interest rates that have unsettled the financial markets in recent times. The 10-year Treasury yield has been on a relentless ascent, reaching a 16-year high of 4.89% following a robust September jobs report. Notably, investors injected over $1 trillion into new T-bills in the last quarter, as reported by Bloomberg.

The Playbook: Capitalizing on Prolonged Rate Expectations:

Rosner elucidates the underlying strategy, which capitalizes on the expectation that interest rates will remain elevated for a longer duration than previously anticipated. If this sentiment holds true, longer-duration Treasuries, such as the 10-year bonds, are poised to offer more attractive yields in the coming year as the yield curve steepens. Rosner explains, “You get to collect a 5% coupon for the next year,” highlighting the allure of short-term stability. Moreover, she anticipates potential opportunities in longer-duration Treasuries and properly priced corporate bonds in the near future.

Untapped Potential in Fixed-Income Instruments:

While the 10-year Treasuries have experienced recent volatility, other fixed-income instruments, including investment-grade and high-yield bonds, have yet to fully reflect the shifting rate assumptions. Rosner suggests that, for the time being, these alternatives may not be the most favorable choice. However, they could hold the promise of lucrative opportunities down the road.

A Shift in Portfolio Strategy:

Ben Emons, the Head of Fixed Income at NewEdge Wealth, observes that the upheaval in longer-dated Treasuries has prompted professional portfolio managers to adjust the average duration of their holdings. He notes, “Treasury bills are in high demand,” highlighting the utility of 1-year Treasury bills for managing portfolio duration. Prominent financial institutions like BlackRock are among those adopting this strategic shift.

Takeaway:

In this volatile financial landscape, investors are rewriting their playbooks. Short-term U.S. government bonds have emerged as a key strategic move, providing stability in a sea of uncertainty. As the market continues to evolve, investors will closely monitor the dynamics of interest rates, ready to seize opportunities as they arise.

CPI set to influence the Fed’s 2023 plans for inflation

Avatar photo Jeah Lorraine Adams on October 30, 2023

CPI: Consumer inflation is anticipated to have fallen in December compared to November after a problematic 2022 driven by inflation and high costs.

The sudden drop in energy and fuel costs brought on the decline.

However, the yearly rate would likely remain high.

According to Dow Jones, analysts anticipate a monthly decline in the consumer price index of 0.1%.

In the meantime, a 6.5% increase in inflation is presumed.

Despite the reports, the CPI remained below its all-time high of 9.1% in June 2022.

CPI vs Core CPI

The consumer price index measures the average yearly change in prices of consumer goods and services.

Costs associated with food and energy are removed from the core CPI because they alter more frequently than other products.

This limitation is crucial because it may take time to determine the underlying price trend when food and energy expenses vary significantly from month to month or year to year.

Since it is less impacted by short-term changes in food and energy costs, the core CPI is seen as a more reliable inflation index.

It is anticipated to increase by 0.3% in December, reflecting a 5.7% annual growth.

The core CPI increased by 6% annually and 0.2% monthly in November.

Diane Swonk, the chief economist at KPMG, praised the projected drop.

“We welcome it with open arms. It’s good news,” said Swonk.

“It’s great and it helped to fuel consumer spending in the fourth quarter. But it’s still not enough.”

Slowed inflation outlook

The CPI will be released on Thursday, the last batch of data, before the Federal Reserve decides on interest rates on February 1.

The relevance of the inflation rate on the financial markets has increased lately.

Traders predict the CPI to reflect less inflation than analysts expect.

They cited the weaker-than-expected wage increase in the December employment report and other data points that signaled lower inflation expectations.

Stocks rose before the results were made public on Wednesday, which worried Peter Boockvar, the chief investment officer at Bleakley Financial Group.

“The market is looking at it as glass half full. Inflation is rolling over, and the Fed is almost done raising interest rates,” he said.

“I think they remember the last two months when you had numbers that were well below expectations. They’re just assuming that’s going to be the case again.”

Read also: The Fed needs freedom to make hard decisions

The Fed impact

Traders continue to wager on the central bank raising interest rates by a quarter point at its upcoming meeting in the futures market.

