Three Things Moving the Markets

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.