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Last Week in Review: Inflation Declines Again

Home loan rates held steady near the best levels in months after another decline in inflation. Let's look at what happened this past week and brace for what is coming in the week ahead.

December Consumer Price Index (CPI)

The headline Consumer Price Index, which includes food and energy prices, came in -0.1% for the month of December, which lowered the annual rate to 6.5%. The month-over-month decline was the first negative reading since December 2020.

Inflation is a main driver of long-term rates and is closely watched by the Fed, so seeing prices decline was a welcome sign for both.

The markets agreed. After the CPI report was released, the probability of a .25% rate hike on February 1st spiked to 87%. So, the markets are now expecting smaller and less Fed rate hikes.

Markets Are Forward Looking

The 10-yr Note yield, which does ebb and flow alongside mortgage rates, touched 3.46% after the report, the lowest level since early December. Long-term rates are forward looking and seeing where inflation is headed, which is lower. If inflation continues to decline, we should expect long-term rates like the 10-yr Note and mortgages, to decline as well.

Fed Jawboning Not Working Like 2022

Last year, home loan rates spiked higher and quickly in response to tough Fed talk or jawboning. So far this year, tough Fed talk is not having the same effect. Even though the Fed is currently saying they will keep rates higher for longer, long-term rates have ignored their words and continued to improve.

This is a reminder that long-term rates will only go higher if the economy can absorb all the rate hikes. The Treasury market is clearly saying the economy can't handle higher for longer rates without tipping into an economic recession. Like the famed investor, Jeffrey Gundlach, shared this week, "Watch Treasuries to follow Fed rate hikes and do not listen to the Fed".

Bottom line: 2023 has started with an improvement in rates, which is the opposite of what happened last year. With sellers eager to make deals, now is a great time for a buyer.

Last Week in Review: New Year, New Outlook

The first few trading days of 2023 saw an improvement in rates. Let's look at what happened this past week and brace for what is coming in the week ahead.

Lower Than Last Year

Long-term interest rates started the year moving lower, with both mortgage-backed securities (where home loans are priced) and the 10-year Note yield posting nice gains.

This is a bit different than what happened last year, as when 2022 rang in, interest rates moved higher and never looked back.

Remember, the Federal Reserve controls the Fed Funds Rate, which is an overnight rate. That interest rate, along with short-term rates like the 3-month bill and 2-year Note are all higher than the 10-year Note and 30-yr Bond rates. Historically, when short-term rates remain higher than long-term rates, it means a recession is on the horizon.

Good News is Bad News

Interest rates gave up some of their nice gains to start the year in response to a much better than expected ADP Report (labor market reading).

The good news on more jobs being created was bad news for rates as markets worry the Fed will continue with higher for longer rates and eventually tip the economy into recession.

The market response to the ADP report also elevated the chance of a .50% Fed rate hike to 50/50, up from a .75% chance of a .25% hike just a day earlier.

Ultimately, the strong labor market is great for housing and the overall economy as it would ensure that any economic recession would be shallow and short-lived in nature.

December Fed Minutes Released

Last week, we also got to hear what the Fed was thinking and talking about at the December Fed Meeting, where they raised rates by a smaller .50%, breaking a string of four consecutive .75% hikes.

"Participants welcomed inflation drops in October, November but concurred it would take "substantially more evidence" of progress to be confident of a sustained downward path" - December FOMC Minutes.

This line from the Minutes is encouraging that inflation has indeed peaked but is a bit worrisome the Fed will be trying to keep rates higher for longer when inflation is already coming down. Remember, it was just back in November 2021 when the Fed admittedly got it wrong regarding high inflation. Could they get it wrong this time around?

Bottom line: Long-term rates appear to have peaked, but any further improvement will be based on the incoming data. We are seeing the threat of higher inflation being offset by the elevated threat of a recession.

Last Week in Review: Market Themes as We Enter 2023

Home loan rates crept higher in the final week of 2022. Let's look at some themes that should bode well for housing in 2023.

Inflation Has Peaked

One of the biggest economic stories in the U.S. was seeing inflation hit the highest levels in over 40-years. The Federal Reserve, led by Jerome Powell, lifted short-term rates at the fastest pace in decades to combat inflation and help reach their federal mandate of price stability.

There are different monthly readings that track consumer inflation, including the Consumer Price Index and the Core Personal Consumption Expenditure Index. The good news is both readings have declined in recent months, suggesting we enter 2023 with the rate of inflation slowing. This is good news, because it will take pressure off Fed rate hikes and it will allow long-term rates, like mortgages, to continue to improve in 2023.

