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Last Week in Review: Banking Fears Ease

This past week, home loan rates ticked higher from the previous week in response to no dire news in the banking sector. Let's walk through the Fed Meeting and the other big events impacting the markets.

Contagion Fears Subside

No news was good news for stocks and bad news for bonds and interest rates. After two weeks of multiple bank collapses and central bank intervention, fears of contagion leading to other banks has eased a bit.

This removal of fear pushed home loan rates higher after they touched the best levels in over a month. And stocks which like less risk, enjoyed solid gains throughout the week.

Pending Home Sales Bodes Well for Housing

The February Pending Home Sales Index, a leading indicator for the housing sector, grew for a third straight month. It appears that housing sales may have bottomed as demand remains strong. With the Fed nearing the end of its rate hiking cycle, long-term rates having already peaked and the labor market still resilient, it all adds up to a bright outlook for housing.

Economic Growth Slowed into 2023

The final revision for 4th Quarter 2022 GDP came in at 2.6%, which was a slowdown from the 3rd Quarter 3.2% rate. The final GDP rate for 2022 was 2.1%...a sharp slowdown from the 5.9% rate in 2021.

The evidence of slowing growth may be music to the Fed's ears as they hope their previous rate hikes will slow the economy enough to lower inflation, while achieving a "soft landing" and where we could avoid a deep recession.

Home Price Gains Slowing is Good News

The Case-Shiller Home Price Index showed the broad-based 20-City Composite posted a 2.5% year-over-year gain in January, down from 4.6% in the previous month.

"2023 began as 2022 had ended, with U.S. home prices falling for the seventh consecutive month," says Craig J. Lazzara, Managing Director at S&P DJI.

This is yet another data point the Federal Reserve is happy to see. The Fed wanted to slow down housing and cool price gains, which make up a large portion of overall inflation. This backward and lagging indicator should help lower inflation in the months ahead.

50/50

As of press time, the easing bank fears have slightly elevated the chance of a .25% rate hike in May to 50%. The Fed had forecasted at the last meeting they will get the Terminal Rate, a fancy way to say peak in Fed Funds Rate to 5.1%. One more .25% rate hike will achieve this. With so many important economic reports and uncertainty in the banking sector, this story can change quickly.

Bottom line: With mortgage rates now near the levels seen in early February, when home sales jumped, there are signs the Spring housing market may be better than expected than just a couple of weeks ago.

Last Week in Review: Fed Raises Rates, Home Loan Rates Decline

This past week, home loan rates hovered near the lowest levels in over a month as the Federal Reserve raised rates once again. Let's walk through the Fed Meeting and the other big events impacting the markets.

Fed Funds Rate Hike

"Some additional policy firming may be appropriate" – FOMC Monetary Policy Statement on 3/22/2023.

This past Wednesday, the Federal Reserve raised the Fed Funds Rate by .25%, the 9th rate hike in just over one year. This lifted The Fed Funds Rate to a range of 4.75% to 5.00%. There was some speculation the Fed may pause hiking rates at this meeting amidst the fallout of the SVB and Signature Bank failures.

The good news was the quote above along with the Fed's updated Economic Projections are suggesting one more rate hike in May, so rate hikes could be nearing the end.

Credit Tightening

"Likely to see tighter credit conditions that weigh on economic activity." FOMC Statement.

This may be the main reason rate hikes are nearing their end. The SVB failure, uncertainty around potential bank runs and overall liquidity concerns will likely lead to banks making it tougher for small business and commercial loans. As Fed Chair Powell said in his press conference last Wednesday, "Credit tightening post-bank failure is akin to rate hikes."

Lower Rates Equal Housing Relief

A backward-looking housing report may reveal better times ahead for housing. Existing-Home Sales for February rose 14.5% from January, ending a 12-month streak of declining sales.

This good reading came on the heels of improved mortgage rates in January and February. With home loan rates now within a whisker of those levels and spring in the air, better days for housing lie ahead.

Bottom line: The end of Fed rate hikes is near and long-term rates, like mortgages, may have likely already seen their peak. With mortgage rates now near the levels seen in early February, when home sales jumped, it will be no surprise to see this trend continue through spring.

