Earlier this week, the Federal Housing Finance Authority, the government regulator for Fannie Mae and Freddie Mac authorized Freddie to buy second mortgages. The intent of the agency is to make it cheaper for homeowners to tap home equity without refinancing their existing mortgage and thereby preserving the low-rate mortgages originated prior to the run up in rates. The program is an 18-month trial with Freddie authorized to buy up to $2.5 billion second mortgages. The purchases will be limited to second mortgages of $78,277 or less. Critics say that the program will be inflationary, which if it was done on a larger magnitude we would agree with, but with a $2.5 billion program cap, we doubt that will come to pass. On the other hand, it could be a slippery slope to a wider program and another government handout.

The investment community, lately, had bought into the narrative that the economy is slowing, and that the Fed was about to reengage in the rate cut conversation. The May employment report, released this morning, fully took the air out of that notion. After April’s report came in below expectation, economists were expecting the number of new jobs created for the month would total 180,000, with the low estimate at 120,000 and the high at 259,000. The actual number blew past those forecasts with 272,000 new jobs created in the month. The report was a little messy in that the household report showed a contraction of -408,000 jobs and the labor force shrunk by -250,000 workers causing the unemployment rate to tick up to 4.0%. We advise to look past that uptick due to a few nuances between the household and the establishment survey. The bottom line is the June jobs report changes the soft-landing narrative and further postpones the likelihood of a rate cut anytime soon.

The April consumer price index and the various subcomponents came in as expected offering relief to investors fearful of an upside surprise. The year-over-year headline measure showed that inflation cooled to 3.4% from the 3.5% reported in March. The change in direction was welcome news to the capital markets but the incremental improvement is hardly enough for the Fed to claim victory. There’s an old saying in the capital market “that one number does not make a trend” and that clearly applies to last month’s CPI. We’ll be watching the index through the summer to identify any potential trend.

Investors began this week with much trepidation, given the mixed economic data and stubbornly high inflation that has characterized the first four months of this year. It was widely expected that Powell would offer a “mea culpa” for suggesting that rate cuts were imminent back in December. He didn’t go quite that far but did opine that the committee was “less confident” that inflation would fall to 2% in the near term. But he also cast doubt on the possibility that the next move in interest rates would be a hike.