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Last Week in Review: Omicron Hits the Financial Markets

The financial markets entered the 2021 Holiday season in a volatile fashion in response to Omicron, Build Back Better fallout, and the threat of Fed rate hikes in the coming year. Let's discuss what's happening and look at what to expect in the final week of the year.
Fallout from Rapid Omicron Variant Spread
This past week Omicron surprised the financial markets by exploding across the US. Despite the uncertainty, stocks attempted to stabilize and shrug off last week's losses at the expense of bonds.
The financial markets are looking beyond the rapid rise in cases as it appears, for now, most cases are somewhat mild. The markets will continue to watch the response for more restrictions, mandates, and potential shutdowns that will impact economic activity.
"As we look through these cases, literally ripping through the country right now – putting aside the rest of the world, I think we're finding ourselves where we knew we were going to get to for the past several months and that is that this virus will not be eradicated and we're going to have to learn to live with it". NBA Commissioner, Adam Silver.
This quote from NBA Commissioner Adam Silver about why the NBA is not likely to postpone the basketball season sums up what the financial markets are sensing.
Build Back Better off the Table, for Now
President Biden's Build Back Better (BBB) bill is no longer being debated as Sen. Joe Manchin said he is a "no" and will not vote for the legislature. We shall see what happens in 2022 and if a leaner bill comes to pass. If BBB doesn't pass or is watered down, it does help interest rates in three ways:

1. Less bond issuance: The Treasury will not be tasked to issue new bonds to help pay for the plan.
2. Less inflationary fears.
3. Less economic stimulus.

Some big financial institutions are already out saying that if BBB doesn't pass, our Gross Domestic Product (GDP) will come in .50% lower. With that said, any further economic slowdown will remove the likelihood of three Fed rate hikes in 2022.
Bottom line: The rise of Omicron has introduced uncertainty, which may soon pass. If you have clients considering a purchase or refinance, now is the time to secure a home loan before we return to pre-pandemic mortgage rates.

Last Week in Review: Fed Meeting Highlights and Market Reaction
It was Fed week. The highly anticipated Federal Reserve meeting took place last Wednesday, where they issued the FOMC monetary policy statement and Fed Chair Powell held a press conference. Let's break down what happened, the market's reaction, and what to look for in the weeks ahead.

The Federal Reserve is Speeding up the Taper
"In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases by $20 billion for Treasury securities and $10 billion for agency mortgage-backed securities." Fed Monetary Policy Statement, Dec 15, 2021.
This is the long way of saying that the recent spike in inflation is forcing the Fed to end its bond-buying program by mid-March 2022. With consumer prices increasing by nearly 7% year over year, the Fed wants to remove this accommodative bond-buying program and pave the way for Fed rate hikes.
How many rate hikes? The Fed shared their "dot plot" which highlights the voting Federal Open Market Committee (FOMC) members forecast on rate hikes and it showed the Fed feels there will be three rate hikes in 2022, three more in 2023, and one more in 2024.
In response to the taper and rate hike forecast, long-term rates held steady and didn't increase ... why? The bond market may be questioning whether the Fed can increase rates that many times and if it does, it would likely slow down the economy. Bonds love bad news and if the economy slowed down, that would be a reason for lower rates.
Remember, when and if the Fed hikes rates, it will have no direct impact on mortgage rates. Rate hikes affect short-term loans like credit cards, autos, and home equity lines of credit.
The Jerome Powell Presser
Shortly after the Fed statement was released, Fed Chair Jerome Powell held a press conference and it was here, where he made the markets feel good about the action they are taking. Here are some key quotes and their impact:
"FOMC rate predictions don't represent a plan". Even though the "dot plot" or Fed rate forecast showed three hikes coming in each of the next two years, Powell reminded the world that any rate hikes would be based on incoming data.
"Nobody knows where the economy will be a year from now". This line soothed the markets that the Fed will not hike rates for the sake of hiking rates, and it will take time and data to determine if and, when it would be appropriate to hike rates.
"Labor Force Participation Rate (LFPR) subdued is disappointing". Part of the Fed's dual mandate is to promote maximum employment. In the absence of seeing a meaningful improvement where more people reenter the labor force and are working, the Fed may be pressured to hold off hiking rates.
"The path of the economy continues to depend on the course of the virus". With cases rising in some areas and mandates/restrictions being instituted in others, there is a sense that the Fed may have to be patient on rate hikes as we still deal with economic activity being impacted by the virus.
Lastly, the Fed Chair took a question about hiking rates with long-term yields and touched on a reason we may see long-term rates relatively low for a longer time. Why? Low global yields. Both Japanese and German 10-year bonds have negative yields with the latter yielding -0.35%. For global investors searching for yield, our 10-year Note yielding 1.45% looks frothy compared to other options so we should expect investors to continue to buy our Treasuries. Thereby keeping our long-term rates relatively low.
Bottom line: The Fed just completely shifted its position from dovish to hawkish. The speeding up of the taper and growing likelihood of rate hikes, means we are likely to experience more volatility in the weeks and months ahead. If you have clients considering a purchase or refinance, now is the time to secure a home loan before we return to pre-pandemic mortgage rates.