Last Week in Review: SVB Bank Fallout and Rates

This past week, home loan rates improved to their lowest levels in a month in response to the closures of Silicon Valley Bank (SVB) and Signature Bank. Let's walk through what happened as we approach the Fed Meeting this week.

SVB Failure And Rates

It's important to remember that bonds enjoy bad news, so when word broke earlier this week that SVB was shuttered by the FDIC, home loan rates improved to their best level in six weeks. At the same time, the 2-year Note yield, which tracks Fed rate hike activity, plummeted from over 5.00% to under 4.00% in just a couple of days. This was an epic decline in rates not seen even after 9/11 or the Great Recession.

The good news (in the case of SVB and even Signature) is that bad management, failure to manage interest rate risk and a widespread desire for depositors to gain access to their funds (bank run) is what caused these banks to shutter.

In response, the Federal Reserve immediately created a line of credit and an implicit backstop to protect any depositors from any losses. This was good news and will hopefully limit any further fallout in the banking sector.

So, what does the Fed do with rates now that we have high uncertainty and contagion risk in the banking sector?

Stability > Inflation

Seeing that one reason SVB failed was in response to a rapid rise in interest rates, there is increased pressure for the Fed to limit rate hikes going forward and regain stability in the financial sector.

Just last week there was a high probability the Fed would raise rates by .50. Now just days later, there is a 75% chance of a .25% and a 25% chance the Fed doesn't hike rates at all.

This week's Fed Meeting and press conference will hopefully have the markets feeling that the Fed is going to take every measure possible to ensure stability while they closely watch the pace of inflation decline.

Housing Numbers OK

It wasn't all bad news this week. Housing numbers for February highlighted the little rate relief we saw in January and brought some optimism into February. Both Housing Starts (which is putting the shovel in the ground), and Permits (a leading indicator of future building), came in better than expectations.

This bodes well for housing in the months ahead, especially combined with the rate relief we are experiencing.

Bottom line: Last week's news in banking has changed everything as it relates to the Fed and rate hikes. The markets are suggesting the Fed will be cutting rates in the second half of the year which is a big change from the rate outlook just days ago.

Last Week in Review: Powell Visits Capitol Hill

This past week, Fed Chair Powell testified on Capitol Hill and his words sent rates higher. Let's walk through what happened and take a peek at what to watch next week.

"Rates Need to Go Higher, Faster"

Last Tuesday and Wednesday, Fed Chair Jerome Powell testified before both the House and Senate on the state regarding the economy and monetary policy.

His prepared speech set off fireworks in the financial markets on Tuesday as stocks moved sharply lower, and rates spiked once again. He started by suggesting that rates need to go higher and faster. This was a surprise as the Fed Chair recently said, "The disinflation process had begun." He had the markets sensing there would be possibly three more .25% rate hikes.

As of this writing, things have changed a lot. Now, there is a 69% change of a .50% hike at the March Fed Meeting in two weeks. Before the Fed Chair spoke, the chance of a .50% was just 25%. The threat of even more rate hikes elevated short-term rates (which move closely with Fed rate hikes) to the highest levels in 16 years.

2-Year & 10-Year Yield Curve Inversion Widens

With the 2-year Note yield spiking to 5.00% and the 10-year yield remaining beneath 4.00%, we witnessed the largest yield curve inversion since 1981. Why is this important? Yield curve inversions are typically accurate in predicting recessions. So, seeing the widest yield curve inversion in decades suggests the bond market is screaming that a recession is likely to happen within the next 12 to 18 months.

"We do not think we need to see a sharp increase in unemployment to get inflation under control." Powell

Here, the Fed Chair is trying to soothe the markets on the notion they can hike rates more to help lower inflation and avoid a large uptick in unemployment. Currently the labor market remains very tight. There are still nearly 11 million jobs available and nearly half that amount of people unemployed, so there is a 5 million gap between jobs available and people to fill those positions.

Let's hope the Fed Chair is correct and inflation will continue to come down and we do not experience significant unemployment...as jobs buy homes.

