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Personal Consumption Expenditures (PCE) – Crestone Mortgage Take

The Fed’s preferred inflation gauge, PCE, came in right on target for September. Headline PCE increased 0.3% for the month, matching expectations, and the year-over-year figure edged up from 2.7% to 2.8%.

Core PCE—what the Fed truly focuses on because it strips out food and energy—also landed exactly where markets expected. Core rose 0.2% in September, and the annual rate cooled from 2.9% to 2.8%, one-tenth softer than forecast and perfectly in line with what we anticipated yesterday.

Gasoline prices were the main source of upward pressure, jumping 3.6% on the month. But the big story, especially for Core, is shelter. Just like we saw in the CPI report, shelter finally came in tame. Overall shelter rose only 0.15%, with rents up 0.2% and Owners’ Equivalent Rent up 0.14%. This is the behavior we’ve been waiting for. While the year-over-year shelter number is still running warm at 3.7%, it should continue drifting lower as it catches up to the softer real-time rental data we’ve been seeing for months.

On a momentum basis, Core PCE continues to improve. The three-month annualized run rate eased from 2.9% to 2.6%, while the six-month measure ticked up slightly from 2.5% to 2.7%.

Looking ahead, the BEA hasn’t released the calendar date for the October report yet, but the math suggests we could see Core dip another notch to 2.7% year over year. The challenge comes later in the year—November and December 2024 were unusually low readings, making additional progress toward the Fed’s 2% target more difficult. Early 2026 should bring better traction, as higher readings from early 2025 roll out of the calculation.

Beyond the PCE data, the University of Michigan survey showed that consumers are expecting cooler inflation as well. Their 1-year inflation expectations dropped from 4.5% to 4.1%—the second-lowest of the year—and 5-year expectations eased from 3.4% to 3.2%, the lowest of the year. Consumers may not pin down inflation precisely, but directionally this is exactly what the Fed wants to see.

Bottom line: Between Wednesday’s ADP report showing 32,000 job losses in November and today’s softer PCE reading, the runway is clear for the Fed to cut rates by 25 bps next Wednesday. The cut may come with a hawkish tone, so the statement, projections, and press conference will be key—but the path to lower rates is opening.

Pending Home Sales

Pending Home Sales—signed contracts on existing homes—rose 1.9% in October, beating expectations of a 0.5% gain. On a year-over-year basis, sales are essentially flat, down just 0.4%.

The trend, however, continues to improve. This is the third consecutive monthly increase, and the pace of activity is now at the highest level of the year. Coming on the heels of a stronger-than-expected New Home Sales report, this momentum points to a firmer Existing Home Sales number for November.

Mortgage Applications

Purchase applications continue to strengthen. The Mortgage Bankers Association reported an 8% increase last week and a 20% gain year over year.

Rates held steady at 6.4%. Refinances pulled back 6% last week, but are still up a strong 117% compared to last year—a sign that more homeowners are finding opportunities as rates stabilize.

Initial Jobless Claims

Initial Jobless Claims fell by 6,000 to 216,000 last week, showing that layoffs remain limited for now—even as announced job cuts continue to trend higher.

Continuing Claims rose by 7,000 to 1.96 million, hovering just under the 2-million mark and sitting near the highest level in four years. The story remains the same: firings are low, but hiring is even lower, making it harder for those who lose jobs to find new ones.

Durable Goods Orders

Durable Goods Orders, which track major purchases like machinery and equipment, rose 0.5% last month, outperforming estimates of a 0.3% increase. Late-year strength may reflect businesses taking advantage of bonus depreciation opportunities before year-end, particularly in categories like aircraft.

Core Durable Goods (excluding defense and aircraft) rose 0.9%, well above expectations. This contrasts with yesterday’s softer Retail Sales report and highlights the mixed signals within the broader economy.

Core Shipments—used directly in GDP calculations—also increased 0.9%, which could lead to a slight upward revision in GDP estimates.