Policymakers are expected to raise the fed funds target rate by 0.5 percentage points, according to economists.

20% of the market anticipates a hike of 50 basis points.

State Street Global Advisors’ head economist, Simona Mocuta, saw commotion surrounding a particular data point.

“It’s amazing how much reaction and over a single data point,” she mused. “Clearly, the CPI is very important.”

“In this particular case, it does have fairly direct implications, which are about the size of the next Fed rate hike.”

According to Mocuta, the Fed may be swayed by a lower CPI.

“The market has not priced the full 50. I think the market is right in this case,” she explained.

“The Fed can still contradict the market, but what the market is pricing is the right decision.”

According to Luke Tilley, chief economist at Wilmington Trust, the decline in energy costs and the 12% decline in gasoline prices in December reduced inflation.

The CPI has not reflected a deceased pace, even though the rental market suggests a drop.

“Shelter is the main focus because of the lag,” said Tilley. “Everyone is familiar with the lag that it takes for the data to show up in the CPI.”

“We think there could be a sharper slowdown.”

Nearly 40% of the core CPI comprises housing costs, which are anticipated to increase by 0.6% per month.

Luke Tilley claims that landlords have complained that as the housing market gets worse, it is getting harder for them to boost rent.

“We’re pencilling in slower increases in January and February and March on that shorter leg.”

Focus on services

Economic experts have concentrated on growing service inflation in the CPI since goods inflation is likely to continue shrinking because of the stabilized supply chain.

“The headline monthly changes over the last two, three months overstate the improvement,” said Simona Mocuta.

“We’re going to get the same help from gasoline in the next report. I don’t want to see an acceleration in shelter. I want to see some of the discretionary areas show deceleration.”

“I think right now the focus is very much on the services side.”

The market is now concentrating on the Fed’s capacity to control inflation since it may affect how much further interest rates are hiked.

The economic slowdown brought on by the hike might be the discrepancy between a recession and a soft landing.

“The hope is that basically, we are now in a position where you could envision a soft landing,” said Diane Swonk.

“That requires the Fed to not only stop raising rates but ease up sooner, and that doesn’t seem to be where they’re at.”

“The Fed is hedging a different bet than the markets are. This is where nuance is really hard. You’re in this position where you’re improving,” she continued.

“It’s like a patient is getting better, but they’re not out of the hospital yet.”

Reference:

Inflation is expected to have declined in December, but it may not be enough to stop the Fed

How Does Inflation Affect Small Businesses?

Avatar photo Jerry Cooper on September 26, 2023

While inflation may be affecting us all right now, no one is feeling the impact quite as much as small business owners. As many as 85% of small business owners are concerned about inflation, and with good reason, as inflation poses significant challenges. Not only is inflation reducing customer purchasing power, but rising costs of raw materials and labor are increasing operating costs and squeezing profit margins.

Small business owners are having to find ways to absorb these rising costs or face passing them on to their customers. Inflation can be a constant challenge to small businesses. To mitigate its impact, small business owners must prepare by understanding how inflation affects their businesses and identifying effective strategies to manage it.

What is inflation?

Inflation is the continuous increase in the prices of goods and services over a period of time. While economic factors mean it’s a feature of daily life, inflation is considered a negative.  It occurs due to the rising cost of products and services and can lead to consumers buying less. Rising prices can result from increased production costs, changes in demand and supply, government policies, and excessive money supply. It impacts the economy, consumers, and businesses by contracting purchasing power, eroding the value of savings, and reducing confidence in investment decisions and business operations. 

How inflation affects small businesses

The US economy experienced record inflation levels during 2022, with the consumer price index (CPI) up by 8.3%. This inflationary pressure affects small businesses in several key ways.

Higher costs of goods and services

During inflation, costs typically increase for all kinds of necessities, from labor and raw materials to utilities. As this can seriously squeeze profit margins, small businesses may struggle to absorb these increased costs and may have to pass them on to the customer.

Reduced consumer sales and spending

With higher costs of goods and services, consumers typically have less disposable income for purchasing non-essential items, leading to reduced sales. This can mean small businesses struggle to maintain profitability and compete against larger businesses that can absorb the effects of inflation more efficiently. 