Bottom line: The uncertainty, confusion and volatility in the financial markets has elevated pessimism in the economy and housing. History has shown when pessimism or optimism elevates, it's generally a contrarian indicator and a change in sentiment is forthcoming. The other good news? Despite all the noise, both inflation and home loan rates have likely peaked.

Last Week in Review: Inflation and The Fed Dominate Markets

This past week, home loan rates touched their highest levels since November. Let's walk through what happened and mention the big events in the week ahead.

Global Inflation Remains High

Back in early February Fed Chair Jerome Powell stated that the disinflation process has begun and that's a good thing. Since that moment, the U.S. has endured several higher-than-expected inflation readings causing interest rates to spike to the highest levels since November.

This included the recent Q4 2022 Unit Labor Cost Numbers, which came in double expectations.

And if that were not enough, inflation across the pond rose to record levels causing global yields to rise. France, Spain, Germany and Italy all reported record inflation prompting markets to start pricing in more rate hikes ahead for the European Union.

The European Central Bank is now expected to raise their benchmark interest rate to 4%. It was not long ago where that interest rate was negative and as interest rates rise around the globe, it places upward pressure on our yields.

4%

Last Wednesday, the ISM Manufacturing Index was reported. And while the headline number was disappointing and shows the manufacturing sector contracting, the prices paid component or inflation reading was elevated. After several higher-than-expected inflation readings over the last few weeks, this report was enough to push rates higher, with the 10-year yield breaking a psychological barrier at 4%. With this break above 4%, market watchers' sense that the November highs of 4.20% will be tested.

Fed Tough Talk Is Back

On the heels of the hotter than expected inflation numbers, Federal Reserve officials were out in full force, reminding markets that interest rates will go higher for longer. Fed President Kashkari said, "If we declare victory too soon, there will be a flood of exuberance and we will need to do even more work (rate hikes)."

The financial markets are now pricing .25 basis point rate hikes in March, May, and June, lifting the Fed Funds Rate to over 5% for the first time since 2007.

The good news? The Fed's efforts to fight inflation, slow demand create some unemployment and lower asset prices is good for long-term bonds like the 10-year Note and Mortgage-Backed Securities (MBS). We will now watch carefully to see if MBS prices can remain above the November price lows and if the 10-year yield can remain beneath the closing peak of 4.20% last seen in November.

Bottom line: In the absence of market-moving economic data we should not expect any meaningful improvement in rates. The good news is the cure for higher rates is higher rates. Rates are near peaks seen in the Fall. The economy is slowing and all of the Fed rate hikes from last year have yet to hit the economy.

This Week in Review: Three Things That Happened Last Week

Last week, rates touched the highest levels since Fall. Let's walk through three things that happened and what to watch in the week ahead.

1.) Fed Meeting Minutes Released

Last Wednesday, the Minutes from the February 1st Fed Meeting were released. At that meeting, the Fed raised rates by .25% and in the following press conference, Fed Chair Powell said, "The disinflation process has started and that's a good thing." The smaller rate hike and disinflation reference were bond friendly at that time and led to the lowest rates since September.

Fast forward to today, the markets were on edge heading into the Minutes as we have since seen a surprisingly strong Jobs Report for January and a higher-than-expected inflation number, both of which lifted Fed rate hike expectations and mortgage rates.

The Fed Minutes ended up not mentioning disinflation whatsoever, but acknowledged prices have declined, but they need to see more progress (lower prices). Moreover, some Fed Members said there is an elevated threat of a recession in 2023. After the dust settled, rates remained elevated but stable.

2.) Inflation Rising Abroad

In Europe, Core inflation (ex food and energy) for January was revised higher to 5.3%. This now puts pressure on the European Central Bank to raise rates more aggressively like our Federal Reserve did last year with its string of .75% rate hikes. There is speculation the ECB will raise rates from the current 2.5% to 3.75% by September.

Why is this important to us? The bond market is global. If rates rise in other big bond markets like Europe, they increase here. The opposite is true. The markets will start watching to see if these economies slow materially because of the rate hikes. This would benefit long-term rates like mortgages. Currently, short-term rates are higher than long-term rates, which is generally a sign that economies are slowing, and the Fed must be careful not to hike rates too much and for too long.