This past week, mortgage-backed securities (MBSs) moved lower and are trading near 2021 price lows, pushing mortgage rates up near the worst levels of the year. Let's talk about three things moving the markets and what to look for in the weeks ahead.

1. Omicron Safe Haven Trade Unwinds
The financial markets had panicked in response to the initial Omicron news on fears of rising hospitalizations, deaths, and more shutdowns/restrictions. Stocks fell sharply and bond yields improved, with the 10-yr Note touching 1.34%.
We are awaiting more data, but the initial feedback suggests those who are affected by the Omicron variant are not requiring medical attention or hospitalization. We also learned that Pfizer's vaccine may also help keep symptoms mild.
In response to this good news, stocks soared higher, erasing all the previous week's losses and bond yield ticked higher with the 10-yr moving back up to 1.50%.
In addition to looking past Omicron, it appears the financial markets may be looking past COVID on the realization we will continue to see new variants that may produce mild symptoms and not require us to shut down parts of the economy.
2. Quiet Before the Storm
It was a "quiet" week, literally on the Fed front, as no Federal Reserve officials spoke this week in what is the "quiet period" before Wednesday's Fed Statement release.
Come Wednesday at 2 pm ET, things will be far from quiet. When the Federal Reserve delivers its Monetary Policy Statement, we will hear the Fed's outlook on inflation, the labor market, and the economy.
Most importantly, we will hear whether the Fed will speed up the "tapering" of bond purchases, meaning will they buy even less every month.
Recently renominated Fed Chair Powell was on Capitol Hill and spoke far more hawkishly, where he said it's probably time to speed up the tapering, so we expect that announcement next week. This move would pave the way for the pandemic-induced bond-buying program to likely end sometime in Spring 2022, rather than June 2022.
This is an important move by the Fed because it also paves the way for a potential rate hike earlier in 2022. The recent hawkish tone by the Fed was another big reason for stocks to sell-off recently. We shall soon see what the Fed says and does this week and how the financial markets react.
It is worth reminding here that Fed rate hikes do not affect mortgage rates. Once the Fed does hike rates, it impacts short-term rates like credit cards, auto loans, and home equity lines of credit.
3. Mixed Labor Market Picture
"Promoting maximum employment" is part of the Fed's dual mandate. The labor market has been giving us mixed signals of late. Our unemployment rate has fallen to 4.2% which is the lowest since the pandemic began, but our Labor Force Participation Rate (LFPR) remains stubbornly low and at levels last seen in the 1970s.
The LFPR is an important figure as it tells us how many people over the age of 16 and not in the military are either working or actively looking for a job.
The Fed recently said they want to see "maximum participation" before hiking rates. At the moment, we are not seeing any meaningful improvement in LFPR, so it will be interesting to see what the Fed says next week and if they touch on "participation".
The unemployment line is certainly short...Initial Jobless Claims, people who first file for unemployment, came in at 185K. This is a low number and highlights how easy it is to get a job.
How easy is it? We have 6.5M people unemployed and over 11M jobs available. Anyone looking for a job can easily find one and likely command higher pays, hence the reason we are seeing a record amount of job quitters.
Bottom line: The improving labor market will continue to support housing into 2022 and beyond. At the same time, rates are ticking up as the Fed threatens to buy fewer bonds. Now is a wonderful time to lock in a home loan before we see pre-pandemic rates.