Increased prices

Inflation makes running a business more expensive, forcing businesses to increase their prices to mitigate the effects.  Around seven in 10 small business owners have had to raise prices to cope with the impact of inflation. This can reduce the business’s competitiveness as customers may want to avoid paying these higher prices. Inflation also makes it more challenging to determine the optimal prices for goods and services if prices are rising rapidly. 

Planning and budgeting uncertainty

Inflation can create uncertainty within the economy, industry, and business environment. It can make it significantly more challenging to plan for the future. The rapid changes in costs and pricing can make it much harder for small businesses to budget, determine operating expenses, manage cash flow, and make accurate financial projections. 

Borrowing and financing

Inflation can cause interest rates to rise, making it more expensive for small businesses to get credit. This could prevent some small businesses from being able to access the affordable financing options they need to grow and expand. However, inflation can sometimes work to business owners’ advantage when they have older debt. Those with fixed-rate credit lines can make repayments based on their old rates, making the debt cheaper than new funding.

“A credit card with cashback rewards tailored to the needs of the business can help offset increasing costs. It also allows for better expense tracking and financial planning, helping small businesses navigate the challenges posed by inflation.”

David Luck, Founder and CEO of Capital on Tap

Photo Credits: Pexels

Not all small businesses will feel the impact of inflation as sharply as others. Small businesses that are focused on non-essential items are likely to face greater effects as consumers concentrate more of their spending on essential goods and services.

How can small businesses cope with inflation?

Inflation presents a number of crucial challenges for small businesses. As their costs rise, small business owners must consider ways to adapt and navigate these complex economic conditions to maintain profitability.

Cost management

Small businesses should look for ways to keep expenses low by cutting back on non-essential costs and reducing production costs. This could mean negotiating better deals with suppliers, reducing wastage, and optimizing operational efficiency.

Diversify suppliers

A small business relying on just one supplier can make the business significantly more vulnerable to price fluctuations. Changing or expanding suppliers can provide more flexibility and options to negotiate better prices.

Pricing strategies

A common tactic small businesses use to mitigate the rising cost of inflation is to adjust their pricing strategies by gradually increasing prices to maintain profit margins. However, before doing so, it’s important to consider current market conditions and competitors’ pricing to ensure the business can effectively balance profitability and competitiveness.

Consider available financing

A small business credit card can help manage short-term small business cash flow and finance needs during periods of high inflation. Many of these cards offer rewards, flexible payment terms, and expense tracking to help small businesses bridge gaps in cash flow and manage expenses.

Monitor consumer demand

Monitoring the market and changes in consumer behavior and demand can be invaluable. It enables small business owners to adapt their offerings to align with consumer preferences and adjust marketing strategies to maintain or increase sales.

Impact of inflation on small businesses: Summing up

Inflation poses significant challenges for small business owners, from contracting profitability and purchasing power to affecting operational decisions and forecasting. Rising costs combined with planning uncertainties and reduced market demand make it essential to introduce effective strategies such as cost management, adjusting prices, and exploring available financing to successfully navigate the challenges of inflation.

Inflation remains a thorn, but other problems loom

Avatar photo Jerry Cooper on April 13, 2023

Inflation — More than a year later, persistent inflation continues to be a thorn in the Federal Reserve’s shoes.

Even with the banking sector’s current predicament and investors on edge after two prominent banks failing in March, inflation remains the Fed’s top concern.

However, this week’s Consumer Price Index (CPI) could determine if the central bank will need to raise rates again in May.

The CPI is set to be announced on Wednesday at 8:30 in the morning.

The upcoming index could also affect markets as Wall Street has shifted its focus from the financial system to the economy.

Greg McBride, the chief analyst at Bankrate noted, “Inflation is no less relevant than it has been for the past two years.”

“The Consumer Price remains the most-watched monthly economic report.”

What’s happening?

According to CPI readings, inflation levels have cooled down for five consecutive months.

However, they are still close to historic highs at 6%, which is above the Federal Reserve’s goal of 2%.

The March reading showed prices increasing between January and February.

Greg McBride said the increase didn’t spur any confidence of the 2% target being around.