3.) FHA Makes MIP Cut

The Department of Housing and Urban Development (HUD), through the Federal Housing Administration (FHA), announced a 30-basis point reduction to the annual mortgage insurance premiums (annual MIP) charged to homebuyers who obtain an FHA-insured mortgage. The premium will be reduced from 0.85% to 0.55% for most homebuyers seeking an FHA-insured mortgage, which could mean an estimated savings of $678 million for American families in aggregate by the end of 2023 alone. The reduction will benefit an estimated 850,000 borrowers over the coming year, saving these families an average of $800 annually.

Takeaway? This effort by the government to help with housing affordability should be applauded. This measure will help would-be homeowners.

Bottom line: We are revisiting the theme of 2022 where there was uncertainty and volatility about where inflation is headed, what the labor market will look like and what the Fed will do about it. Long-term rates still looked to have peaked, which is a good thing.

Last Week in Review: Inflation Lingering, Fed Officials Singing

Last week multiple inflation readings came in higher than expected and home loan rates ticked higher. Let's walk through what happened and what to watch in the week ahead.

"More upside inflation surprises could make Fed Policy more aggressive." Ohio Fed President Loretta Mester.

What happened? We thought inflation was on the decline. Even Fed Chair Powell just days ago said, "For the first time, we can say the disinflation process has started".

Inflation readings at the consumer and producer level did decline, they just simply didn't decline as much as expected. The shelter component, which includes rent, insurance, lodging (away from home and owners' equivalent rent of residences), makes up a sizable portion of consumer inflation which continues to run higher than 7% year over year.

One major way to knock down housing inflation is to build more homes. It is estimated we are several million homes short of what is needed to meet demand.

Homebuilder Outlook Improving, But...

The National Association of Home Builders announced an uptick in Homebuilder Sentiment to 42, a level last seen in September and right before home loan rates peaked in October and November. The downtick in rates in January fueled some of the optimism.

But, Building Permits and Housing Starts for January, both came in lower than expected. The Permits is forward looking as it shows authorization to build and ultimately leads to Starts, where the shovel goes in the ground.

We think of the Fed fighting inflation as part of their dual mandate of maintaining price stability. However, this problem will not be fixed by rate hikes alone, if at all. The lack of supply that can be filled by affordable home building could be addressed with fiscal policy at the County, State and National level.

Consumers Spent in January

Retail Sales, which measures consumer spending activity, came in much higher than expected. The markets initially hated the good news because it fuels the notion of more rate hikes. However, after a closer look, the markets saw one-time anomalies affecting the number, including an annual benchmark revision and consumers racing to spend holiday gift cards at vendors offering big discounts.

Going Higher

After all the news, the chances of more rate hikes went higher. The futures markets are now fully pricing in a .25% hike in March and May. There is also a 50% chance of another .25% hike in June, which would lift the Fed Fund Rates to 5.25-5.50%.

It is worth reminding everyone that Fed rate hikes have no direct correlation in mortgage or long-term rates. For example, the 10-yr Note yield, which has ticked up in recent weeks, along with mortgage rates, remains at 1.00% beneath the 3-Month Treasury Bill. The only way long-term rates go higher, is if the economy can absorb those rate hikes. The bond market continues to say it can't, so it likely won't.

Bottom line: Rates and inflation have peaked, but as we have seen the past couple of weeks, further improvement won't be a straight line. Expect further inflation and rate improvement in the weeks and months ahead as the Fed is committed to lowering inflation.

Last Week in Review: Fed Chair is Back After Strong Jobs Report

After last week's surprisingly strong Jobs Report, Fed Chair Jerome Powell spoke about the economy and direction of rates. Let's walk through what happened and what to watch in the week ahead.

"The strong Jobs Report shows you why we think this will be a process that takes a significant period of time." Fed Chair Powell 2/7/23.

The Federal Reserve has a dual mandate, which is to maintain price stability (inflation) and promote maximum employment. On the inflation front, it appears inflation has indeed peaked and is on the decline. The Fed Chair reiterated the "disinflationary process" has begun. This is a positive development for the economy, housing, and long-term rates.

