A Look Into the Markets

This past week, home loan rates bounced around in a volatile fashion in response to more of the same...Fed speaks, inflation readings, and uncertainty. Let's walk through what happened and discuss what to look for in the week ahead.

"Although the task is difficult, it is not insurmountable. We have the tools to return balance to the economy and restore price stability, and we are committed to using them," New York Fed President, John Williams.

One week after the first .50% rate hike in 22 years, there were many Fed officials out using soothing rhetoric in an attempt to reassure financial markets they will be able to lower inflation while maintaining economic growth. Fed rate hikes and balance sheet reduction are intended to help slow consumer demand and there is now a growing fear the Fed will "overcook" the rate hikes and slow the US economy into a recession.

Stocks are sharply lower in 2022 and one of the main drivers is fear of a sustained economic slowdown. If the economy slows down, consumer demand will slow and that would likely lead to lower long-term rates, like mortgages. Bond yields or rates may already be giving us a sense that long-term rates may be close to peaking. The 10-yr Note backed well off its Monday high of 3.20% to reach 2.82% by midweek.

Inflation Has Not Yet Peaked

The April Consumer Price Index (CPI) was reported on Wednesday, and it was a bad surprise. The headline CPI, which includes food and energy prices, came in at a scorching 8.1% year over year. This, despite seeing an energy pullback in April. Energy prices have since moved higher, with diesel hitting all-time highs, so we should expect May's headline CPI print to remain higher than we would like.

The big disappointment was the higher-than-expected Core CPI, which removes energy and food. This month-over-month reading came in at a blistering 0.6% to bring the year-over-year reading to 6.2%, more than three times hotter than the Fed's target of 2% over the longer term.

"There are things we can do and we can address. That starts with the Federal Reserve, which plays a primary role in fighting inflation" President Biden.

President Biden reaffirmed the Fed's mandate of maintaining price stability or inflation. The challenge for the Fed? The Fed tightens monetary conditions and slows down demand by hiking rates. These rate hikes will not do much, if anything, to help lower energy and food costs. With energy being a component in many goods and services, we should expect headline inflation to remain stubbornly high for some time.

A Long-Term Trend Remains Our Friend

For those considering a home purchase and worrying about rising rates, there is a positive trend to consider.

Over the last 40 years, every time the Fed hiked rates the 10-yr Note yield never reached the peak from the previous hiking cycle. The 10-yr Note hit 3.20% this past Monday and the previous peak was 3.25% - the last time the Fed hiked rates in 2018. Could we have hit a rate peak this week? Time will tell.

          Bottom line:

Home loan rates remain on a trend higher. Uncertainty and volatility around inflation, the Fed, and economic growth will continue to push rates and stocks around. If you are considering a purchase transaction, now is a great time to lock.

          Looking Ahead:

Next week's economic calendar is a bit on the light side. But a parade of Fed speakers as we march towards the June Fed Meeting will keep the financial markets on edge. The next big thing to watch will be the balance sheet reduction coming in June. The Fed has only shrunk the balance sheet by a small amount and that was during better economic conditions with very low inflation. This will bring more uncertainty and volatility still - stay tuned.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a five-year view of the Fannie Mae 30- 4.00% coupon, where currently closed loans are being packaged. As prices go higher, rates move lower and vice versa.

You can see on the right side of the chart, that MBS fell beneath support at price lows last seen in 2018, thereby making a fresh 11-year price low.

With the 10-yr Note pulling back from 2018 highs, MBS improving from the May lows, and the aforementioned long-term 10yr Note trend in place, we may very well be nearing the peak in rates.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday May 13, 2022)

Economic Calendar for the Week of May 16 - May 20

John Higgins

NMLS #136061

The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is without errors.

As your mortgage professional, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you. 

A Look Into the Markets

This past week, the Federal Reserve hiked the Fed Fund Rate by .50%, the largest rate increase in 22 years. Let's discuss what other action the Fed took, how the market reacted and what to look for in the week ahead.

"I would like to first speak to the American people. Inflation is much too high, and the Fed understands the hardship and is moving expeditiously to bring down inflation." Fed Chair Jerome Powell - May 4, 2022.

How does the Fed move to bring down inflation? Raise rates and tighten monetary conditions. And this started on Wednesday when the Fed raised the Fed Funds rate by .50%. In a separate measure, the Fed will also begin shrinking its enormous $9T balance sheet of Treasuries and mortgage-backed securities (MBS).

It is important to remember that this hike in Fed Funds Rate has no direct effect on home loan rates. Oddly enough, the measures the Fed is taking to lower inflation help preserve the value of long-term bonds like MBS. If the Fed is successful in bringing down inflation, it will help long-term bond prices improve and long-term rates remain relatively stable.

The lift to the Fed Funds Rate will immediately impact all short-term loans, like auto loans, credit card debt, and home equity lines of credit. Increasing these rates is expected to slow consumer demand, which in effect will slow price increases.