For March, economists projected a 0.4% monthly increase in the CPI, aligning with the September – February average, keeping year-over-year averages high.

But it has presented the question of how to make the Federal Reserve and investors happy.

McBride offer some insight, saying:

“To feel good about where inflation is headed, we need to see more than just moderation in the rate of both headline and core inflation.”

“We also need to see moderation in price pressures across a wide range of categories that are staples of the household budget: shelter, food, electricity, motor vehicle insurance, apparel, and household furnishings and operations.”

However, Greg Bassuk, the CEO of AXS Investments, noted that resiliently elevated prices could potentially lead to another Fed rate hike in May.

“That’s notwithstanding the slowing economy that has been weighed down even more heavily by the banking system debacle,” added Bassuk.

Effect on the market

According to US Bank Wealth Management chief equity strategist Terry Sandven, the week is set up for increased stock volatility, stuck between inflation data and the start of the first-quarter corporate earnings season.

Three prominent US banks are set to report this Friday, including:

  • JPMorgan Chase
  • Wells Fargo
  • Citigroup

“Persistent inflation, rising interest rates and uncertainty over the pace of earnings growth in 2023 remain headwinds to advancing equity prices,” said Sandven.

“Each will be in focus this week.”

Read also: Business Intelligence—Importance to Business’s Growth

Bank stocks

On Monday, TD Ameritrade released its March Investor Movement Index, which tracks retail investor activities.

According to the report, retail traders continued to be equities net buyers in March, which means Main Street traders are buying most of the new stock in the United States, not larger financial institutions.

The increasing power of the retail investor has been a continued trend since the onset of the pandemic, fueled by several factors like:

  • Stimulus cash
  • Easier access to trading platforms
  • Further market education

Recently, larger companies have started changing their investor relations strategies to accommodate retail investors.

Even ‘smart money’ traders have turned to Reddit for stock tips.

TD Ameritrade found  that the strongest buying interest is focused on the Financial sector, which comes despite macroeconomic catalysts in March like the collapse of Silicon Valley Bank and Credit Suisse’s emergency sale.

Lorraine Gavican-Kerr, TD Ameritrade’s managing director, said:

“March was full of surprises, but the overall impact among TD Ameritrade retail clients when it came to exposure to the markets was neutral.”

“For the second month in a row, our clients were net buyers of equities, seemingly eyeing an opportunity to buy into the Financial sector’s lows and to sell off the highs in Information Technology.”

TD Ameritrade noted that the five most popular stocks purchased were:

  • Amazon
  • Ford Motors
  • First Republic Bank
  • Rivian
  • Tesla

Meanwhile, retail investors were net sellers of:

  • Advanced Micro Devises
  • Apple
  • Intel
  • Meta
  • NVIDIA

Increased short-term inflation expectations

The Federal Reserve Bank of New York’s March Survey of Consumer Expectations was released on Monday.

It said that inflation expectations have increased at the short-term and medium-term horizons.

According to the survey, inflation expectations for 2023 have increased by half a percentage point to 4.7%, the first increase since October 2022.

The survey questions around 1,300 household heads in the United States each month.

It found that respondents were more pessimistic about the US labor market’s outlook compared to previous months.

Meanwhile, the New York Fed found that unemployment expectations increased by 1.3 percentage points, going up to 40.7%.

The recent banking crisis and looming credit crunch have raised concerns in US households.

The Federal Reserve reported that perception of credit access compared to 2022 fell in March.

The share of households saying it’s harder to obtain credit than in 2022 hit an all-time high.

Inflation has a higher toll on women, experts believe

Avatar photo Brandon Foster on April 6, 2023

…

Inflation —- The high inflation has been difficult for everyone with prices surging at a rapid rate, but women are suffering a greater deal than most.

Child care prices have soared, prompting women to leave the workforce.

In recent years, US child care costs have outpaced wage growth.

According to the Bureau of Labor Statistics, day care and preschool prices jumped 5.7% annually in February 2023 and 25% in the last decade.

From 1990 to 2022, child care inflation increased by 214%, outpacing the average family income gains, which rose by 143%.

Simultaneously, sectors with the highest share of female workers are seeing inflation beat wage increases.

