A Look Into the Markets

The Federal Reserve raised the Fed Funds Rate by .75% in a widely expected move while home loan rates continue to be well off the highest levels in June. Let's discuss what the Fed Chair Powell said in his press conference and what it means going forward.

Boom

The Fed raised the Fed Funds Rate in back-to-back meetings by .75% or more for the first time since 1980 when Magic Johnson guided the Lakers to an NBA Championship as a rookie.

This rate hike has no effect on home loan rates. Or does it? The Fed raised rates by 1.50% in the last 45 days and the 10-yr Note yield has declined from 3.49% to 2.75% in the same time frame. Why?

Fed rate hikes are intended to cool inflation, slow economic growth and slow down the labor market. If inflation cools, the economy slows, and the unemployment rate ticks up...long-term rates move lower.

Recession or No Recession

In his press conference, the Fed Chair was asked about whether our economy was in a recession and Mr. Powell said he didn't believe the US economy was in or near a recession. He cited the resiliency of the labor market as the reason why the economy was not in a recession. He did reiterate it was not the Fed's job to define a recession.

The classic definition of a recession is two consecutive quarters of negative growth. It will take a couple more months and revised reports before we see whether we have two back-to-back quarters of negative growth. In the same press conference, Powell did say the "slowdown in Q2 was notable".

Data Dependent

The Fed said that the size and scope of future rate hikes will be based on the incoming data. If inflation remains high, we could and should expect an "unusually" large rate hike especially if the labor market remains as strong as the Fed Chair noted.

Uncertainty and Volatility Ahead

There was nothing in the Fed Statement or Press Conference which should suggest higher home loan rates ahead. Watching how the Treasury Market is performing, its clear long-term rates do not see inflation as the long-term problem and the recent yield curve inversion in the 2-yr Note suggests we are in a recession, despite the Fed Chair saying otherwise.

          Bottom line:

Home loan rates have appeared to make their peak back in mid-June. With more housing inventory coming to market, now is a great time to capture the home of your dreams with prices and rates off the highest levels of late.

          Looking Ahead:

This week we will find out the strength of the labor market. Until now, there are literally 2 jobs open for every one person to fill them - that's tight and that is what the Fed wants to cool off. Jobs buy homes so this continued strong labor market is important for the Fed to protect.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices are what determine home loan rates The chart below is a one-year view of the Fannie Mae 30-year 4.5% coupon, where currently closed loans are being packaged. As prices go higher, rates move lower and vice versa.

You can see the right side of the chart; prices fell to new 2022 price lows - meaning 2022 rate highs but bounced sharply higher after the big Fed rate hike in mid-June and then gave up some of those gains in response to the recent high inflation readings. It does appear the mid-June price lows will represent the rate peaks for 2022. A move above $101 would go a long way to creating another leg lower in interest rates.

Chart: Fannie Mae 4.5% Mortgage Bond (Friday Jul 29, 2022)

Economic Calendar for the Week of August 01 - August 05

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

The quiet before the storm. This past week, Fed officials were literally "quiet" with no speeches ahead of next week's Fed Meeting where a .75% rate hike is widely expected. Let's discuss what will be an important week ahead.

Another Big Fed Rate Hike Coming

For the first time in over 40 years the Fed is expected to raise rates by at least .75% in back-to-back meetings.

This rate hike will have no direct impact on home loan rates, but it will increase short-term rates like credit cards, auto loans and home equity lines of credit. Consumers should also expect a boost to the interest rate in your savings accounts.

How will mortgage rates react? That is the unknown at the moment. Back in June, when the Fed also raised rates by .75%, the 10-yr Note yield hit 3.49%, the highest levels in years and moved sharply lower on increased recession fears. Today, the 10-yr Note stands near 3.00%. If the economy can absorb higher long-term rates, then we should expect long-term rates to move higher. Currently the 2-yr-Note yield is near 3.25% and inverted with the 10-yr, which typically portends a recession.

In a recession, long-term rates do not go higher, and the Fed doesn't hike rates.

The Fed, who controls short-term rates, is hiking the Fed Funds Rate to slow demand, tamp down inflation, cool off the labor market and remove "froth" from the housing market.

Froth Removed

"Single-family starts are retreating on higher construction costs and interest rates, and this decline is reflected in our latest builder surveys, which show a steep drop in builder sentiment for the single-family market," Jerry Konter, chairman of the National Association of Home Builders (NAHB).