On the labor market front of the Fed's mandate, the Fed in its desire to slow demand and thus inflation, wants to see some unemployment. The good news/bad news? Last week, the Bureau of Labor Statistics (BLS) reported the unemployment rate at 3.4%, the lowest in 53 years...that is good news. The bad news is it means the Fed will look to raise rates by .25% in March and another .25% in May, thereby lifting the Fed Funds Rate above 5.00%.

This renewed outlook for a higher Fed Funds Rate has elevated uncertainty and volatility in long-term rates, which move up and down based on economic conditions and inflation, both of which are easing and a reason why long-term rates are lower than short-term rates.

"Likely to see some softening in labor market conditions" - Powell

This is a reasonable assumption considering the number of planned layoffs announced this year, while we sit at multi-decade low unemployment, it seems like up is the only direction for unemployment.

Soft Landing Back in Play

Due to the current strength of the labor market, there is a growing chance the Fed can raise rates and lower inflation towards its 2.00% target without triggering a deep recession.

History has shown that recessions do not take place with unemployment at 4% or below without some sort of surprise shock to the economy.

Let's hope the Fed is not too successful in "creating" unemployment because if it quickly rises, the idea of a soft economic landing could go away quickly too.

3.70%

As we mentioned, long-term rates have responded negatively to last week's strong jobs report, because good news is bad news for bonds and rates. The 10-yr Note touched 3.33% last Thursday and touched 3.70% just a few days later. However, rates remain beneath where the 10-yr yield opened 2023 at 3.85%.

"We are going to react to the data" – Powell

Here the Fed Chair reminds the markets that last Friday's Jobs report was strong, but backward looking and lagging while other economic indicators show signs of s slowdown. The Fed does not want to over hike rates into a slowing economy and be the reason for the recession. So, while the market is currently pricing in two more rate hikes and a rate cut in December, this story could quickly change once again.

Bottom line: Rates and inflation have peaked. Housing activity has jumped in the past weeks as a result. The incoming data will determine how much better rates can get in the next few weeks leading to the next Fed Meeting.

Last Week in Review: Fed Hikes, Market Likes

This past week the Fed hiked rates by .25% and home loan rates improved to their best levels since September. Let's walk through what happened with the Fed and talk about what to watch in the week ahead.

"We can now say for the first time that the disinflationary process has started. This is a good thing." Fed Chair Powell 2/1/23.

As expected, the Federal Reserve raised the overnight Fed Funds Rate by .25% to a range of 4.50 to 4.75%. The Fed Statement and subsequent press conference also contained "dovish" tones where the Fed offered hope that inflation is headed lower and future hikes would be dependent on the incoming data.

"We haven't made a decision on exactly where rates need to end up." Jerome Powell.

Here, the Fed Chair was non-committal on where he sees the Fed Funds Rate reaching the terminal rate or peak. In his press conference, he reminded everyone the Fed will release their updated quarterly economic projections and forecast for rates. Meantime, the financial markets have their own idea of where rates are headed and are pricing in multiple rate CUTs later this year.

This means in the months ahead we should expect uncertainty and volatility as economic reports are released and Fed officials speak.

3.33%

Last October, the 10-year Note yield, which moves up and down with home loan rates, was 4.30%. Four months later, the yield has declined sharply to 3.33%. It is important to note the 10-year yield does have an important technical barrier right at current levels which may limit how much better rates can get in the near term. The trend for longer-term rates remains lower which is a good thing.

Labor Market Resilient

"By many, many indicators, the jobs market remains strong." - Powell.

The JOLTS report showed 11.1M jobs available and with 5.7M people unemployed, we have a nearly 4.5M person shortfall to fill open positions. The latest first-time unemployment claims are also at multi-decade lows, which further highlights the continued strength of the labor market.

This is great news for housing and the notion the economy can land softly and avoid a recession.

Bottom line: Rates have continued to improve since the start of the year. Couple this with continued strength in the labor market and you have multiple reasons to see housing sales improve going forward.