Last Week in Review: Fed Surprise Flip Flop

This past week, we watched mortgage-backed securities (MBSs) bounce higher off 2021 price lows, helping home loan rates modestly improve from their worst levels of the year. Let's talk about three things moving the markets and what to look for in the weeks ahead.
1. Fed Chair Throws Towel in On Inflation
I think it's probably a good time to retire that word (transitory) and try to explain more clearly what we mean," Fed Chair Powell 11/30/21.
On Tuesday, Fed Chair Jerome Powell and Treasury Secretary Janet Yellen, were on Capitol Hill providing the Senate and House their semi-annual testimony on the state of the economy and monetary policy.
In this setting, politicians push with tough questions, and it was here where Fed Chair Powell "folded" and seemed to have completely flip-flopped on the outlook for inflation. For months, Mr. Powell was steadfast saying that the increases in prices were "transitory" or short-lived in nature and that supply chain bottlenecks would likely be relieved sometime mid-2022.
This "retiring" of transitory is a big change for the Fed and it means a few things. One, the Fed has finally acknowledged that the increase in prices we are seeing is not going to be temporary and cool down in mid-2022. It also means the Fed must change its position as it relates to inflation because its mandate is to maintain price stability.
The surprising inflation outlook change and hawkish tone shook the financial markets, with stocks dropping to the benefit of bonds/rates.
2. When the Fed Becomes Hawkish
"At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner" – Fed Chair Jerome Powell – 11/30/21.
In another surprise move, one week after being renominated, Fed Chair Powell told the world that at the December Fed meeting, they may likely announce quickening the pace of the bond taper to end sometime in the Spring of 2022.
The main reason for this new hawkish tone and to speed up the taper is to make way for a Fed Rate Hike, which the markets expect to happen by July 2022.
It's probably a good time to remember that Fed rate hikes have no direct impact on home loan rates. Fed rate hikes impact short-term rates like auto loans, credit cards, and home equity lines of credit. However, if you look at why the Fed is hiking rates, it is to help lower inflation and cool off economic growth. Both of those help long-term bonds like mortgage-backed securities.
The hawkish Fed action of stopping bond-buying and hiking rates, also strengthens the US Dollar versus other currencies, thereby lowering import prices and commodity prices like oil, etc. All of which are disinflationary and helpful to long-term rates.
3. Omicron Uncertainty
A new Covid variant, Omicron, emerged with its first case in the US. Initially, the stock market tanked, and interest rates improved on the rumors, chaos, and uncertainty surrounding the new variant.
It will take a couple of weeks before we have more data and insights, but at first glance, it appears the cases are mild, which if proven true, would be very good news as we head into winter. Remember stocks like good news, bonds/rates hate good news.
In the weeks ahead, we will also have to see the response by the Federal government and States. More restrictions and mandates create uncertainty and negatively impact economic activity, all of which hurt stocks and help rates.
Bottom line: The Fed just completely shifted its position from dovish to hawkish. The speeding up of the taper and growing likelihood of rate hikes, means we are likely to experience more volatility in the weeks and months ahead. If you have clients considering a purchase or refinance, now is the time to secure a home loan before we return to pre-pandemic mortgage rates.

This past week, we watched mortgage-backed securities (MBSs) make 2021 price lows, which means the highest home loan rates in 2021. Let's talk about three things moving the markets and what to look for in the week ahead.

