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Debt Ceiling Debate

Failure to reach a deal..."Would be a negative signal of the broader governance and willingness of the U.S. to honor its obligations in a timely fashion and would be unlikely to be consistent with a "AAA" rating" – Fitch rating agency.

As of this press time, there has been no resolution to the debt ceiling negotiations. This event has caused major disruptions in the financial markets, including a spike in interest rates over the last few weeks.

Adding to the uncertainty, the bond rating firm Fitch has put our debt on a negative rating watch. This is a direct threat that if we do not resolve the debt ceiling, a credit downgrade would result.

History Might Be On Our Side

Back in April 2011, our debt was put on negative watch by credit agencies and on August 5th, 2011, our debt was downgraded. What happened at that time? Rates improved.

After a week plus of rates edging higher, maybe this event will start the process of stabilization. If you look at the chart section below, you can see MBS prices were able to remain above support, which means rates stopped increasing.

The lack of resolution on the debt ceiling may be a reason why the Fed may very well pause on hiking rates in June.

Bottom line: As the debt ceiling debate continues unresolved, we should not expect much if any improvement in interest rates.

This past week interest rates ticked higher in response to the still unresolved debt ceiling debate. Let's look at what happened last week and discuss events to watch for this week.

Debt Ceiling Fallout

As of this writing, there has been no resolution to the debt ceiling debate, where Congress and the White House agree on a plan to lift our spending limit. In the absence of lifting our debt ceiling, there is a risk of debt default and/or a credit downgrade. Any of those scenarios would be very disruptive to the financial markets and our overall economy.

We are already seeing upward pressure on rates due to the lack of a resolution. The one-month Treasury bill spiked to 5.60%, up from 4% just a few weeks ago. This dramatic spike has also placed upward pressure on the 10-year yield and mortgage rates. The former hit two-month highs last Thursday.

There is optimism a deal will get done, but until that happens, we should expect continued upward pressure on rates along with a lot of volatility.

Regional Banks Faring Better

Some good news in the banking sector. A couple of banks, which were feared to have problems, reported larger than expected deposits over the first quarter. This gave a sense that the worst of the banking crisis may be behind us. It may still be too early to tell, but stocks blasted off on Wednesday from this optimism.

If we do indeed see the banking sector stabilize, it would likely embolden the Federal Reserve to continue talking about holding rates higher for longer.

Fed Speak Continues

Federal Reserve officials were out offering their thoughts on rates and inflation and generally spoke tough about the need to keep rates higher for longer. Some, like Fed Governor Phillip Jefferson, offered hope for a June pause on hikes saying this, "History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates."

33% For .25%

Despite high uncertainty around the debt ceiling debate and banking sector, the chance of a .25% rate hike in June is now at 33%. Remember, Fed rate hikes have no direct impact on home loan rates, but this will affect credit cards, auto loans and home equity lines of credit.

Mixed Messages

Home Depot reported poor earnings, casting a dark shadow on the markets. But then the very next day, Wal-Mart reported fantastic earnings, which was highlighted by broad purchases from their consumers. These conflicting signals on the health of the consumer have added to the uncertainty in the financial markets and thus what the Fed should do next.

Retail Sales for April came in less than expectations when factoring in inflation. Meaning, because of higher prices, consumers purchased less. Reports like this elevate fears of more rate hikes ahead.

Bottom line: As the debt ceiling debate continues unresolved, we should not expect much, if any, improvement in interest rates.

This past week, mortgage rates held near the best levels of the last several months in response to the lowest inflation reading in two years. Let's discuss what happened and have a look at this week.

Inflation Moving Lower

The Consumer Price Index (CPI) for April, a closely watched reading on consumer inflation, was reported at 4.9% year over year. This was lower than what was expected and the lowest reading since April 2021.

Last year the CPI was running above 9%, so seeing annual readings under 5% is a welcome sign.

There is a reason to be optimistic about lower inflation ahead. Shelter, which includes rent, makes up a sizable portion of CPI. That figure, which is lagging as declines in rent take time to hit the CPI report, are finally appearing in the report. We should expect the shelter component to continue lowering inflation later this year and into 2024. This will help keep long-term rates (like mortgage rates) all beneath current levels.

