Company News

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.

Last Week in Review: Powell Press Conference Shakes Markets

This week interest rates revisited 2022 highs in response to the Fed meeting, where the Federal Reserve raised the Fed Funds Rate by .75%. Let's discuss what happened and investigate the week ahead.

"It's very premature in my view to be thinking about or talking about pausing our rate hikes. We have a ways to go." Fed Chair Powell at Wednesday's press conference. 

This quote, which took place 30 minutes after the Fed raised rates, was the main driver in a selloff in stocks and bonds. Stocks reversed 900 points lower intraday and the 10-year yield went from 3.97% to 4.11%.

Heading into the meeting there was growing speculation that the Fed would somehow tell the markets that future rate hikes would be smaller. There was even a Wall Street Journal article a couple of weeks ago which highlighted the debate Fed members had about how to message this "step down" of lower rate hikes ahead.

Mixed signals = Uncertainty and Volatility

"In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments." FOMC Monetary Policy Statement - November 2022.

This line within the statement was initially read as a positive sign to both stocks and bonds that the Fed will pause or slow the pace of rate hikes to allow the existing rate hikes to seep into the economy.

However, just a short 30 minutes later at the press conference, Fed Chair Powell did not let the markets believe the Fed will make a smaller hike in December. Yet at the same time, he said "it could happen."

Some other hawkish Fed quotes which led the market to believe the Fed will continue with higher for longer with rates were the following:

• "Don't think we have overtightened"
• "No sense of inflation coming down"
• "Overheated labor market"

Other Central Banks Around Globe Are Hiking

The Bank of England also raised their benchmark rate by .75% and said, "if we do not act forcefully now (against inflation) it will be tougher later on." As yields around the globe inch higher, it pulls our yields higher as well. The opposite is true.

Fed Rate Hikes and Home Loan Rates

It is important to remember, the Fed is looking to raise the Fed Funds Rate (an overnight rate) to potentially 5.00% sometime in the spring of 2023. And the Fed's goal, for the moment, is to hold it elevated until inflation comes down to 2%. The Core PCE measure is currently running at 6%.

Long-term rates, like the 10-year yield and home loans, will only increase if the economy can absorb the hikes. Right now, those rates are showing some resistance to move higher, suggesting the economy can't afford the higher rates without slipping into a recession.

Fed Chair Powell closed out his press conference by saying the chance of seeing a "soft landing" in the economy has "narrowed." The increased threat of a recession will limit how high rates will go and for how long.

Looking Ahead

It's a big week with Election Day on Tuesday and an important inflation reading, the Consumer Price Index (CPI) on Thursday. If the inflation reading comes in soft, we will very likely see smaller rate hikes next month. If the reading comes in strong and supports the Fed's "no sense of inflation coming down" mantra, then we could very well see another .75% increase in December.

Last Week in Review: Central Bank Step Down

This past week we watched interest rates improve nicely on the notion that central banks around the globe will be hiking rates less going forward. Let's break down what happened this week as we approach the important Fed meeting next Wednesday.

"We've made substantial progress in withdrawing accommodation" - European Central Bank (ECB) President, Christine Lagarde 10/27/22.

This was the line of the week. It suggests that the ECB is going to raise rates by less going forward. The global financial markets agreed as they are now pricing in a .50% ECB rate hike in December versus a .75% right before the announcement.

Why is this ECB move important?

Last Friday, the Wall Street Journal wrote an article that suggested our Federal Reserve is going to do the same thing next week...raise rates by .75% and shared that they will do less rate hikes going forward.

As a result of the "step down" or smaller future rate hike talk, yields around the globe moved lower.

3-Month T-Bill And 10-year Note Yield Inversion

There is a lot of chatter about yield curve inversions and the likelihood of a recession. Just this week the 3-month Bill and the 10-year Note yield inverted. This means, the 3-month T-Bill is yielding more than the 10-year yield. The Federal Reserve has acknowledged that they look at this metric as a sign of a recession ahead.