1. Consumer Sentiment Remains Near a Decade Low
The Michigan Consumer Sentiment for October was reported at 67.4, hovering near a decade low. The reason? Inflation. Even though we are seeing the highest hourly wage gains in decades, they are being completely outpaced by the rise in prices, which means we are currently seeing negative wage growth, where wages do not keep up with price growth.
This is not a good thing in the longer term. If inflation does not moderate as the Fed had been expecting, this will put pressure on the consumer. If the consumer slows spending due to lack of purchasing power, our Gross Domestic Product (GDP) will decline, as consumer spending makes up two-thirds of our economic growth. We do not want to see consumer spending stall or stop, or we will be seeing bits of stagflation – high inflation and slow growth.
For now, the consumer remains resilient with the ability and willingness to spend. What happens next from a policy response (WH Administration and Federal Reserve) will be very important in 2022. The wrong move at the wrong time could have lingering effects on our economy.
2. MBS Make Fresh 2021 Price Lows
It is important to know that MBSs determine home loan rates, not the 10-yr Note. So even though the 10-yr yield, at 1.67%, has not made a new 2021 high yet, home loan rates hit their highest levels of 2021.
If MBS prices fall much beneath current levels, we are likely to see prices fall further and rates heading higher towards pre-pandemic levels.
This should not be a surprise as the Fed, which we mention above, helped the economy with its pandemic-induced bond-buying program. That bond-buying program is now being tapered and it is scheduled to end in the middle of 2022. Less bond-buying should lead to a gradual increase in home loan rates over time. If you add on the persistently high inflation, one could argue that rates should probably already be higher than present levels.
3. Fed Chair Powell Renominated
President Biden announced he was going to renominate current Fed Chair Jerome Powell to another 4-yr team. He cited his experience and steady hand through the depths of the pandemic. As it relates to housing and mortgage, the Federal Reserve was a savior.
Back in March of 2020, the Fed immediately started a bond-buying program to help stabilize the disrupted MBS market and to pin down long-term mortgage rates. It worked. The Fed's action created a boom of refinancing and purchase activity which helped grow the economy at a time when many industries were shut down or struggling.
In response to the nomination, the financial markets started pricing in Fed rate hikes as Jerome Powell is less dovish or tolerant of inflation than the other person up for nomination, Lael Brainard.
Stocks were under selling pressure all week in response to the spike in rates, threat of inflation, and increased likelihood of rate hikes.
It remains to be seen when and if the Fed will be able to hike rates sometime in 2022. We have already heard from countries abroad, like the European Union, who recently said they are not likely to hike rates until 2024...citing another wave of Covid and restrictions that will disrupt economic activity.
Bottom line: The Fed is tapering, and inflation is running high, well north of mortgage rates. This is unsustainable over the long term. Either inflation comes down, rates go up, or a bit of both. This means if you are considering a mortgage, take advantage of pandemic-induced rates, while they exist.

This past week, we watched mortgage-backed securities (MBSs), drift down near the lowest prices of 2021, which means the highest home loan rates in 2021. Let's talk about three things moving the markets and what to look for in the week ahead.

1. Let the Taper Begin
The Fed officially started tapering or scaling back their bond purchases this week. On average, the Fed will be buying about $4.8B per day over the next month, down from $5.3B.
The plan is to "taper" by $5B per month every month and remove the additional $40B in MBS purchases every month. Note, even when the Fed is done tapering, they will still be buying MBSs daily as billions of dollars are reinvested from the principal being returned on refinancing and purchase activity.
With all things equal, once the Fed removes this pandemic-induced MBS buying, it is reasonable to think home loan rates should drift higher towards pre-pandemic levels as well.
Over the next few months, as the Fed tapers, the outlook for inflation, employment, and what the Fed does next with rates will also have a role in the next directional move in rates.
2. Benefits of a Strong Buck
The bond market has been showing amazing resilience despite the Fed taper and hot inflation. One reason is the strong U.S. dollar. The buck has been rallying for weeks as our country outperforms those around the world and our yields are "juicy" when compared to negative yields around the globe. Additionally, the Fed tapering and threat of a rate hike in the summer of 2022 is also helping the greenback strengthen.
The benefits of a strong U.S. dollar are as follows:

• It makes our imports less expensive or disinflationary. It helps keep commodity and oil prices (those priced in dollars) in check and it makes our debt/bonds more attractive to global investors.
• With the Dollar at a 16-month high, it is now touching a resistance level, which could pause or even push the dollar lower. The Build Back Better Framework, which is being debated in D.C., could also influence the dollar. More spending could lead to dollar weakness, no more or little spending could lead to dollar strength.
• If the greenback continues higher, it is good for bond/rates, inflation, and Fed policy (maybe hold off on rate hikes). The opposite is true.