1.5%

The softening inflation reading is adding to the idea that the Fed should pause on rate hikes in June.  As of right now, the financial markets are pricing in just a 1.5% probability that the Fed will hike rates at their next meeting in June.

After the fastest rate hiking cycle in 40 years, this would be welcome news. Despite Fed officials saying otherwise, the financial markets are also pricing in a high probability of multiple Fed rate cuts in the second half of this year. If inflation cools further and unemployment starts to rise, this may come to pass.

Debt Ceiling Debacle

Add one more uncertain event to our economy, and it is the debt ceiling debate taking place in Congress. Essentially, we will reach the limit to what our government could spend as early as next month. This means Congress has to agree to raise the limit regarding what we could spend, or we risk a potential debt default and credit downgrade like we watched in 2011.

Most everyone believes that aside from the political grandstanding and bickering back and forth, a deal will get done to ensure the U.S. doesn't default on its debt. However, in the near term it could cause increased volatility, and potentially an uptick in rates, including mortgage rates, as the threat of a downgrade rises.

Sell In May

After a rough 2022, stocks have enjoyed a couple of strong quarters of gains. Now we enter the summer months and the old adage "sell in May and go away" is gathering steam. Essentially, the idea is to sell stocks in May and re-enter the market later in the year. Why is this important? If stocks move lower amidst uncertainty, bonds and interest rates will likely be the beneficiary.

Bottom line: This is an important moment for rates. There is a pending breakout that could cause yet another fast improvement in rates. Follow this closely and be prepared to strike at any opportunity!

This past week the Federal Reserve raised rates for the 10th time in a little over a year. Let's discuss what happened and see what this week has in store for us.

The Last Hike?

As we expected, the Federal Reserve raised the Fed Funds Rate to a range of 5.00% - 5.25%. Remember, this interest rate affects short-term loans like credit cards, autos, and home equity lines of credit.

The big question is whether this will be the last hike. When the Fed statement was released, the markets believed the Fed was signaling a pause by omitting the following line from the previous statement: "The Committee anticipates that some additional policy firming may be appropriate."

However, shortly after the statement was released, Fed Chair Powell hosted a press conference and right at the top said the Fed Members have not discussed a "pause" in rates. Bottom line? Expect more uncertainty and volatility as it relates to rates.

Sound And Resilient

This is the term Fed Chair Powell used to describe the banking sector. Unfortunately, we are seeing more banks have issues. This week it was First Republic taken over by JP Morgan Chase and as of this writing PacWest was said to be "exploring strategic options." The fear of banking contagion has elevated uncertainty in the financial markets. It's not clear if and how many more banks will continue to have issues. Bottom line? The fear of this story has created a "safe haven" to trade into bonds where prices move higher, and rates move lower.

European Central Bank Hikes By Less

The European Central Bank (ECB) hiked their benchmark rate by .25%, the smallest since the start of their hiking cycle. Like our Fed, they too signaled they would be "data-dependent" going forward, leading markets to speculate a pause on future rate hikes.

Bottom line:The Federal Reserve is sending mixed messages on the future direction of rates. Meanwhile, long-term rates, which the Fed doesn't control, are near their best levels in months and sense all the uncertainty in our economy will prompt the Fed to pause and potentially cut rates later this year. The incoming data and issues in the banking system will determine what happens next.

Home loan rates continue to stabilize ahead of this week's Fed Meeting. Let's discuss what happened last week as we await yet another Fed rate hike Wednesday.

New Home Sales Soared In March

Housing continues to show some positive signs lately, thanks to the decline in mortgage rates. This week, New Home Sales for March grew by 9.6%, when the markets expected a 1.6% decline. The sales pace remains 3.4% lower than in March of 2022 but the improvement we are seeing since the beginning of the year highlights the strong demand for housing coupled with interest rate sensitivity.

The Northeast saw the largest pickup in sales. Warm weather could have helped fuel the buying activity. Builders also used incentives and buydowns to close deals.