If there were another reason for the Fed to step down the size of future rate hikes, it is seen in the 3-month Bill and 10-year Note inversion.

The Case For The Fed "Step Down"

Besides other central banks around the globe signaling the likelihood of smaller rate hikes in the future, there are reasons the Fed could "step down" and reduce the size of rate hikes going forward.

Here they are:

1. It is estimated that a Fed Rate hike takes about six months to have an impact on the economy. This means the Fed will likely raise the Fed Funds Rate by 3.50% in the second half of 2022 and those hikes have not even made an impact on an economy that is already slowing.
2. The 3-month T-Bill/10-year Note yield inversion. The last time this happened back in 2019, the Fed "cut" rates six months later. We do not expect a rate cut, but we should certainly expect the Fed to pause on larger rate hikes and see what impact they now have since that a key metric has taken place, like this inversion.
3. We can't afford it! With $31 trillion in government debt and $16.5 trillion household debt, we can't afford rates to move too high so the Fed will need to be careful with how high they lift rates.
4. Housing has slowed dramatically and is a major driver of the economy. We do not need to see much lower rates to have a healthy housing market, we just need some clarity and stability and that could come with the Fed signaling a slowdown of larger rate hikes.

Looking Ahead

The main event is the Fed meeting next Wednesday at 2:00 p.m. ET. There will be multiple market reactions including one on the monetary policy statement, another at the 2:30 p.m. ET press conference from Fed Chair Powell and another more powerful one on Thursday morning. And if that were not enough, we will get the October Jobs Report next Friday.

Last Week in Review: Higher Prices and Higher Rates in a Global Issue

This past week we watched the 10-year yield hit a fresh 14-year high, closing above 4.00%. As a result, home loan rates also ticked higher. Let's discuss what happened and investigate the week ahead.

Inflation Is High Everywhere

Global yields continue to push higher, as inflation continues to rise across most of the globe. In the UK, core inflation rose by 6.5% annually, the highest rate in decades. This high reading pushed their 10-year government bond, the Gilt, to 4.00%, the highest level in 14 years.

As yields around the globe push higher, it applies upward pressure on our yields. It is a big reason why our 10-year note touched 4.12%, the highest level since 2008.

Resistance Becomes Support

The 10-year note crossing above 4.00% carries some significance. Up until this week, 4% was acting as a ceiling of resistance limiting how high rates could go. Now it appears 4% will serve as support, thereby limiting how much rates can improve in the near term. Essentially, we went from 4% being about as bad as rates could get to seeing 4% being about as good as rates could get.

The "R" Word Gaining Steam

Through most of this year many Federal Reserve officials resisted using the word recession to define where the economy is and where it may be headed. That has changed in recent weeks.

Besides a few officials acknowledging a recession risk is high, this week many big names on Wall Street are calling for a recession. Those names include Goldman Sachs, JP Morgan and Bloomberg. The latter suggests the chance of a recession in the next year is 100%.

It's not clear if and when a recession will hit or how deep and lasting it will be. The good news is our labor market remains tight and the consumer still has the urge to spend. This bodes well for the economy to resist a deep recession and it also will help housing thrive in the future.

Looking Ahead

The economic calendar is chock full of reports which feature the first read on Q3 Gross Domestic Product after Q1 and Q2 saw negative prints. Also, the Fed's favorite inflation measure, the Core Personal Consumption Expenditure, will be released. Earnings season will be in full bloom with many big names reporting numbers.

Last Week in Review: Inflation Remains High, Markets Looking Forward

This past week, we witnessed the highest consumer inflation reading in 40 years and the markets responded. Let's walk through what happened and investigate the week ahead.

Consumer Prices Still Rising

On Thursday, the Personal Consumption Index (CPI) was reported at 8.2%, which was higher than expectations. What is of bigger concern is the month over month rate of inflation was reported at 0.4%...double expectations of 0.2%. The monthly increase is what the Federal Reserve watches closely to see if inflation is peaking.