Fed Commentary Shifts Rate Expectations

 

This morning, New York Fed President John Williams signaled that the Fed may need to cut rates in the near term, noting that labor-market weakness now poses a greater risk than inflation. “Near term” is doing a lot of heavy lifting here—it’s a clear indication he would support a cut at the December 10 meeting.

Markets reacted instantly. Rate-cut odds jumped from 33% to 74% following his remarks, lifting both Stocks and Bonds.

Yesterday, Boston Fed President and voting member Susan Collins offered a contrasting view. She prefers to pause in December due to inflation remaining above the Fed’s 2% target. Collins said she would consider a cut if the labor market softened “materially,” but she does not believe that has happened.

However, the data tells a different story:

• Since April 2023, unemployment has risen from 3.4% to 4.44%—a 30% increase.

• Since January, it has climbed from 4.0% to 4.4%.

• Since June, the rate has increased three months in a row.

 

Collins is focused on Initial Jobless Claims, which remain low. But the more telling metric is Continuing Claims, now just under 2 million, the highest since 2021—signaling that once someone loses a job, it’s becoming much harder to find a new one.

Chicago Fed President Austan Goolsbee, also a voter, added more division to the mix. Once the most dovish member on the committee—openly talking about sizable cuts before reaching neutral—he’s now uneasy about “front-loading” cuts. He believes the overall economy remains relatively strong and, despite softening labor data, is focused primarily on inflation. He expects cuts eventually, but not in December.

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Where the Voting Members Stand for December 10

 

Team Cut

• Miran, Governor

• Waller, Governor

• Bowman, Governor

• Williams, New York

 

Team Pause

• Schmid, Kansas City

• Collins, Boston

• Goolsbee, Chicago

 

Undeclared (but leaning toward pause)

• Powell, Chair

• Cook, Governor

• Barr, Governor

• Jefferson, Governor

• Musalem, St. Louis

 

Diana Olick from CNBC is back with another alarming headline—but once again, the narrative doesn’t match the full story. For years, Olick has been consistently negative on housing, even as the market has proven remarkably resilient. Over the past five years alone, home prices have climbed roughly 60%, despite repeated predictions of major declines. Housing has been a strong long-term performer for decades—85 years of data show only a brief period of sustained price drops during the housing bubble.

Her latest headline reads:

“New foreclosures jump 20% in October, a sign of more distress in the housing market.”

The problem? Most people won’t read past the headline—and that headline can scare buyers right out of the market. But buried deeper in the article, she notes that the increase is coming off extremely low levels. Foreclosures today remain less than half, even a third, of what’s considered normal. And remember, foreclosure moratoriums in 2021 suppressed activity dramatically—so even now, levels remain historically low with no sign of systemic distress.

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Looking Ahead to the December 10 Fed Meeting

 

We’re now 26 days away from the next Fed rate decision, and several Fed members have weighed in this week:

• Boston Fed President Collins (voting): Against a cut—she believes inflation is too high and isn’t concerned about labor market softness.

• Kansas City President Schmid (voting): Also against a cut; he dissented at the October 29 meeting.

• St. Louis President Musalem (voting): Inflation-focused as well; expects unemployment to rise from 4.3% to 4.5% but still doesn’t support easing.

 

Non-voting members also spoke, including Atlanta’s Bostic, and Dallas’s Logan and Cleveland’s Hammack—both of whom will vote next year. All are leaning against a December cut.

Minneapolis President Kashkari is undecided, having opposed the October cut but signaling he could go either way in December.

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Market Odds Have Shifted Dramatically

 

Before Powell’s hawkish cut on October 29—when he made it clear a December cut was far from guaranteed—the market was pricing in a 95% chance of a cut on December 10.

After Powell’s comments and similar messaging from other Fed officials, those odds have fallen to 49%—essentially a coin toss.

But remember: these probabilities become less reliable the farther out you go. Now that the government has reopened and fresh economic data is about to hit, any weak reports could quickly shift sentiment among Fed voters.