With the US economy close or in a recession, we should expect housing to slow, and it is. The single-family home market is also slowing in the existing home arena. The June Existing Home Sales report showed the slowest sales pace since June 2020, at the start of the Covid pandemic.

The median price of a home sold in June hit $416,000, another record and an increase of 13.4%. Price gains are expected to slow in the months ahead to a more normal rate of appreciation – this is a good thing.

The Unemployment Line is Getting Longer

Initial Jobs Claims, a leading indicator of the labor market, showed that 251,000 signed up for unemployment benefits. This is a low historic number, but the numbers have been increasing each of the last several weeks – highlighting layoffs across the country.

Currently, there are still 2 jobs available for every unemployed person that wants a job, so the labor market remains strong, which is great for housing as well as ensuring any recession would be shallow.

Let's hope the Fed stays true to their word and remains "nimble" in response to the incoming data which is showing signs of worsening.

          Bottom line:

Home loan rates appeared to have stabilized and more housing inventory has been coming to the market in many areas. With that said, if you are interested in purchasing a home, it remains a great time to find a home and capture rates well beneath the rate of inflation.

          Looking Ahead:

It's Fed Week. On Wednesday at 2pm ET, the Fed will release their Monetary Policy Statement. Expect a lot of volatility. We could see multiple reactions. The first coming on the Statement, the next coming at the 2:30 pm ET Press Conference – then the more forceful and possibly different reaction next Thursday morning.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 4.5% coupon, where currently closed loans are being packaged. As prices go higher, rates move lower and vice versa.

You can see the right side of the chart; prices fell to new 2022 price lows...meaning 2022 rate highs but bounced sharply higher after the big Fed rate hike in mid-June, then gave up some of those gains in response to the recent high inflation readings. It does appear the mid-June price lows will represent the rate peaks for 2022. Next week's Fed Meeting and action may determine whether this rate peak remains in place.

Chart: Fannie Mae 4.5% Mortgage Bond (Friday Jul 22, 2022)

Economic Calendar for the Week of July 25 - July 29

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 we experienced a couple of soaring inflation numbers which has injected new uncertainty surrounding inflation peaks, Fed rate hikes and the likelihood of a recession. Let's discuss what happened and what to watch for in the coming weeks.

Consumer Prices Soaring

The headline Consumer Price Index (CPI) for June showed prices climbed a scorching 9.1% year over year. Headline inflation includes both food and energy. When you take out food and energy costs, Core CPI came in at 5.9% year over year. Both numbers were well above expectations and put into question whether inflation has peaked.

The Federal Reserve wants core inflation to run at 2 to 2.5% in the long run, so 5.9% is more than double the Fed's comfort zone.

How does the Fed lower inflation? They hike the Fed Funds Rate and shrink their balance sheet, which slows demand and removes liquidity in the financial system.

The problem? A sizable portion of our inflation is energy based which seeps through the entire food and supply chain through shipping and manufacturing plants. Fed rate hikes do not lower oil prices. There are only two ways to lower oil prices:

1. More supply
2. Recession fears, which means less demand

Recession Signals Emerge

It's important to remember that the Fed controls short term rates, and the Treasury market controls the Fed. Short term rates have nudged higher but longer-term rates like the 10-year yield and home loan rates have not gone up nearly as much. This despite the likelihood of more Fed rate hikes ahead.

In response to the high CPI print, the chance of a full 1.00% rate hike at the July meeting stands at 85%. As a result, the 2-year yield soared to 3.25% and the 10-year moved up to 2.99%. The 25+ basis point yield curve inversion, where the 2-year yield is 25bp higher than the 10-year, is the widest since the spring of 2000...right before a recession.

Back in June, JPMorgan CEO, Jamie Dimon told the world to "brace for an economic hurricane" as some rough conditions were on the horizon. The firm reported quarterly earnings this week and it missed both revenue and earnings forecasts. This miss has elevated fears that more corporations are going to miss earnings which caused stocks to decline sharply on Thursday with some of the money finding the U.S. bond market.

Besides rates likely peaking because of a recession or near recession, there is some more good news.

Oil prices collapse

There are two ways for energy prices to move lower:

1. More supply
2. Less demand, by way of recession fears

We are watching the latter take place as heightened recession fears have pushed oil to $92 a barrel, the lowest levels since February.

Should oil move lower still, we should expect headline inflation to move lower in the months ahead which would be a welcome sign.