Shelter makes up 40% of consumer inflation and that component rose 6.6% year over year. For inflation to come down to the Fed's target of 2%, we will need to see rents come down and this will take some time.

Here's what we learned with the high inflation reading. First, the Federal Reserve is now very likely to increase the Fed Funds Rate by .75%. It also means they will continue to talk tough and maintain a position of higher for longer for rates.

The Market Reaction

It's a good time to be reminded that the Fed only controls the Fed Funds Rates, which is a short-term, overnight rate. Long-term rates, like the 10-yr Note will only go up IF the economy can absorb the higher rates. Despite rates spiking in response to the inflation numbers, the 10-yr Note yield was stopped at 4%. This is because the markets are forward looking and sensing slower economic conditions ahead will lower inflation.

Fed Rate Hike Impact

Another reason long-term rates may be approaching their peak is to consider why the Fed is hiking rates to begin with. The Fed is hiking rates to lower inflation, slow demand, create unemployment and lower asset prices. All these things are beneficial to long-term rates.

Looking Ahead

The economic calendar is lean here at home with just housing on the docket. There will be plenty of Fed speak and central bank activity around the globe to track as well as corporate earnings being reported.

Last Week in Review: Bank of England Blinks, Interest Rates Sink

This past week, we watched the sharpest one-day decline in Treasury rates since 2008. The rate relief was relatively short-lived as uncertainty and volatility reign supreme in the financial markets. Let's recap what happened and investigate the big news in the week ahead.

Last Wednesday morning, in a surprise move, the Bank of England administered a new bond-buying program to help stabilize their bond market as yields were soaring in the region.

What happened? In the previous week, UK's Prime Minister Liz Truss, announced a new fiscal program with tax cuts across the board. The bond market questioned Britain's ability to grow its economy and pay off any existing newly created debt required to help pay for the tax cuts.

If bond holders believe there is a risk of being paid back their principal, they must demand a higher interest rate. This is essentially what happened on a large and fast scale in England. So, the Bank of England stepped in and said they would purchase unlimited bonds (quantitative easing) in order to calm markets and keep rates from rising too high.

Within hours of the Bank of England's decision, our Treasury market, and mortgage-backed securities (MBS) market soared with prices moving sharply higher and yields dropping quickly. The 10-year note yield closed near 3.70% after touching 4.00% earlier in the day. This represented the largest one-day rate decline since 2008.

In the MBS market, we watched a nice bounce in bond prices and recovery in home loan rates, after touching a 2022 high on Monday.

The Bank of England news gave our financial markets a sense the Federal Reserve rate hiking cycle may start to slow. This notion was further enforced after Fed member Bullard spoke earlier in the week. He noted that the current Fed Funds Rate (what the Fed hikes) is restrictive, meaning that it is hurting the economy. He was also the first Fed official in quite some time to mention the word recession, acknowledging that our economy is slowing quickly, and higher rates are going to likely push us into a recession. He finished by saying the "terminal rate" or the rate the Fed Funds will be upon the last hike of this cycle, will be 4.40%, still 1.25% above current levels.

At least through mid-week, the bond market has begun to react as if the Fed rate hiking cycle is nearing the end. We still need to see a lot of incoming data by way of inflation, employment, and economic numbers to support whether the Fed could slow its rate hikes. For now, Fed Chair Powell says he wants to keep rates higher for longer to stave off inflation. At some point, like we caught a glimpse this week, with the 10-year note yield declining, the Treasury market will buck against going higher and say enough is enough.

Bottom line: The 10-year Note yield reversed sharply after hitting 4.00%. Hopefully, this ceiling will hold, which would limit any further increase in rates. With housing inventory increasing and sellers making concessions to help make deals, now may be a wonderful time to explore housing opportunities.