A Look into the Markets
Home loan rates have ticked higher week to week but some bad economic news halted the rise. Let’s discuss what happened and look ahead into next week.
“Baby come back; you can blame it all on me” Baby Come Back by Player
Positive Bank Earnings Impact
The rise in home loan rates over the last couple of weeks has mainly been in response to good news from the banking sector. Corporate earnings from the likes of JPMorgan Chase, Bank of America, Charles Schwab, and others have lifted fears of a contagion from the recent bank failures. With those fears lifting, it has now brought focus back to the Federal Reserve, and the threat of more rate hikes.
Fed Rate Hike Coming
With bank failure fears easing, Fed officials have been speaking loudly about the need for more rate hikes. Some OK economic reports over the last week have also given the Fed cover to raise rates once again. Currently, there is an 85% chance the Fed will raise rates by 0.25% on May 3rd.
Now the question is will this be the last rate hike? Will 5.00% to 5.25% be the terminal rate? If you try to listen to Fed officials, you will hear a lot of mixed messages. Fed President Bullard was speaking out this week saying he wants to see the Fed Funds Rate at 5.75%, which is an additional .75% higher than current levels. Fed President Bostick had a more cautious tone, saying the Fed should raise rates one time and pause to see how the economy responds to all the previous hikes.
As you can imagine, the wildly different opinions from Fed members move the markets all over the place.
Inflation With Your Scones
The bond market is global. So, when interest rates move higher in other parts of the world, it puts upward pressure on our yields as well. Midweek, the UK reported consumer inflation of over 10%, when markets were looking for a reading below 10%. If that were not enough, food inflation ran at the highest clip since 1977. Inflation in England is now moving twice as fast as it is here in the United States, with our CPI at 5%. The stubbornly high inflation in the UK caused their interest rates to move higher, which lifted our interest rates to the highest levels in weeks.
3.60% Yield Resistance Holds
The 10-year Note yield, which ebbs and flows with home loan rates, is remaining beneath important yield resistance at 3.60%. This is a key technical level, which has been limiting the rise in rates over the past month. With the banking crisis looking less uncertain for now, there is a threat that rates will drift higher still. Staying beneath 3.60% would be an excellent sign for longer-term interest rates.
Bad News is Good News
On Thursday, Weekly Initial Jobless Claims, a leading indicator of labor market health, came in worse than expected. It showed that more people signed up for first-time unemployment benefits. The bad news is good news for the Fed, which has been looking for an uptick in unemployment. On top of this, the Philadelphia Fed Index showed that manufacturing in that region slowed dramatically. Slower growth means less need for rate hikes.
Bottom line: Home loan rates have stabilized. Spring is in the air and the demand for housing remains high. Opportunities exist for nimble would-be buyers.
Looking Ahead
With one week before the next Fed Meeting on May 3rd, the Fed will enter the “quiet period” where they do not have speeches or make comments. This will make things a bit silent in the financial markets up until next Friday when the Fed’s favored gauge of inflation, the Core PCE, is released. If this number comes in light, bonds may improve further. The opposite is true.
Mortgage Market Guide Candlestick Chart
Mortgage-backed security (MBS) prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 5.5% coupon, where currently closed loans are being packaged. As prices rise, rates move lower and vice versa.
MBS prices improved late in the week, as evidenced by the Green Candles on the right side of the chart. Next week’s Core PCE may determine whether prices continue to improve or not.
Chart: Fannie Mae Mortgage Bond (Friday April 21, 2023)
Economic Calendar for the Week of April 24 – 28