Home Prices Rise - First Time In Eight Months

The S&P CoreLogic Case-Shiller National Home Price Index rose month over month in February, breaking a string of seven consecutive months of declines.

The Federal Housing Finance Agency also reported a price rise for February. What is sparking the increase in prices in what overall remains a slower housing market? Low housing inventory and a nice decline in home loan rates since the peak in October.

The home price gains continue to decelerate and this is good for restoring market balance as well as helping lower future inflation readings.

First Republic - The Next Bank Problem?

Weeks after the SVB collapse, First Republic Bank, despite multiple bailouts, is said to be on the brink of failure. There is some speculation that measures might need to be taken over the weekend to help the Bank survive.

This story reignites uncertainty around financial stability as we approach next week's Fed Meeting. Higher short-term rates, controlled by the Fed, only make problems worse for the banks. The Fed's comments on the banks next week will be market-moving.

Technical Barriers To Further Rate Improvement

Mortgage and housing professionals monitor both macroeconomic conditions, as well as technical factors (chart signals), to help determine rates trends and changes to them.

Currently, the 200-day Moving Average is limiting further rate improvement in the 2-year Note yield and the 10-year and mortgage-backed securities (where home loan rates are derived).

Next week's Fed Meeting, where it is widely believed the Fed will end this rate hiking cycle, could be the trigger to push bond prices above this ceiling.

One thing for sure? Rates can't improve further until prices break through this barrier. And if they do, we could very well see another leg lower in rates.

Bottom line: Home loan rates have peaked, inflation has peaked and next week the Fed rate hikes are likely finished. Couple this with the bright future in housing and it's a reason to go shopping today.

Home loan rates have ticked higher week to week but some bad economic news halted the rise. Let's discuss what happened and look ahead into next week.

Positive Bank Earnings Impact

The rise in home loan rates over the last couple of weeks has mainly been in response to good news from the banking sector. Corporate earnings from the likes of JPMorgan Chase, Bank of America, Charles Schwab, and others have lifted fears of a contagion from the recent bank failures. With those fears lifting, it has now brought focus back to the Federal Reserve, and the threat of more rate hikes.

Fed Rate Hike Coming

With bank failure fears easing, Fed officials have been speaking loudly about the need for more rate hikes. Some OK economic reports over the last week have also given the Fed cover to raise rates once again. Currently, there is an 85% chance the Fed will raise rates by 0.25% on May 3rd.

Now the question is will this be the last rate hike? Will 5.00% to 5.25% be the terminal rate? If you try to listen to Fed officials, you will hear a lot of mixed messages. Fed President Bullard was speaking out this week saying he wants to see the Fed Funds Rate at 5.75%, which is an additional .75% higher than current levels. Fed President Bostick had a more cautious tone, saying the Fed should raise rates one time and pause to see how the economy responds to all the previous hikes.

As you can imagine, the wildly different opinions from Fed members move the markets all over the place.

Inflation With Your Scones

The bond market is global. So, when interest rates move higher in other parts of the world, it puts upward pressure on our yields as well. Midweek, the UK reported consumer inflation of over 10%, when markets were looking for a reading below 10%. If that were not enough, food inflation ran at the highest clip since 1977. Inflation in England is now moving twice as fast as it is here in the United States, with our CPI at 5%. The stubbornly high inflation in the UK caused their interest rates to move higher, which lifted our interest rates to the highest levels in weeks.

3.60% Yield Resistance Holds

The 10-year Note yield, which ebbs and flows with home loan rates, is remaining beneath important yield resistance at 3.60%. This is a key technical level, which has been limiting the rise in rates over the past month. With the banking crisis looking less uncertain for now, there is a threat that rates will drift higher still. Staying beneath 3.60% would be an excellent sign for longer-term interest rates.

Bad News is Good News

Last Thursday, Weekly Initial Jobless Claims, a leading indicator of labor market health, came in worse than expected. It showed that more people signed up for first-time unemployment benefits. The bad news is good news for the Fed, which has been looking for an uptick in unemployment. On top of this, the Philadelphia Fed Index showed that manufacturing in that region slowed dramatically. Slower growth means less need for rate hikes.