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The Jobs Data May Be the Deciding Factor

 

The labor market continues to soften. Nearly every week brings a new round of high-profile layoffs. Just yesterday, Verizon announced a 15% workforce reduction—about 15,000 jobs.

ADP’s data tells an even clearer story. Over the last three months, the U.S. has created an average of just 3,333 private-sector jobs per month—down sharply from more than 200,000 per month a year ago. The weakening trend is undeniable, even if some Fed officials remain hesitant to acknowledge it.

NEC Director Kevin Hassett added that the long-delayed September Jobs Report will likely be released next week. The October Jobs Report will follow, though only the Business Survey will be published—meaning the unemployment rate from the Household Survey will not be included. Still, weak job creation alone may be enough to push certain Fed members toward supporting a December cut.

Revelio Labs — Labor is Still Softening

Revelio Labs — which we respect a lot — publishes their own “Jobs Report” by tracking over 100 million U.S. profiles. That’s roughly two-thirds of the workforce. Compare that to BLS — which captures only 27% — and the Household Survey, which is literally 60,000 phone calls (0.03% of the labor force).

Revelio is a much broader read — and their data still shows labor weakening.

They reported 9,000 job losses in October — and they revised September down even further, from 27,000 to -33,000. That’s meaningful deterioration.

Keep in mind — Revelio may be catching weakness ADP isn’t — because Revelio does include government workers. And we’re now seeing that show up in Federal continuing claims — which just hit the highest since 2019.

ADP also isn’t fully capturing big layoffs from massive enterprise companies if they’re not ADP customers — and we’ve seen real cuts from major tech names.

On top of that — Indeed is showing job openings at the lowest levels since February 2021.

So the signals everywhere are leaning soft.

Yet — some Fed members are still downplaying this. Cleveland Fed President Beth Hammack said the labor market is “OK” and “stable.” She’s not worried about labor — but she is very focused on inflation — without properly adjusting for temporary tariff distortions or the known overstatement from shelter and portfolio management.

She thinks policy is barely restrictive — if at all — and she’s clearly not in favor of a December 10 cut.

But New York Fed President John Williams — who is always a voter — did shift his stance recently.

He now says R* — the neutral rate — is lower than he previously believed. Previously he had assumed R* at ~0.75% — at the high end of the Fed distribution. Now he believes it has moved lower and will continue to move lower.

That matters.

Williams’ updated view implies the Fed is actually more restrictive than he thought — and that there is room to cut further before getting near neutral.

Translation for mortgage markets:

Revelio’s labor signal leans dovish.

Williams’ shift on R* leans dovish.

Hammack’s messaging leans hawkish — but she’s ignoring known distortions.

Net: The data is softening — even if some Fed voices are pretending it isn’t.

Fed Comments

Kansas City Fed President Jeffrey Schmid was on CNBC this morning explaining why he dissented on Wednesday — he didn’t want the 25bp cut. And based on how he framed things, if a cut is proposed in December, he’ll likely dissent again.

Schmid’s read on inflation is overstated. He called Core at 3%. But Core PCE is 2.9% — and Powell even suggested Wednesday that the unreleased data would have printed closer to 2.8%.

Importantly — Schmid is ignoring what Powell himself has repeatedly acknowledged: tariffs alone are temporarily adding ~0.3% – 0.4% to inflation, and shelter + portfolio management are still overstating inflation as well.

When you strip out those distortions, “real” Core PCE is effectively right at 2% YoY.

He also argues the labor market is “in balance.” That’s just not what the data is showing. BLS has been weak, ADP has shown job losses in 3 of the last 4 months, and June payrolls from BLS were outright negative. Yes — immigration increased labor supply — but if hiring slows and layoffs broaden, supply doesn’t matter because it’s not being absorbed. And major companies — like Amazon and Microsoft — have announced layoffs recently.