3. Consumers Paying More, for Now
Inflation expectations are simply the rate at which consumers, businesses, and investors expect prices to rise in the future. This means inflation is self-fulfilling, if people believe or "expect" higher prices, prices will go higher.
This past week we saw a very strong Retail Sales number, which highlighted that the consumer has an ability and willingness to spend. Consumer spending makes up two-thirds of U.S. economic growth, so it is important the consumer doesn't retreat.
What can hurt the consumer? Inflation and the decline in purchasing power. That is starting to rear its ugly head. Retail Sales and other reports of late like the Empire Manufacturing Index showed the "prices paid" by consumers and producers are soaring. Sometime in 2022, we will see if the inflation is transitory and recedes, or it increases. If the latter takes place, consumer demand may be challenged, which could lead to slower economic growth.
Bottom line: The Fed is tapering, and inflation is running high, well north of mortgage rates. This is unsustainable over the long term. Either inflation comes down, rates go up, or a bit of both.

Last Week in Review: Fundamentals and Technicals Collide
This past week, we watched mortgage-backed securities (MBSs) touch their highest level since late September, meaning the lowest home loan rates. But the good vibes and rate improvement were quickly halted as prices hit key technical barriers. Let's break down what happened.

1. Global Yields Decline
The bond market is global. Meaning there are investors all over the planet in search of yield. So, when these investors look around the globe and see negative-yielding rates throughout many bond markets, it makes our anemic 10-yr Note yield, presently at 1.48%, look attractive. Our low, but outperforming yield, will always attract capital from around the globe and is a major reason why we haven't seen or likely will see a material increase in rates.
This past week rates around the globe moved lower, which pulled our 10-yr Note lower, which in turn helps MBS prices move higher and home loan rates lower. In Germany, their 10-yr Bund moved from – 0.10% to - 0.30% on the notion the European Central Bank will not be hiking rates anytime soon.
There is about a 165bp spread between the German Bund and our 10yr Note which at times narrows and widens but is a reliable figure over the long term. So, when there are problems in Europe and the Bund declines, we often see a similar decline in our yields. The opposite is true.
2. High Inflation Persists, Bonds Don't Care...for now
Inflation is the archenemy of bonds, or so we are taught in economics. Generally, as inflation rises, interest rates must rise to compensate investors for the additional cost of inflation. Today, investors are not being compensated for the negative effects of inflation when purchasing a long-term bond like the 10-yr Note.
The Consumer Price Index (CPI) was delivered on Wednesday. It showed overall consumer prices, which included energy and food, were up a whopping 6.2% year over year, the fastest pace in 31 years.
Inflation this high makes the 10-yr Note, yielding 1.48%, a horrible investment. Who would buy such a bad investment? For one, foreign investors, who are familiar with negative yields. Our Federal Reserve is also a big buyer of our Treasuries every month.
There is a big debate whether high inflation will be transitory. One thing to watch closely is whether inflation expectations are rising. If inflation expectations rise, meaning - if people think or feel prices will rise, they will.
Right now, inflation expectations for the next 10 years are running at 2.63%, the highest in decades. If this number goes higher, it will put pressure on the Fed to speed up their bond tapering program and ultimately hike rates.
3. Technicals Matter
After a sharp decline in rates over the past couple of weeks, many ask, where is the bottom? This is where technicals can be incredibly important. The 10yr Note and the German 10-yr Bund rate decline stopped right at its 200-day Moving Average.
For rates to move beneath this important moving average, it may take bad news which bonds like. At the moment, with inflation rising to the highest level in 31 years, it may be difficult for rates to improve much, if at all from here.
Bottom line: Home loan rates have made a marked improvement over the past couple of weeks. But tough technical levels and another hot inflation reading may limit further rate improvement.

