Last Week in Review: Inflation, Fed, and the Wall
This past week, home loan rates were improving slightly week-over-week until their arch-nemesis, inflation, reared its head. Let us break it all down and talk about what it means for you and your clients.
Consumer Inflation and Looking Ahead
On Thursday, the May Consumer Price Index (CPI) showed that consumer inflation rose by 5.0% year-over-year, and after removing the effects of food and energy, the year-over-year rate of inflation was 3.8%.
While the headline showed that 5.00% inflation might be alarming, the bond market’s reaction was a bit restrained. Normally, high inflation numbers would apply heavy selling pressure on bond prices, causing rates to rise. That did not happen. Why?
The bond market is forward-looking. The financial markets were expecting a “hot” inflation reading and have sided with the Fed who continues to say higher inflation over the coming months will be “transitory,” or short-term, in nature. Future readings of CPI will be important to follow to see if the high inflation readings do cool down. If they do, rates will remain low and could continue to improve; the opposite is also true.
9.3M Reasons Why the Fed Won’t Taper
The Federal Reserve, our central bank, has a dual mandate: maintain price stability (manage inflation/deflation) and promote maximum employment. On the latter, the economy is coming up short on the job creation front. The last two jobs reports came in well beneath expectations, and a recent report shows there are 9.3M jobs available in the economy: a record-high figure. So, we have a lot of work to do to get to maximum employment. If that is the case, it is highly unlikely the Fed will taper their monthly bond purchases anytime soon. The Fed has said they need to see “substantial improvement” toward their dual mandate before tapering. What does that mean for you and your clients? It means that long-term rates are likely to remain lower for a longer time.
Be sure to read the chart section below as we discuss the wall, which has limited rate improvement.
Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed bond-buying program. The Fed will continue to buy bonds and keep rates relatively low for quite a bit longer, but if inflation ticks up in the months ahead, we should expect rates to tick up too.
Last Week in Review: Real Rates and When the Music Stops
This past week, home loan rates ticked up slightly but remain near three-month lows. Despite historically low rates, mortgage applications ticked down for the second consecutive week as tight inventory and rapidly rising home prices weighed on purchase activity.
Opportunity Is Knocking
Mortgage and housing professionals should be telling their clients and sphere of influence that if they are looking to either refinance or purchase, the time is now.
Home loan rates are literally being pinned down by the Federal Reserve, which is purchasing $120B worth of Treasurys and mortgage bonds every month. If the Fed were not purchasing these bonds, home loan rates would be much higher.
How do we know? Look at real rates, or the value of the 10-year note yield after the effects of inflation. At the moment, the 10-year yield is near 1.60%, and inflation expectations for the next ten years are 2.45%. If you subtract the 2.45% from 1.60%, you get -.85%. So, we currently have negative real rates, meaning investors buying the 10-year note are losing -.85% a year. That is unsustainable over the long term. Who in their right mind would purchase the 10-year note as an investment just to lose money every year? Yes, the Fed.
The Federal Reserve has made it clear that they are not “even thinking about, thinking about” tapering their bond purchases.
What Happens When the Music Stops?
A look at history shows the last time the Fed was engaged in bond buying, or quantitative easing, was back in 2013, and this was the last time real rates were negative. In May 2013, the Fed simply stated that they could “taper” purchases in the future, and rates immediately shot up with the 10-year yield going from 1.60% to over 3.00% in just a few months. This caused a major spike in mortgage rates.
The Fed Conundrum
Despite heightened inflation fears and calls to taper bond purchases, the Fed continues to say, “Now is not the time.” There may also be pressure from the Treasury Department to keep long-term rates low as the country embarks on an enormous stimulus and spending spree. It could be quite detrimental for long-term rates to tick up as our debt expense would be massive.
Over the next few months, watch inflation. If readings come in hotter on a month-over-month basis, we could see upward pressure on rates, like we did between January and March of this year.
And remember, the uptick in rates happened despite the Fed bond buying, which is a testament to their inability to keep long-term rates pinned down if inflation is a problem.
Bottom line: This is an amazing moment to take advantage of an interest rate environment that is being manipulated by the Fed. The Fed will continue to buy bonds and keep rates relatively low for quite a bit longer, but if inflation ticks up, we should expect rates to tick up too.
Last Week in Review: What Goes Up Must Come Down
This past week home loan rates held steady despite enormous volatility in the financial markets. Let’s break down what happened and look at what to watch for in the week ahead.
A “risk-off” trade is when investors sell risky assets like stocks and then park the money in safer investments like bonds and gold. This past Wednesday was one of those odd times when virtually everything went lower in price: stocks, bonds, commodities, US dollars, and cryptocurrencies.
On the latter, cryptocurrencies fell sharply on word China will not embrace Bitcoin for transactions. This “risk-off” selloff seeped into stocks, which fell sharply, and even bonds were not immune to the price decline.
When Buying Demand Doesn’t Meet Selling Demand
Every week the U.S. Treasury sells bills, notes, and bonds to help fund the government. Now with the many different stimulus packages and more on the way, the Treasury is pressured to sell an enormous and ever-growing amount of debt into the bond market.