Recession Fears Elevated

At the December Fed Meeting, the Federal Reserve revised their economic growth forecast lower to just .50% in 2023. This means the economy is going to slow further and be at or close to a recession next year. What could tip the economy into a recession? Policy error. This is a fancy way of suggesting the Fed may hike rates too far or keep rates high too long.

The Treasury market, which is arguably more accurate than the Federal Reserve in forecasting economic conditions, is saying a recession is looming. The 3-month T-Bill has been yielding more than the 10-year Note yield. This has happened eight times since the 1960's and each time a recession came in the months thereafter.

The good news is if the economy is at or near the recession, it will help lower inflation, lower rates and make for a healthier housing market, with slower price gains.

Labor Market Remains Strong

Probably the brightest spot in our economy is the labor market, we finish the year with a tight 3.7% unemployment rate. We expect unemployment to tick up from here as the Fed wants unemployment to move higher and slow demand. Even still, an unemployment rate beneath 5.00%, which is what we should expect for the foreseeable future, is healthy and will support the housing market into the future.

The good news is, jobs buy homes and our labor market looks healthy heading into 2023. It may be strong enough to help our economy avoid a recession.

Bottom line: After a rough 2022 for interest rates and housing, there are many positive signals as we enter 2023, setting us up for a healthy housing market into the future.

Last Week in Review: Shrugging off BOJ Surprise

Home loan rates held steady near 3-month lows despite a negative surprise from the Bank of Japan. Let's discuss what happened and look into this week.

BOJ Surprise

Earlier this week, the Bank of Japan (BOJ) unexpectedly allowed its 10-yr government bond rates to rise. This sounds like a big deal on the surface, but let's break it down.

First, for many years, the BOJ has had a collar around their 10-yr bond, restricting it from going no more than .25% above or below 0.0%. On Tuesday, they announced they would widen the band and allow their 10-yr rate to float up to .50% above or beneath 0.0%. Yes, you read this right, the BOJ essentially went from having a .25% to having a rate as high as .50% which is a meager interest rate when you consider our 10-yr Note is yielding 3.65%.

To signal to the markets that the BOJ was not tightening monetary policy, they also announced that they will purchase more bonds (QE) to prevent yields from rising.

It's worth a reminder that here in the US our Federal Reserve is doing the opposite. They are no longer buying bonds and are allowing them to run off the balance sheet, hence the dramatic increase in rates this year.

Consumer Confidence Mixed

Consumer confidence bounced back in December, reversing consecutive declines in October and November to reach its highest level since April 2022. Why? Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus which is good for rates and less Fed hikes.

3.65%

The 10-year Note, which ebbs and flows with mortgage rates remained steady at 3-month lows, well off the 4.20% highs seen last month. Future inflation and labor market readings will determine if long-term rates continue to edge lower at the beginning of 2023.

Bottom line: Home loan rates have improved nicely from their peak in 2022 and inventory has increased in many parts of the country. Furthermore, sellers have become more realistic in pricing, and many are eager to make deals. This poses a wonderful opportunity for a would-be home buyer.

Last Week in Review: Fed Raises Rates and Home Loan Rates Improve

This week, the Federal Reserve raised the Fed Funds Rate by .50%, the smallest hike in over 6 months, and in response, home loan rates improved. Let's discuss the seemingly odd market reaction and what to watch in the week ahead.

"We've covered a lot of ground, full effects of tightening yet to be felt" - Fed Chair Jerome Powell - 12/14/22

This line from the Fed Chair's press conference highlights the Fed's action of smaller rate hikes as we approach what is the "terminal rate" or peak in the Fed Funds Rate.

The Fed Chair also reiterated that while the Fed is doing a smaller hike it is going to take time for the previous hikes to tamp down inflation pressures and elevate unemployment. And they will stay the course until the job is done.

Fed's Summary of Economic Projections

Every three months, the Fed revises its outlook on economic growth, inflation, unemployment, and the Fed Funds Rate. What does the Fed think about 2023, and what has changed since September?

The Fed now sees the economy growing by just .50% in 2023, well below the 1.2%, they forecasted 90 days ago.

On inflation, the Fed expects their favored measure, The Core PCE, to come in at 3.5%, above their previous estimate of 3.1%.

Unemployment is expected to be 4.6%, higher than the 4.4% they previously expected.

3.46%

It's a good time to remember that the Fed controls the Fed Funds Rate, which is an overnight lending rate, and their hiking activity has no direct correlation to home loan rates.

Long-term Treasury rates, like the 10-yr Note, move higher if the economy can absorb the Fed rate hikes. Seeing the 10-yr Note yield at 3.46% after the Fed raised the Fed Funds Rate to 4.50% tells us the bond market feels the slowing economic conditions are not supportive of higher rates and the Fed will have to change course at some point.

