A Look into the Markets
This week, Fed Chair Jerome Powell spoke, and interest rates touched the lowest level in almost 3 months. Let’s discuss what happened and look into the week ahead.
“Help me get my feet back on the ground, Won’t you please, please help me” – Help by The Beatles
“Time To Moderate Pace of Rate Hikes May Come as Soon as December Meeting” – Fed Chair Powell Nov 30, 2022.
On Wednesday, November 30th, the anniversary of the Fed flip-flopping on inflation and telling us they were wrong about its high nature, Powell delivered the most “dovish” speech in a year.
The quote above is the one that really sent the markets soaring, as it confirms the Federal Reserve will lower the size of rate hikes going forward.
Since June, The Fed has raised the Fed Funds Rate by .75% four times. Now the markets are pricing in a smaller .50% rate hike at the Fed meeting in two weeks.
“Growth in Economic Activity has Slowed to Well Below Longer-Run Trend, and This Needs to be Sustained” – Powell.
This quote highlights the Fed’s desire to slow demand and thereby lower inflation/prices. Many critics of the Federal Reserve have been saying the Fed needs to slow down the size of rate hikes for this very reason as the economy has materially slowed down. And, the Fed is going to have raised rates by 3.50% in the back half of 2022…none of which has impacted the economy. There is a lag of anywhere from 6 to 9 months for rate hikes to make an impact on the economy, so seeing the Fed acknowledge that conditions have slowed is seen as further confirmation to slow the size of rate hikes.
“The Federal Reserve has been pretty aggressive already with its interest rate hikes and won’t try to crash the economy with further sharp increases just to get inflation under control faster” – Powell.
This quote came from the question-and-answer session and confirms what market conditions are saying. We have seen inflation peak and we must direct our attention toward not putting the economy into a deep recession through overly strict monetary policy.
Remember, long-term rates only go higher if the economy can absorb the Fed rate hikes. Watching the 10-yr Note fall from 4.30% to 3.57% over the course of the last month tells us long-term rates are sensing the economy can’t absorb much more Fed rate hikes without going into a recession.
Consumer Inflation May Have Peaked
On Thursday, the Core Personal Consumption Expenditure (PCE) Index for October came in lower than expectations and lower than September. With the economy slowing as the Fed Chair acknowledged, we should expect lower inflation readings going forward.
Bottom line: Home loan rates have improved a bit. With more inventory coming to market and many sellers eager to make deals, now could be a great time to consider taking advantage of the opportunities in housing.
Looking Ahead
Next week the economic calendar is a little lighter, with only some medium impact reports set to be released. Additionally, the Federal Reserve members are in the quiet period where they do not speak one week prior to the next Fed Meeting. This all leads to the next Fed Meeting on Dec 13-14, where it is now widely expected the Fed will raise the Fed Funds Rate by .50% to a range of 4.25 to 4.50%.
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 go higher, rates move lower and vice versa.
You can see on the right side of the chart the Green Candles moving above $101 for the first time since September. Should prices remain above this once tough ceiling, today’s rates could be about as bad as rates can get going forward.
Chart: Fannie Mae Mortgage Bond (Friday Dec 2, 2022)
Economic Calendar for the Week of December 5 – 9
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A Look into the Markets
This week, interest rates touched the lowest levels in two months on the idea that inflation may have peaked. Let’s break down what happened and look into Thanksgiving Week.
“Well I’m going down. Down, down, down, down, down” Going Down by Jeff Back
10-yr Note Touches 3.67%
The 10-yr Note yield touched 3.67% this week, a large rate improvement from 4.23% seen the previous week. The downtick in long-term rates also fed into home loan rates, which have declined as much as .50% in the last week or so.
The big question? Does this decline in rates have “legs” and will it continue?
Peak Inflation Equals Peak Rates
The readings on inflation suggest that we may have just seen the peak in inflation. We will want to see future inflation readings to confirm this, but long-term bonds, which are forward-looking, appear to be pricing at a peak.
Do not tell the Federal Reserve that inflation may have peaked. There were several Fed speakers out this week saying that inflation is still a problem, and they want to keep rates higher for longer.
Short-Term – Higher for Longer
Remember, when the Federal Reserve says they want rates higher for longer, they are talking about the Federal Funds Rate, which is an overnight rate that banks lend to each other. The Federal Funds Rate affects short term loans like credit cards autos and home equity lines of credit.
It is important to note that while the Fed Funds rate may increase by another 1.25% between now and next May, long-term rates like the 10-yr Note and mortgages, may have already peaked.
Smaller December Hike
The financial markets are now pricing in a high probability the Federal Reserve will only raise rates by .50% next month. Additionally, the markets are also sensing the Terminal Rate, or peak in the Fed Funds Rate will be 5 to 5.25% achieved by May of 2023. The Fed will attempt to lift rates that high and keep them there if the economic readings will support it.
Should we see the labor market struggle and inflation come down even further, the Fed may be forced to do less hikes. As the old saying goes, time will tell.
Bottom line: Home loan rates have improved. With more inventory coming to market and many sellers eager to make deals, now could be a great time to consider taking advantage of the opportunities in housing.
Looking Ahead
Next week we celebrate Thanksgiving, which means bonds are closed Thursday and only open a half day on Friday. There is also little in the way of economic data, with just Durable Goods Orders and Consumer Sentiment on Wednesday. There will be plenty of Fed speakers out to remind us of the need to hike rates more.
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 go higher, rates move lower and vice versa.
You can see on the right side of the chart the Green Candles moving higher means a nice improvement in rates. For rates to improve further, we need to see MBS climb above $101, which will serve as a ceiling of resistance.
Chart: Fannie Mae Mortgage Bond (Friday Nov 18, 2022)
Economic Calendar for the Week of November 21 – 25