Last Week in Review: Fed Tapers, No Tantrum

This past week, the highly anticipated Fed Meeting took place. As expected, the Fed announced it will taper bond purchases starting later this month. The good news? Bonds and stocks didn’t have a tantrum. Let’s break down what happened and what to look for in the weeks ahead.
“In light of the substantial further progress the economy has made toward the Committee’s goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases” FOMC Statement – Nov 3rd, 2021.
Fed Chair Jerome Powell held a press conference 30 minutes after issuing the Fed Monetary Policy Statement to provide further color on the Fed’s outlook and to take questions.
The Fed has been very clear that they want to finish tapering bond purchases by the middle of next year. They’ve also shared that there will be no rate hikes until they are finished tapering.
“The Committee judges that similar reductions in the pace of net asset purchases will likely be appropriate each month, but it is prepared to adjust the pace of purchases if warranted by changes in the economic outlook” FOMC Statement – Nov 3rd, 2021.
The “but” and idea that they are prepared to adjust purchases means that if inflation or inflation expectations rise further, the Fed may very well accelerate the tapering, thereby finishing bond-buying sooner and opening the door to rate hikes sooner. The opposite is true so, if we underperform or inflation moderates sooner, the Fed could taper more slowly, thereby pushing rate hikes out further.
“We don’t think it is time to raise rates” Fed Chair Jerome Powell – Nov 3, 2021, Fed Press Conference.
“We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate”
This more “stringent” test means we need to see maximum employment. In the last 12 months, the Fed has redefined what “maximum employment” means, and they reiterated that this week.
The Fed wants to see maximum employment “broad-based and inclusive”, meaning they want to see Hispanic, Black, and Asian unemployment come down much further. They also just added they want to see maximum “participation” – meaning they want to see the size of our labor pool increase…it is currently at a 45-yr low. Until these metrics meaningfully improve, the Fed is not likely going to hike rates.
Presently, the financial markets are pricing in a high probability of three rate hikes in 2022. For the Fed to hike rates three times next year, the Fed will have to be finished with tapering and we will need to see enormous labor market improvement…time will tell.
Bottom line: Home loan rates are behaving well post-taper announcement, making for a great opportunity to purchase or refinance.

Last Week in Review: Three Reasons Rates Might Have Peaked

After weeks of prices dropping and rates creeping higher, mortgage-backed securities (MBS) bounced sharply higher this past week - helping home loan rates improve week over week. Let's break down three reasons why we might have just seen the highest rates in 2021 and what to watch for in the weeks ahead.
1.Opposite of the Herd
This past week, the 10-yr Note yield touched 1.70% for the first time since May and has since fallen sharply into the 1.50s%. If you watch business television, read articles online or listen to market watchers on the radio, you can hardly find a single person who doesn't think rates will go higher.
It is during these moments when virtually everyone says something will happen that the opposite takes place. For instance, there was an article out recently saying "Buying on the dip is dead for stocks". It was on that exact day that stocks rocketed higher once again and have not looked back.
Bottom line: If everyone thinks rates are going higher, do not be surprised if rates move lower.
2. Sell on the Rumor, Buy on the News
In the stock world, the saying is "buy on the rumor, sell on the news" - where stocks move higher in anticipation of good news and ultimately sell when the good news is announced.
We might be seeing the opposite in the bond market. This coming week, it is widely expected the Fed will announce a tapering or scaling back of bond purchases. The bond market knows this, and rates have been creeping higher for weeks.
Maybe, just maybe, we will see bonds continue to improve or at least not move lower once the Fed makes the official announcement next week.
3. Fed Rates Could Lead to Lower Long-Term Rates
Yes, you read that correctly. The Fed is going to announce bond tapering and wants to wrap up their pandemic-induced bond-buying by mid-2022. Once the Fed wraps up tapering, then they can proceed with possibly hiking rates.
Remember, when the Fed hikes rates, they are hiking the Fed Funds Rate, which is the overnight rate banks use to lend to one another. This rate affects short-term loans like credit cards, home equity lines of credit, and auto loans. A rate hike or rate cut by the Fed has no direct effect on long-term rates like mortgages, but it could help keep mortgage rates remain relatively low - here's why?
The chance of a Fed rate hike in June 2022 is now at 60% up from just 20% one month ago. Persistently higher inflation is the reason why the probability of a rate hike is moving higher.
So, the Fed is going to hike rates, likely sooner than recently believed, because inflation remains stubbornly high. The rate hike is designed to tamp down inflation and prevent it from getting out of hand.
Do you know what likes tamped down or lower inflation? Yes, long-term bonds like MBS. Inflation is the archenemy of long-term bonds. If inflation moves higher, so do long-term rates. The opposite is true.
Bottom line: If you are considering a home loan, now is an amazing time. We shall see how MBSs ultimately react next week when the Fed announces the taper. If the bond market reacts poorly, we have technical levels we are watching, which would signal we are moving to an era of higher rates.