Powell gave the market comfort when he said there was "a good chance to have a soft landing". Meaning the Fed can continue to raise rates more and slow demand without pushing the economy into a recession.

How much more will the Fed hike rates? The Fed Chair signaled they are likely to raise rates by another .50% in both June and July. Of course, making these moves will depend on the incoming data. This means we should continue to expect high-interest rate volatility around key economic reports like inflation, GDP, and the labor market.

"Beginning on June 1, principal payments from securities held in the System Open Market Account will be reinvested to the extent that they exceed monthly caps." FOMC announcement on balance sheet reduction.

The balance sheet reduction announcement means the Fed will be buying fewer bonds going forward. This is the opposite of what the Fed did through Quantitative Easing where they purchased $120B worth of Treasuries and MBS every month. It is not yet truly clear what will happen to home loan rates once the process in June commences as the Federal Reserve has only once shrunk the balance sheet for a limited amount of time back in 2018.

"It's a strong economy and nothing about it suggests it's close to or vulnerable to a recession. We have a good chance to restore price stability (lower inflation) without a recession". Jerome Powell.

These words initially provided some comfort to both stocks and rates, but come Thursday, after sleeping on it, interest rates crept higher with MBS prices hitting 11-year lows and the 10-yr Note yield touching 3.09%.

Despite the Fed Chair saying the Fed is not considering a .75% rate hike, the markets finished the week assigning a very high probability the Fed will hike by .75% in June.

          Bottom line:

Home loan rates are at an important juncture. While MBS attempt to stabilize, there is a real threat they can go another leg higher and fast. If you are considering a purchase transaction, now is the time to lock.

          Looking Ahead:

Next week brings a ton of headline risk. We are going to get an important consumer inflation reading via the Consumer Price Index. The Consumer Sentiment reading will also tell us how the consumer feels. If that were not all, we will once again get a bunch of Fed speakers who can move the markets.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a five-year view of the Fannie Mae 30-year 4.00% coupon, where currently closed loans are being packaged. As prices go higher, rates move lower and vice versa.

You can see on the right side of the chart MBS fell beneath support at price lows last seen in 2018, thereby making a fresh 11-year price low. With the 10-yr moving above 3.00%, we may very well see rates follow the path of least resistance...higher.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday May 06, 2022)

Economic Calendar for the Week of May 09 - May 13

John Higgins

NMLS #136061

The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is without errors.

As your mortgage professional, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you. 

A Look Into the Markets

This past week was a bit quiet as no Federal Reserve officials were talking to move the market. However, this changes next week, as we approach the highly anticipated FOMC (Federal Open Market Committee) Meeting. Let's discuss what to look for as we wait on the Fed.

This week was the "quiet period," where no Fed officials talked about the economy or monetary policy seven days before the upcoming Fed meeting. The U.S. bond market embraced the quiet and lack of jawboning with rates improving slightly from the previous week.

Ironically, Fed President James Bullard recently said the "bond market was not a safe place to be"...and what we watched this week was the opposite. Amidst high uncertainty in Asia and an economic slowdown in China, investors around the globe sought the "safe-haven" of the U.S. Treasury market, which also helped home loan rates improve a bit.

The One Rate the Fed Can't Control

"There is an obvious need to move expeditiously to a more neutral level and more restrictive levels if needed to restore price stability," Fed Chair Jerome Powell, March 2022.

This quote from Fed Chair Jerome Powell at the March Fed Meeting highlights the Fed's desire to lift the Fed Funds Rate 2.00% or more from current levels. The Fed wants the short-term rate to be "neutral" where it neither helps nor hurts the economy.

The Fed can't control long-term rates like mortgages or the 10-year note yield which are influenced by inflation and economic growth. Until now, long-term rates have gone up solely on inflation fears and the tough talk of the Fed.

Next week, expectations are for the Fed to hike the Fed Funds Rate by .50%. This will have no impact on home loan rates. Much like 2018 when the Fed hiked rates a 4th time, mortgage rates improved dramatically as it was perceived the Fed was going to slow the economy too much with more rate hikes. Time will tell what the Fed will be able to do in this rate hiking cycle. There are heightened signs that the Fed won't be able to hike as much which includes U.S. economic growth slowing quickly from last year's pace.

Peak Signs

The 10-year note yield, currently at 2.84%, is below its peak of 2.98% seen on 4/20. If it remains beneath 3.0%, we will continue to see much-needed signs of stabilization in home loan rates. However, if the 10-year spikes again and moves back above 3.0%, we should expect home loan rates to move another leg higher.

The first read on Q1 2022 GDP showed that within the data, the inflation reading Core PCE (Personal Consumption Expenditure) continued to rise while growth fell 1.4% from the near 7% read in Q4 2021. Slow growth and high inflation paint an uncertain future.

          Bottom line:

Home loan rates are at an important juncture. While MBS attempt to stabilize, there is a real threat that rates can move another leg higher and fast. If you are considering a purchase transaction, now is the time to lock.