Bottom line: Home loan rates are at the best levels since September. Couple this with sellers eager to make deals and you have the recipe for an opportunity for nimble buyers.

Last Week in Review: Waiting on the Fed

This past week home loan rates improved modestly as we approach an important Fed Meeting and inflation reading this week. Let's discuss what happened and talk about the headline risk on the horizon.

More Signs Of Inflation Falling

On Tuesday, 3rd Quarter Productivity showed that Unit Labor Costs (how much a business pays its workers to produce one unit of output), came in lower than expectations. If it costs less to produce something, there is no pressure to charge more, thereby lowering inflation expectations.

The Productivity and Unit Labor Costs reading do not typically move the market that much, but in a world looking for signs that inflation is abating, this soft reading pushed bond yields sharply lower.

3.40%

Back on Nov 8th, the 10-yr Note yield peaked at 4.20%. One month later, yields fell all the way down to 3.40%, matching the lowest level since mid-September.

Mortgage-backed securities (MBS), which is where home loan rates are derived, moved more sideways and didn't experience the large rate improvements seen in Treasuries. That is OK as mortgage rates also remain at the lowest levels since September.

2/10 Yield Curve Inversion

The yield on the 10-yr Note dropped over .80% beneath the 2-yr Note for the first time in over 40 years. Why is this important to us? Nearly every time the 2-yr yield moves above the 10-yr yield, a recession soon follows. Seeing the inversion steepen to levels last seen when Reagan was President suggests the threat of a recession is elevated. So, it seems, the financial markets have moved on from the threat of inflation to the threat of a recession.

Policy Error

Here's a term that is starting to catch the airwaves. Essentially it means the Fed will raise rates too high or try to keep them high for too long and push the economy into a recession. Remember, long-term rates only move higher with the Fed Funds Rate (the rate the Fed hikes) IF the economy can absorb those hikes. The bond market is clearly challenging the idea of a "higher for longer" Fed Funds Rate with the 10-yr Note falling as fast as it has over the past month.

Bottom line: Rates have improved and sellers are eager to make deals. This may pose great opportunities for a nimble buyer. This is not an environment to wait until everyone hears about the improvement in rates.

"Time To Moderate Pace of Rate Hikes May Come as Soon as December Meeting" - Fed Chair Powell Nov 30, 2022.

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.

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.

"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

Last week was a shortened trading week due to the holiday, we are seeing interest rates continue to hover near the lowest levels in 2 months. Let's break down what happened.

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.

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.

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.

Last week, interest rates moved a bit sideways after Election Day and only added to the uncertainty as ballots continue to be counted. Let's discuss what happened and look into the week ahead.

Consumed By Uncertainty

It has been nearly a year since the Federal Reserve flip-flopped on the idea that high inflation was "transitory" and the need for that word to be retired. Since that time, we have experienced unprecedented uncertainty in the financial markets, with home loan rates moving from 3% to 7%...the fastest rate of change in our history.

A lot of the uncertainty, and thus volatility, is surrounded by where inflation and the overall economy is and how far is the Fed going to go with rate hikes. With the election results still up in the air, we should expect to see more of the same continued uncertainty and volatility.

Balance of Power Rate Impact

Mixed control between Congress and the White House could benefit interest rates. How? It makes it more challenging to deliver large scale changes to tax policy or deficit spending to try and help the economy. On the spending, lower spending likely helps to lower inflation, which means lower rates.

The Terminal Rate

How high will the Fed raise rates? Currently, the Fed Funds Rate, which is an overnight rate the Fed hikes and cuts, is in a range of 3.75 - 4.00%. This week, major financial institutions, with most forecasting the terminal rate, or the peak in the Fed Funds Rate to be 5.00%, coming by May 2023.

It is important to note, that while the Fed Funds Rate may increase by another 1.25% between now and next May, that doesn't mean long-term rates will go higher.

The only way long-term rates go higher is if the economy can absorb the increased rates. Mortgage bonds and Treasuries are essentially at the same levels they were back in late September, so long-term rates are starting to buck the idea of moving higher.

The Fed Step Down

After four consecutive .75% rate hikes, the markets are wondering and hoping the Fed will "step down" the size of rate hikes come December. Currently, there is a 57% chance of a .50% rate hike. A smaller rate hike would make sense as the Fed will have raised rates by 3.50% in the second half of the year and those hikes have yet to hit the economy.

Bottom Line: Home loan rates have improved from the highest levels of 2022. 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.