I hope you enjoyed your Thanksgiving and were surrounded by friends and family. Here’s a little history about the Thanksgiving Holiday:
Sarah Joseph Hale campaigned for a national Thanksgiving in the United States during the 19th century, eventually winning President Abraham Lincoln’s support in 1863. He and subsequent presidents proclaimed a National Day of Thanksgiving annually for the last Thursday in November. In 1870, Congress passed legislation making Thanksgiving (along with Christmas Day, New Year’s Day, and Independence Day) a national holiday. On December 26, 1941, President Roosevelt issued a proclamation designating the fourth Thursday in November (which is not always the last Thursday) as Thanksgiving Day.
A Look into the Markets
“I think we can slow down from the .75% at the next meeting. I don’t have a problem with that, I do think that’s very appropriate,” Cleveland Fed President Loretta Mester
In this holiday shortened trading week, we are seeing interest rates continue to hover near the lowest levels in 2 months.
It has become clearer that the Federal Reserve will hike rates by .50% in mid-December as the Fed “steps down” the size of its rate hikes. Fed President Mester and other Fed officials have been telling the markets do not focus on the size of the rate hike, but focus on the fact rates will continue to go higher and will remain high until inflation reaches their target of 2.00%.
Markets Are Forward-Looking
Despite all the continued tough Fed talk about higher rates for longer, the 10-yr Note and mortgage-backed security rates have improved nicely on the notion that inflation has peaked and future Fed rate hikes will only elevate the chance of a recession.
Be mindful that as the Fed talks about higher rates, they are talking about their overnight Fed Funds Rates. The only way long-term rates like mortgages go higher, is if the economy can absorb the rate hikes.
It’s clear that long-term rates are having a tough time believing the economy can absorb the higher rates as the 10-yr Note is yielding 3.79% and the 2-yr Note is yielding 4.53%, representing the widest inversion in over 40 years. This suggests the end of the rate hiking cycle is coming near and that long-term rates have peaked.
Bottom line: Home loan rates have stabilized 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 there are a bunch of continued “Fed speak” but the main event is the November Jobs Report, and the Fed’s favorite inflation gauge, the Core PCE, reported next Friday. If that report shows weakness, it will further confirm the smaller Fed rate hike in December. If the number comes in strong, it could very well embolden the Fed to talk tough while elevating uncertainty around a potential .75% hike again.
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 a lot of Green Candles which tell us prices are higher from where they opened the day, meaning rates are lower from where they opened the day. 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 25, 2022)
Economic Calendar for the Week of November 28 – December 2
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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