MMG Weekly | 10.10.2022
A Look Into the Markets
This past week, a leading indicator of labor market health was reported ugly, which helped stocks and bonds perform well. However, we still witnessed some incredible volatility and uncertainty thanks to more Fed member speeches. Let's walk through what happened and investigate the week ahead.
Help Wanted Signs Disappearing
On Tuesday the JOLTS report was delivered, and it showed that 1.2 million help wanted signs disappeared between July and August. This is the fastest decline in job availability since April of 2020, when our economy was essentially turned off.
This is important because the Federal Reserve wants to "create" some unemployment. The labor market and promoting maximum employment is part of the Fed's mandate, so they are watching readings like this very closely. What is important is this reading is a leading indicator of the health of the labor market.
For example, businesses will first slow or stop hiring as evidenced in the JOLTS report. Then they begin cutting back on work hours for some employees. Then, if necessary, they start laying people off.
In response to this report, stocks exploded higher and interest rates improved. Why? Because, if the labor market is slowing and unemployment starts to rise, the Fed may not need to hike rates as aggressively going forward.
Some Central Banks Start To Pivot, Some Not
The Reserve Bank of Australia hiked rates by less than expectations, citing an already significant rise in interest rates. This news also helped stocks and bonds early in the week as it provided a sense that our Fed may also pivot somewhat and not hike as aggressively going forward.
But those good moments were short-lived when on Wednesday the Bank of New Zealand raised rates as expected and said they may need to do more because inflation remains a big problem. The New Zealand news pushed our rates higher giving back some of the nice rate relief achieved since last week.
Hawkish Fed Parade Continues
A major reason for the uncertainty and volatility in the financial markets has been caused by our Federal Reserve. Between their inaccurate forecasts and continuous tough talk in the face of conflicting economic data, if there was a place where we could use some help wanted signs, it's the financial markets.
The Treasury Market Controls The Fed
The good news, as it relates to interest rates? The Federal Reserve controls the Fed funds rate which is an overnight rate. The Treasury market controls the Fed. More specifically the long-end or longer-term interest rates say very clearly that the threat of a recession is significant, and the Fed should consider slowing down its rate hikes. Last week the 10-year yield had its largest one-day yield decline in 14 years, suggesting that we are nearing the rate peak.
With increased housing stock coming to some areas and interest rates attempting to peak, now is a wonderful time to explore opportunities existing in the residential housing market.
There are some important economic reports next week including the Consumer Price Index (CPI), the Producer Price Index and retail sales. If these inflation ratings are hot, it will embolden the Fed to talk tough and continue hiking rates aggressively. The opposite is true.
Mortgage Market Guide Candlestick Chart
Mortgage-backed security (MBS) prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 5.5% coupon, where currently closed loans are being packaged. As prices go higher, rates move lower and vice versa.
Prices moved a bit higher this week, giving us some rate relief. Next week's inflation reading may determine if this improvement in rates can continue.
Chart: Fannie Mae 5.5% Mortgage Bond (Friday Oct 07, 2022)
Economic Calendar for the Week of October 10 - October 14
The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is without errors.
As your mortgage professional, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you.