Last Week in Review: Three Things Moving the Markets

Interest rates ticked up week over week and are near the highest levels of 2021. Let’s break down three things moving the markets and what to watch for in the weeks ahead.
1. Buy on the Dip is Back
Stocks had a bad September, with the S&P 500 falling 4.8%, its worst month since March. After a multi-year rally with major indices doubling in value since March 2020. Many market analysts called for a much bigger drop in September.
It has not come to pass and in October, we are seeing investors jump back in and “buy the dip”, sending stocks to fresh historic highs. What has been the main driver of the stock gains?
Earnings, earnings, earnings. Many firms from the banking to the technology sector reported stronger than expected 3rd quarter earnings and maintained their future growth targets.
As stocks go higher, it is typically at the expense of bonds/rates as has been the case this month.
2. Fed Taper Cometh
November 3rd is just around the corner. That is the day the Federal Reserve meets and, likely announces their intentions to start tapering or scaling back their $120B monthly bond purchases.
The Fed started this bond-buying program in March 2020 to help stabilize the mortgage-backed security (MBS) market and help pin down long-term rates to stimulate the purchase and refinance market. Those goals have been met, so the Fed is ready to taper.
MBS prices have been moving lower the past few weeks in anticipation of the Fed taper announcement. Are we seeing a sell on the rumor and a potential buy on the news? Meaning, is the bond market moving lower on the news we expect to hear only to stabilize once the official announcement is made? It’s quite possible if history is any guide. Back in 2013, the bond market endured a “taper tantrum” when the Fed remarked about possibly scaling back purchases. However, when the Fed started the tapering many months later, MBS prices improved as did home loan rates.
This will be an important event and subsequent bond market reaction to follow as rates do threaten to move to the highest levels of the year.
3. Supply Chain Disruption
We are seeing shortages of many goods as the globe struggles to ramp up production to meet demand. Apple just announced they expect to sell far less of their iPhone 13s this holiday because of chip shortages.
On top of this, we currently have nearly 200 cargo ships floating in our waters waiting to be unloaded and shipped throughout the country. The problem?
We do not have enough people working in the ports and driving trucks to help move the goods throughout the country. It has been reported that we may need an additional 80,000 truckers here in the US just to get past this current supply chain disruption and meet demand.
What will be the effect? Scarcity and higher prices. It now appears the supply chain disruption is going to last well into 2022 and that means higher prices (inflation) will be more persistent.
Just this past week, the National Association of Home Builders said the supply chain problems have caused shortages in cement, drywall, and many other materials required to build homes. This will lead to even higher new home prices in the year ahead.
Inflation is the archenemy of bonds. If inflation remains stubbornly high, it will put upward pressure on rates, especially if the Fed is buying fewer bonds.
Bottom line: Home loan rates are testing the highest levels of the year. A price to move lower from here would usher in even higher rates.