75% of the healthcare and education sectors consist of women, but they have had the second lowest increase in nominal wage last year.

Recent progress

The Ellevest Women’s Financial Health Index monitors indicators like employment rates, inflation, reproductive autonomy, and pay gaps.

Recently, the index found progress to be mixed.

While it rose slightly from the November 2022 lows, ongoing inflation casts an overhang on further improvements.

The 2022 drop in women’s financial health lined up with inflation levels hitting double digits.

Dimple Gosai, the head of US ESG strategy for the Bank of America, offered her insight.

“While women are paying more, they also earn less,” she explained.

“The pandemic made the child care crisis undeniably worse, and inflationary pressures are adding fuel to the fire.”

“Surprisingly, over 50% of parents spend over 20% of their income on child care in the US.”

Gosai also noted that child care costs can not only keep women out of the workforce, but also push them out, which would remove the recent progress to close gender parity.

“Caregiving responsibilities are preventing more women from getting into, remaining, and progressing in the labor force,” she continued.

“This is more the norm than the exception.”

“The pandemic worsened this gap, with women taking on more of the traditional child care burden than men.”

Child care

The child care industry is suffering from a supply crunch thanks to low worker retention, which is affected by low wages – an issue that has lingered before the pandemic.

Child care providers are dealt with a dilemma of offering better wages and affordable prices to families and caregivers.

Mike Madowitz, the director of macroeconomic policy at the Washington Center for Equitable Growth, offered some insight.

“We have seen a negative shock to the supply of child care providers in this recovery, and that could make this problem even worse going forward, but child care costs are more systemic than other shorter-term inflation pressures we’ve seen,” said Madowitz.

“Absent public investment, there’s just not much margin to give in this market, and that’s one reason the Treasury department found child care is a failed market.”

However, it isn’t just women with children who are affected by inflation.

Gosai noted that underrepresented women and minorities in higher wage industries like tech or finance are more insulated from inflation pressures.

In addition, the economic landscape has shown that women’s shopping carts are more expensive at a faster rate.

Read also: Black couples still get unfair treatment, they pay higher marriage penalty tax

Long-term impact

The negative impact of rising prices isn’t just a short-term problem, but could have a lasting impact on their financial health.

The Bank of America Institute recently found that women’s 401(k) balances are two-thirds compared to men’s.

Ariane Hegewisch, the Institute for Women’s Policy Research program director of employment and earnings, shared her thoughts.

“Because of both [the] COVID and inflation crisis, women are much more likely to have broken into their retirement savings,” she offered.

“Debt is much higher, [and] rental costs have gone up.”

“So, there’s now an even bigger hole in retirement or in wealth or any kind of security right the financial security that [women] may have, and that needs to be rebuilt.”

Madowitz said the Fed’s aggressive interest rate hikes could impact the improvement of women’s economic health and opportunity.

The Fed has been raising rates since 2022.

“If the FOMC raises interest rates too high in an effort to reach its 2% inflation target faster, that would hurt worker demand and harm those already facing more labor market barriers,” Madowitz noted.

“Namely, women workers and workers of color.”

Hegewisch also said the higher rates could lead to higher unemployment, affecting women.

“Unemployment is always higher for women of color, and men of color, than it is for others,” Hegewisch noted.

“Unemployment is double for black women compared to white women and almost as much for Latinos.”

“And so, if it doubles, it goes [up] at a much higher rate for black women than it does for white women.”

Gosai said that one solution could lift the pressures of inflation on gender parity if companies invest more in their employees’ well-being, including:

  • Enhanced reproductive health care benefits
  • Subsidized child care
  • Flexible work arrangements

Mortgage rates affected by the banking crisis

Avatar photo Brandon Foster on April 3, 2023

…

Mortgage rates – For the past couple of weeks, the United States has been ushered into a banking crisis, which in turn, has affected several industries.

Despite only being March, mortgage rates are already creating a headache for prospective buyers.

They can expect mortgage rates to go down through the rest of 2023 as the banking crisis continues, which could also cool down inflation.

However, there is also the possibility of some setbacks.