Bottom line: Home loan rates have stabilized. Spring is in the air and the demand for housing remains high. Opportunities exist for nimble would-be buyers.

Last week home loan rates remained steady and near their best levels in six months. Let's discuss what happened and the technical factors that are limiting further rate improvement.

Consumer Prices are Coming Down

Consumer Prices fell in March, supporting the notion that inflation remains in a downward trend. The headline Consumer Price Index (CPI), which includes food and energy, came in at 5% year over year, a full 1% decline from the 6% reported in February. This is the slowest rate since May 2021 and that is a good thing.

When taking out food and energy, the more closely watched Core CPI declined less and is stuck at a still high 5.6%. Why? Shelter. The housing component of CPI makes up nearly 60% of the CPI reading. The good news? Housing is a lagging indicator within the inflation reading. Rents have declined for each of the last six months, and they will be reflected in future inflation readings. This is why rates remained steady after this report was released with a 10-year note yield hovering around 3.40%.

Fed Minutes Released

The Minutes from the March Fed meeting were released last Wednesday. There were no shocking details that moved the markets. In a further sign that the Fed is close to ending their rate hikes, all Fed members agreed that financial conditions would tighten due to the bank crisis which equates to further rate hikes.

Speaking of rate hikes, the chance of a .25% Fed rate hike in May is now 63%. Oddly enough, the financial markets are also pricing in as much as four rate cuts in the back half of 2023. If we see rate cuts by the summer, it would be a historically short amount of time between the last rate hike and first rate cut.

Watching the Charts

The bond market reacts to news, and they also react to price history and technical signals. Right now, Mortgage-Backed Securities (MBS) are battling a tough ceiling of resistance, which is holding prices down and keeping rates from further improving. Take a look at the chart section below.

As prices go up rates go down and vice versa. For home loan rates to improve further, MBS must break through and remain above its 200-day moving average.

3.38%

The 10-year Note yield is currently at 3.38%, which is also near its lowest levels in 6 months. For it to move lower still, it needs to fall convincingly beneath 3.30%.

Bottom line: Home loan rates are near the best levels of the year. Spring is in the air and demand for housing is high and despite the lack of housing supply, opportunities exist.

Last Week in Review: Dark Clouds Helping Rates

Home loan rates reached their best levels in two months on the heels of not-so-good news. Let's get into what happened and look into the week ahead.

Bad News is Good News for Rates

The JOLTS (Job Openings and Labor Turnover Survey) report, a leading indicator on the health of the labor market, showed signs of cooling. It revealed 9.8 million jobs available, 700k less than expected and the first reading under 10 million in three years.

If you consider how the labor market works for example, first firms stop hiring, then they cut hours and then if conditions persist, they lay people off. So, this could be a sign to the Fed that the labor market is finally showing some signs of slowing down, which is what they want to help lower inflation.

The good news? While the number of jobs available came in well below expectations, we are still seeing 1.6 jobs available for every person unemployed, which is indicative of a tight labor market.

Dimon Jawboning

Earlier last week, JPMorgan Chase CEO Jamie Dimon, shared his annual thoughts with shareholders. He stated that the problems in the banking sector are far from over and the chance of recession is elevated. Over the last several months, Mr. Dimon did suggest the economy was headed into an economic hurricane and then backed off that gloomy stance and suggested we might not see a recession. Now he is firmly back in the recession camp and upon his headlines, rates improved and stocks didn't.

Manufacturing is Not Manufacturing

The ISM Manufacturing index, which is a reading of our national manufacturing production, came in at 47. Readings beneath 50 suggest contraction or shrinking of production. This is not a good number and because bonds and rates like numbers that are not good, they rallied.

3.26%

During the week, the 10-year Note yield hit 3.26%, the lowest since September. Most importantly, as of press time, the 10-year yield fell well below its 200-day Moving Average. History has shown that when the 10-year moves convincingly beneath its 200-day Moving Average, it leads to better rates in the weeks and months ahead.

Bottom line: With signs of a recession looming in the months ahead and if inflation continues to decline, it could push home borrowing costs lower and buoy the spring buying season.

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.