Schmid claims policy isn’t restrictive because stocks are at all-time highs and CapEx is strong. But that misses the point — AI is doing the heavy lifting there. AI is the catalyst — not Fed policy. We’ve seen hundreds of billions in AI capital commitments in just the last 48 hours — NVIDIA, Meta, and more. And even here in our own industry, mortgage companies are investing heavily in AI.

A 25bp difference in the Fed Funds Rate is not going to make or break that spend. If you don’t invest in AI, you fall behind. It’s existential — not marginal.

Schmid votes again one more time on December 10 — and odds are he’ll vote against another cut.

Dallas Fed President Lorie Logan, who votes next year, also leaned hawkish. She said it’s hard to support another cut in December, arguing the downside labor risk has already been addressed with the cuts we’ve already gotten — and that the outlook doesn’t call for more. She believes the labor market is balanced as well — which, as we laid out above, we disagree with.

She also says inflation is still too high and taking too long to reach target.

But here’s the bigger overlay:

if the government shutdown continues and the Fed doesn’t get the data they need ahead of December 10 — they are not going to cut blind.

And starting tomorrow — SNAP benefits begin to run out. 42 million Americans will lose at least some of their food assistance. That is going to create noise — calls to Congress — and potentially enough political pressure to end the shutdown faster.

Bottom line for rates:

the macro data backdrop is more dovish than Schmid and Logan are portraying — but if the Fed doesn’t have fresh data in hand by December — process alone could keep the December cut off the table.

Consumer Price Index — September Update

The September CPI report came in slightly cooler than expected, showing overall inflation rising 0.3% for the month, one tenth below forecasts. On a year-over-year basis, inflation ticked up from 2.9% to 3%, a touch softer than the market’s expectation of 3.1%. The biggest driver of the monthly gain was energy, which climbed 1.5%, fueled entirely by a 4.1% jump in gasoline prices.

The Core CPI, which excludes food and energy, increased by 0.2%, also one tenth below expectations. Year over year, Core inflation eased from 3.1% to 3%, another positive sign that inflation pressures continue to moderate.

The standout component continues to be shelter, which makes up 44.4% of the Core index. This category helped keep inflation in check, rising just 0.2% for the month. Within that, Owners’ Equivalent Rent (OER)—the largest subcomponent at 33% of Core—rose a modest 0.1%, far cooler than recent trends. This aligns with what we’ve been expecting: a gradual return of shelter data to more realistic levels, helping drive Core inflation lower.

Rent prices rose 0.2%, or roughly 2.4% annualized, now much closer to real-time rent tracking measures. Lodging away from home rose 1.3%, but we anticipate this will ease in coming months as hotel demand and pricing soften.

If we remove shelter entirely, everything else in Core CPI increased just 0.11% for the month and 1.48% year over year—a strong indication that inflation is cooling beneath the surface. While goods prices remain slightly higher due to temporary tariff effects, continued normalization in shelter and OER should keep inflation trending lower.

Why Adjustable-Rate Mortgages Deserve a Closer Look

 

Adjustable-Rate Mortgages (ARMs) have been gaining real momentum, making up a growing share of total loan applications. As the Fed continues to ease and rates trend lower, that momentum will likely build.

Many borrowers shy away from ARMs because of their variable nature after the fixed period—but the math often tells a different story. Even in a conservative or “worst case” scenario, ARMs can outperform fixed-rate loans for years beyond the initial fixed term, thanks to the savings they provide upfront.

To help illustrate this, we’ve added a new ARM vs. Fixed comparison tool under the Calculators section of our website. It’s designed to make it easy to show clients the real numbers behind the decision—why an ARM can often make more financial sense.

In our recent video walkthrough, we ran a scenario using standard 5/2/5 caps on a 7/1 ARM. Even assuming rates rise 5% in year eight—a pretty aggressive move—the ARM still outperforms the fixed for roughly 8.5 years. Historically, over the past 40 years, ARMs have consistently proven to be the better value.