The Feds

According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage topped out at 7.08% in November following a steady rise in 2022 due to the Federal Reserve’s attempts to curb inflation.

The average rate trickled down through January as the economic data suggested inflation was retreating.

However, strong economic reports in February raised concerns that inflation wasn’t cool as quickly or as much as projected.

As a result, the average mortgage rate climbed back up by half a percentage point over the month after it fell to 6.09%.

In March, banks started failing, which sent rates falling again.

Despite the decline, the Federal Reserve and the bank failures didn’t directly impact mortgage rates.

Instead, the rates are indirectly affected by the actions the Fed takes or is expected to take.

Other factors are the health of the broader financial system and uncertainty that could be percolating.

On Wednesday, the Federal Reserve announced another rate hike by a quarter point to combat high inflation while considering the recent risks to financial stability.

Analysts say that despite the bank failures complicating the Fed’s actions, if it’s contained then the crisis might have helped them by bringing down prices without resorting to more interest rate hikes.

The Fed suggested on Wednesday that it could be the end of the rate hikes.

Credit and rates connection

Mortgage rates have been known for tracking the yield on 10-year US Treasury bonds.

It moves based on three factors:

  • The Fed’s actions
  • What the Fed does
  • The investors’ reactions

When Treasury yields increase, mortgage rates also go up; when they decline, mortgage rates follow.

After the Fed’s announcement on Wednesday, bond yields and the mortgage rates that shadow them dropped.

However, it isn’t all bad according to Zillow senior economist Orphe Divounguy.

Divounguy pointed out that the relationship between mortgage rates and Treasuries have slightly weakened in the past few weeks.

“The secondary mortgage market may react to speculation that more financial entities may need to sell their long-term investments, like mortgage backed securities, to get more liquidity today,” he said.

Divounguy added that as Treasuries decline, tighter credit conditions from the bank failures could limit dramatic plunging of mortgage rates.

“This could restrict mortgage lenders’ access to funding sources, resulting in higher rates than Treasuries would otherwise indicate,” he said.

“For borrowers, lending standards were already quite strict, and tighter conditions may make it more difficult for some home shoppers to secure funding.”

“In turn, for home sellers, the time it takes to sell could increase as buyers hesitate.”

Read also: The Fed brings up interest rates for the 9th straight week

Rates expected to stabilize in the long run

Inflation remains high, but it is slowing down.

Analysts are projecting a slower economy in the coming quarters that could contribute to bringing down inflation.

According to Mike Fratantoni, the senior vice president and chief economist of Mortgage Bankers Association, it could be good for mortgage borrowers who can expect rates to retreat throughout 2023.

Inflation is expected to improve in the second half of 2023, which could lead to stable mortgage rates.

“Expectations for slower economic growth or even a recession should bring inflation down and help mortgage rates decline,” said Divounguy.

It could be good news for home buyers as it improves affordability and brings down the cost to finance a home.

Furthermore, it could benefit sellers by reducing the intensity of an interest-rate lock-in.

Lower rates could also convince homeowners to list their home to the market.

As the inventory of homes for sale are edging around historic lows, it would add much-needed inventory to a limited pool.

“Mortgage rates are steering both supply and demand in today’s costly environment,” said Divounguy.

“Home sales picked up in January when rates were relatively low, then slacked off as they ramped back up.”

However, the cooling inflation could bring the risk of job losses, another hurdle in the housing market.

“Of course, much uncertainty surrounding the state of inflation and this still-evolving banking turmoil remains,” Divounguy added.

On Wednesday, Fed Chair Jerome Powell said estimates of the cost of banking developments could slow the economy.

Regardless, the impact would reflect mortgage rates.

“Evidence – in either direction – of spillovers into the broader economy or accelerating inflation would likely cause another policy shift, which would materialize in mortgage rates,” Divounguy noted.

 

Mortgage rates continue their upward rise for 5 straight weeks

Avatar photo Scarlet Logan on March 20, 2023

…

Mortgage – Despite a new year, the fight against inflation continues as it remains stubbornly unpredictable.

For the fifth consecutive week, mortgage rates inched toward 7%, and the Federal Reserve suggested that rates will continue increasing.