          Looking Ahead:

Next week it is all about the Fed. What they say and do can affect the financial markets for an extended period. And if that headline risk were not enough, we also have the important ADP Private Payrolls on Wednesday and the government's Jobs Report on Friday. The labor market remains scorching hot and is a reason why the Fed has been talking so tough for months. Next Wednesday, we get action.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a five-year view of the Fannie Mae 30-year 4.0% coupon, where currently closed loans are being packaged. As prices increase, rates move lower and vice versa.

You can see on the right side of the chart that MBSs are nearing support at price lows/rate peaks last seen in 2018. In looking for a peak in rates, those price bottoms would be an ideal spot. If the bond falls beneath that support, we will see yet another increase in home loan rates.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday Apr 29, 2022)

Economic Calendar for the Week of May 02 - May 06

John Higgins

NMLS #136061

The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is without errors.

As your mortgage professional, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you. 

A Look Into the Markets

This past week, home loan rates hit the highest levels in nearly a decade as inflation readings came in touching 40+ year peaks. Let's discuss what happened and what to watch for next week.

Headline Consumer Inflation vs Core Consumer Inflation

Interest rates around the globe have been on the rise in response to inflation fears and uncertainty surrounding Federal Reserve rate hikes. The next Fed meeting is on May 4th and at that time the market is expecting a 0.50% hike in the Fed Funds Rate. Also on the table, is an announcement to start the balance sheet reduction, which could put more upward pressure on long-term rates.

The rate of consumer inflation will determine what the Fed will do going forward. On Tuesday, we received the important Consumer Price Index (CPI) Index. There are two inflation readings to follow, the headline figure, which includes food and energy costs, and the more closely watched Core reading, which strips out food and energy.

The headline CPI came in at 8.5% year over year. The important month-over-month reading, which determines the near-term trend, showed a higher than expected 1.2% increase or a 14.4% annualized rate!!!!

The Core CPI reading came in at 6.5% year-over-year, driven by a relatively small 0.3% month-over-month rise. Both figures were cooler than expectations. In the words of Fed Governor Lael Brainard - this was a "welcome" sign.

The core inflation number is more closely watched by the Fed and the financial markets as that is the price of everything outside of food and energy. If core inflation continues to moderate in the months ahead, the Fed will not likely raise rates as aggressively as the markets currently fear.

Ironically, the headline and more energy-based inflation may be a reason why the core inflation number was lower. If people are paying more money to fill their tanks and heat their homes, it will come at the expense of all other purchases. How do these other products get purchased? Lower the price.

Consumer spending makes up two-thirds of our economic growth. So when you hear this fresh chatter regarding a recession in the U.S., it suggests the consumer will dramatically stop spending on items outside food and energy.

This could happen further down the road if we are unable to reign in energy costs.

Europe has Inflation Issues

Across the pond, European Central Bank (ECB) President Christine Lagarde shared these words which pushed interest rates higher around the globe:

There are "three main factors that are likely to take inflation higher" going forward.

1. Energy prices are expected to stay higher for longer.
2. Pressure on food inflation is likely to increase.
3. Global manufacturing bottlenecks are likely to persist in certain sectors.

Note: The similar theme abroad is the high headline (food and energy) cost while their economy slows from a lack of spending outside those items. The European economy is performing worse than the U.S. and their central bank is reacting even slower to inflation than our Fed. Their interest rates are 0.50% and there is no timeline to increase them. Additionally, the ECB will continue to purchase bonds to keep rates low until the 3rd Quarter of this year.

The good news? If rates stay low around the globe, it will help keep our rates relatively low.

Shortest Unemployment Line in 52 Years

Initial Jobless Claims are being reported at levels last seen in 1970. This is wonderful for housing as jobs buy homes. A potential problem could be wage-based inflation as it takes more money to attract talent.

The Fed's dual mandate is to maintain price stability (inflation) and promote maximum employment. We will wait to see if the Fed can perform a "soft landing" where inflation comes down without hurting the economy or labor market.

          Bottom line:

Interest rates remain on the rise. And the words of central bankers around the globe this week have added to the uncertainty and volatility. If you are considering a mortgage, now is an ideal time to lock in as the path of least resistance for rates remains higher.

          Looking Ahead:

Next week we will receive important readings on housing. We should expect softness as mortgage rates touched 5% and have exacerbated an already challenging affordability environment. There will be more Fed speak which could further shove price/rates around.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a five-year view of the Fannie Mae 30-year 4.00% coupon, where currently closed loans are being packaged.  As prices increase, rates move lower and vice versa.

You can see on the right side of the chart that MBS are nearing support at price lows/rate peaks last seen in 2018. In looking for a peak in rates, those price bottoms would be an ideal spot. If the bond falls beneath that support, we will see yet another increase in home loan rates.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday Apr 15, 2022)

Economic Calendar for the Week of April 18 - April 22

John Higgins

NMLS #136061

The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is without errors.

As your mortgage professional, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you.