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Looking Ahead

 

Next week, we’ll finally start to see some key economic data again. The Bureau of Labor Statistics had to bring in emergency staff to get the Consumer Price Index (CPI) report out on time, as it’s needed for the Social Security Cost of Living Adjustment (COLA) calculations before November. We’ll be watching closely to see what it says about inflation and how it might shape rate trends moving forward.

National Retail Federation Report

 

With federal data releases on pause, market watchers have been relying more on private sector reports for clues on the economy. The National Retail Federation’s (NRF) version of September Retail Sales showed a broad and meaningful pullback in consumer spending — a sharp contrast to the resilience we’ve seen all year.

While it’s normal to see a slowdown between back-to-school and the holiday season, this could also be an early signal that the consumer is starting to tap the brakes. The NRF downplayed the weaker numbers, expressing confidence that spending will rebound, but we’ll be watching closely to see if this softness carries into Q4.

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Cash Buyers Cooling Off

 

Cash buyers have made up roughly one-third of all real estate transactions this year — but that number is starting to edge lower. A big reason could be the recent drop in mortgage rates, which makes financing more attractive even for those who could pay in cash.

We’re also seeing more participation from first-time buyers and other rate-sensitive borrowers, which is a healthy sign for the housing market. Fewer all-cash purchases mean more mortgage activity — a welcome shift for our industry.

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Looking Ahead

 

The Bureau of Labor Statistics was originally expected to delay its key reports due to the government shutdown, but the agency is now working to release September’s Consumer Price Index (CPI) — a critical input for Social Security adjustments due by November 1. While the release may slip from its scheduled October 15 date, it does appear we’ll get it this month.

Here’s the tentative economic calendar for next week:

• Monday: Markets Closed (Columbus Day)

• Wednesday: Mortgage Applications, Consumer Price Index (CPI)

• Thursday: Producer Price Index (PPI), Retail Sales

• Friday: Housing Starts & Building Permits

 

As always, we’ll keep an eye on how these reports shape market sentiment and the Fed’s path forward — both of which directly influence mortgage rates and borrower affordability.

Fed Talk

Chicago Fed President Austan Goolsbee joined CNBC this morning with some mixed messages on the labor market. He first described conditions as “pretty stable,” only to later admit they’re deteriorating. We’re not sure what more the Fed needs to see to acknowledge that the labor market is weakening — ADP has reported job losses in three of the past four months.

Goolsbee also discussed the Chicago Fed’s new unemployment indicator, which estimates the jobless rate would have held steady at 4.3% in the latest BLS report. But the actual reading sits at 4.34% — just a fraction away from rounding up to 4.4%. The internal probability breakdown even showed a strong chance of 4.4%, which raises some eyebrows, since a higher number would have added real pressure on the Fed.

Digging deeper, the Fed’s own charts show a clear trend: layoffs are rising, and hiring among the unemployed is slowing. It’s hard to square that with the “stable” narrative the Fed continues to push.

On inflation, Goolsbee said he’s concerned about the uptick in services prices. But most of that move came from Owners’ Equivalent Rent — a survey-based estimate of what homeowners think they could rent their homes for. It’s a questionable metric, and it’s overstating Core PCE inflation by roughly 0.3%. Add in the impact from tariffs (another 0.3% to 0.4%) and Portfolio Management fees (around 0.3%), and you’re looking at several artificial boosts to the reported 2.9% Core PCE number.

When you strip out those distortions, Core inflation is closer to 2.0%—or even 1.9% depending on how you account for tariffs. That’s right in line with real-time gauges like Truflation, which shows overall inflation hovering near 2%. Meanwhile, oil prices have fallen sharply, with WTI crude back near $60.

All told, the data supports a strong case for a 25bp rate cut at the Fed’s October 29 meeting.

We also heard from New York Fed President John Williams, who said bond buying remains a normal part of the Fed’s toolkit. Notably, he didn’t exclude mortgage-backed securities (MBS) — opening the door for potential quantitative easing if the economy softens. That would be very supportive for mortgage rates going forward.