          Bottom line:

Long-term rates have stabilized but we should not expect much more improvement until inflation moderates further. With that said, if you are interested in purchasing a home, it remains a great time with rates well beneath the rate of inflation.

          Looking Ahead:

Next week brings some housing data. These reports could further confirm whether the economy is at or near a recession. The Fed wanted to remove some froth from the housing market by talking up rates. It appears to have been successful in that endeavor. There will be limited Fed speak as we approach the quiet period, one week before the next Fed Meeting on July 27th.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 4.5% coupon, where currently closed loans are being packaged. As prices push higher, rates move lower and vice versa.

You can see the right side of the chart; prices fell to new 2022 price lows, meaning 2022 rate highs but bounced sharply higher after the big Fed rate hike in mid-June and then gave up some of those gains in response to the recent high inflation readings. It does appear the mid-June price lows will represent the rate peaks for 2022.

Chart: Fannie Mae 4.5% Mortgage Bond (Friday Jul 15, 2022)

Economic Calendar for the Week of July 18 - July 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. 

A Look Into the Markets

This past week Federal Reserve Chair Jerome Powell delivered his semi-annual testimony to Congress on Capitol Hill. Let's walk through what the Chair said and how the financial markets reacted as well.

"At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses," said Fed Chair Powell.

Last Wednesday, Fed Chair Jerome Powell was on Capitol Hill as part of the Federal Reserve Act, where the Federal Reserve Board is to submit written reports on "the conduct of monetary policy and economic developments and prospects for the future."

Aside from the prepared testimony, the question-and-answer session from Congress always provides sound bites that move the market.

After last week's 0.75% rate hike, the Fed Chair was grilled on the state of the economy, inflation, and the rising threat of recession.

"It's certainly a possibility, it's not our intended outcome, but it's certainly a possibility." Federal Reserve Chair Jerome Powell on whether Fed rate hikes will tip the economy into a recession.

Hearing of a possible recession, slow consumer demand and lower inflation were not comforting words to the financial markets. So, it was not a surprise to see rates improve in response to these words.

The two-year Treasury yield, which moves in advance of Fed moves, has declined from 3.50% at the recent Fed Meeting to under 3.00%, suggesting the Treasury market doesn't see the Fed hiking rates as much as they said for fears of a recession.

"There's really not anything that we can do about oil prices. Inflation was high certainly before the war in Ukraine broke out." Fed Chair Powell.

This line got a lot of press and is a reminder that the Fed can't fix headline or energy-based inflation. The two outcomes that can affect oil prices are either more supply or less demand. Oil has declined from a closing high of $124 to $104 per barrel as we head into the weekend. Why? The threat of slower demand caused by rising recession fears. Falling oil prices brings lower headline inflation, which is also good for bonds and rates.

"Overall, it's a slowing in the housing market, the increase in housing prices to slow pretty significantly." Fed Chair Powell.

The Fed has said they wanted to remove some of the "froth" out of housing and it's clear that this has happened. Home price growth had been running at nearly 20% year over year coming into spring but, the recent rise in mortgage rates has slowed that pace of appreciation. We should expect more normal growth rates going forward and possibly some price declines in the near-term. We may also see a continued increase in housing supply as "would be" sellers jump in for the fear of missing out. All of this would be healthy and welcome to the housing market.

          Bottom line:

Long-term rates might have peaked at the recent Fed Meeting just like they did back in 1994 when the Fed last hiked rates by .75%. With additional homes coming to the market and rates having crested, now is a wonderful time to explore owning real estate.

          Looking Ahead:

Next week is full of economic reports, with the main event being the Fed's favored gauge of consumer inflation – The Core Personal Consumption Expenditure (PCE). This report uses a different methodology to gauge inflation as it takes into consideration consumer buying changes. For example, if beef is expensive, the consumer might purchase chicken instead which is reflected in PCE. If this report comes in soft on a month over month basis, like it did last month, it would further help cement a rate peak and may even prompt the Fed to talk less about more rate hikes.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 4.5% coupon, where currently closed loans are being packaged. As prices move higher, rates move lower and vice versa.

You can see on the right side of the chart, prices fell to fresh 2022 price lows - meaning 2022 rate highs but bounced sharply higher after the big Fed rate hike two weeks ago. Time will tell whether we just witnessed the MBS price bottom and mortgage rate peak for 2022.

Chart: Fannie Mae 4.0% Mortgage Bond (Friday Jun 24, 2022)

Economic Calendar for the Week of June 27 - July 01

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.