Fixed-rate average

According to Freddie Mac data released on Thursday, the 30-year fixed-rate mortgage hit an average of 6.73% in the week ending March 9.

A week before, the fixed-rate mortgage was lower at 6.65%.

Last year, the 30-year fixed rate was 3.85%.

It peaked at 7.08% in November, but the rates started dropping.

Despite the positive progress, rates started climbing again in February.

In the past month, the fixed-rate mortgage rose half a percentage point.

The robust economic data suggests that the Federal Reserve has more to do in the battle against inflation and will likely continue hiking the benchmark lending rate.

“Mortgage rates continue their upward trajectory as the Federal Reserve signals a more aggressive stance on monetary policy,” noted Sam Khater, a chief economist from Freddie Mac.

“Overall, consumers are spending in sectors that are not interest rate-sensitive, such as travel and dining out.”

“However, rate-sensitive sectors, such as housing, continue to be adversely affected. As a result, would-be homebuyers continue to face the compounding challenges of affordability and low inventory.”

The average mortgage rate is based on the mortgage applications Freddie Mac receives from thousands of lenders across the United States.

It only covers borrowers who give a down payment of 20% with excellent credit scores.

Rate hikes confirmed to continue

At the onset of 2023, inflation showed signs of cooling off.

However, substantial employment numbers and a rising Consumer Price Index showed that inflation was still around and remained stubbornly high.

On Tuesday, Federal Reserve Chairman Jerome Powell spoke to Congress, saying the central bank will likely raise interest rates higher than before.

Economist Jiayi Xu of Realtor.com said:

“While last month Fed officials said that a smaller increase in the federal funds rate would help create a soft landing for the economy, Powell’s testimony on Tuesday made it clear that the central bank is prepared to return to a faster pace of rate increases if the incoming February economic indicators remain strong.”

She said the decision suggests that investors weren’t fully prepared as they are anxious about the Federal Reserve’s next actions.

The Fed has another rate-setting meeting on March 21 – March 22, with the possibility of another half-point rate in the cards.

Read also: Bank stocks have become a prospect amid recession fears

“Uncertainty about how high rates will go and how long they will remain elevated makes it challenging for investors to make well-informed decisions,” said Xu.

“Therefore, it’s crucial to keep a close eye on the latest developments from the Federal Reserve.”

Although the Fed doesn’t set the interest rates borrowers pay on mortgages directly, its actions still influence them.

Mortgage rates tend to track the yield on 10-year US Treasury bonds.

It moves based on anticipation of the Fed’s actions, what it actually does, and how investors react.

When Treasury yields increase, mortgage rates also go up; when they decline, so do mortgage rates.

Housing market

The rising mortgage rates have slowed down the spring selling season.

According to the Mortgage Bankers Association, applications for a mortgage slightly rose last week following three weeks of declines.

As a result, the activity is muted.

Bob Broeksmit, the president and CEO of MBA, said:

“Even with this jump in activity, both purchase and refinance applications remain well below year-ago levels when rates were much lower.”

“The recent increase in mortgage rates, right at the start of the busy spring buying season, could cause prospective buyers to delay decisions until rates moderate.”

According to Fannie Mae’s survey, homebuyer sentiment fell to record lows in February.

Following three months of improvement, sentiment dropped and returned the index closer to its all-time survey low from October.

The most notable drops were associated with job security and home-selling conditions.

“While the current housing market may not look promising for sellers due to factors such as an increasing number of unsold homes, longer time on market, and decelerating price growth driven by high mortgage rates, there are still opportunities to be found,” said Xu.

For example, she noted that recent sales data shows the share of first-time homebuyers is higher than last year.

“As a result, sellers with starter homes may see robust demand and retain some bargaining power.”

Additionally, Xu said the lasting presence of hybrid working models offers more flexibility for homebuyers choosing where to live.

Instead of competing for a home in dense, central areas, buyers will move away from work if they don’t commute to work every day.

“This trend could make homes with easy access to public transportation systems more attractive to home buyers, which, in turn, enhances bargaining power for the sellers,” said Xu.

She also said that sellers who are also buyers could leverage their record-high equity even if they have to adjust expectations to lower asking prices.

 

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