On Wednesday, the Treasury peddled $27B in 20-yr notes. The buying demand was weak, and as a result, Treasury yields ticked up a touch.
Why is this important to follow? If the Treasury auctions are unable to attract buying demand, rates will be pressured higher to attract investors, and the Fed will be pressured to do more. Remember, the Fed is buying more than $80B of Treasurys every month to help keep long-term rates low.
Quick price check on Lumber. It sits near $1300, down nearly $400 in the past week or so. If there is a price we want to see decline, it’s lumber.
One Thing We Want to See Go Down: Prices
A big fear and uncertainty in the financial markets is inflation. The Fed continues to believe that higher inflation in the months ahead will be “transitory” or short-term in nature.
Prices are rising year-over-year because of big changes in oil and food, and those should simmer down in the months ahead. However we did see some sizable month-over-month increases in prices. Hopefully, those will simmer down as well later this year.
For the moment, the 10-yr note yield sits near 1.65% which suggests the bond market is not yet worried about inflation.
The Fed Support Will Continue
The minutes from the previous Fed meeting were also delivered on Wednesday and sparked incredible volatility. At the end of the day, this may be the most important line of the minutes:
“In their discussion of the Federal Reserve’s asset purchases, various participants noted that it would likely be some time until the economy had made substantial further progress toward the Committee’s maximum-employment and price-stability goals.”
Finally, the Fed is not going to stop purchasing bonds anytime soon, which means long-term rates will remain relatively low for a bit longer.
Bottom line: This is no time to get complacent, and while interest rates may not move too high in the near future, they may also not improve much from here as evidenced by what happened this week. Take advantage of what is available today thanks to the Fed bond purchasing program.
Last Week in Review: The Price is Wrong
This past week, the yield on the 10-year note increased to its highest level in one month in response to a very hot consumer inflation reading. Let us break down what happened and get into what to look for in the week ahead.
Last Wednesday, the financial markets were prepared for a high Consumer Price Index (CPI) inflation reading. Well, the report showed headline consumer prices climbed 4.2% year-over-year, far above the 3.6% expected and the Core CPI (which strips out food and energy) rose by 3.0% year-over-year, the largest 12-month increase in 26 years.
The market reaction was a swift decline in both stock and bond prices with yields moving higher. If inflation rises, rates/yields must rise to compensate the investor for the effects of inflation.
Some bad history was made with this spike in inflation. For the first time in nearly 50 years, CPI has exceeded mortgage rates on a year-over-year basis. This screams opportunity for those looking to refinance or purchase a home, because at some point either inflation must come back down, rates must go up, or some combination of both.
Will Price Increases Be “Transitory?”
That is the biggest question for the economy and financial markets. The Federal Reserve fully believes that the spike in prices will be temporary, and we should see a moderation in prices come fall. So we will have to wait to see if the Fed is correct. What we can expect over the summer months is more volatility in stocks, bonds, and rates, as future inflation readings will be closely watched for sustained and substantial price increases.
“Don’t Fight the Fed”
We should all remember that saying. The Fed continues to hold the Fed Funds Rate near zero and purchase bonds to keep long-term rates low. The muted outlook for inflation supports their stance.
If the Fed is right and inflation does moderate in the fall, we will not see any major increase in rates. If the Fed is wrong and we see sustained higher inflation, the Fed will likely adopt other tools to help keep long-term rates low. Again, likely no major increase in rates.
If that sounds a bit like a win-win from a rate perspective, yes, it is. We should expect rates to remain relatively low for a longer timeframe.
Bottom line: This is no time to get complacent, and while interest rates may not move too high in the near future, they may also not improve much from here, as evidenced by what happened last week. Take advantage of what is available today thanks to the Fed bond purchasing program.
Last Week in Review: Yellen for Higher Rates
We watched long-term rates, like mortgages, improve slightly this past week despite a surprising comment from Treasury Secretary Janet Yellen. Let’s break it all down and look at what’s on tap for next week.
“It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat” – Treasury Secretary, Janet Yellen
Janet Yellen was being interviewed on Zoom when she unleashed this seemingly innocent and likely honest comment. Well, it sent shockwaves across the stock market, pushing the NASDAQ down as much as 400 points last Tuesday alone.
Yellen was once the Fed Chair, and in that former role, it would be her duty to share comments on monetary policy. As Treasury Secretary, it is not her role to discuss rates. Especially, considering the active Fed Chair Jerome Powell saying over and over just days earlier at the Fed Meeting that “now is not the time” to raise rates.
There is big pressure on the Fed to help keep rates low. First and foremost are the upcoming “Plans” being debated in Washington D.C. The American Jobs Plan and American Family Plan are estimated to cost another $4 trillion, on top of the $1 trillion-plus still not spent from the American Rescue Plan. All this spending must be paid for by selling new bonds in the market. What we as a country can’t afford now is higher rates as the expense to service all this new debt will be an enormous burden.
Sell in May and Go Away
Stocks, especially the tech-laden NASDAQ, may have used Yellen’s comment as a reason to sell – but some of the downward pressure in stocks may be a seasonal phenomenon called “Sell in May and Go Away”. The idea is that stocks generally underperform during the summer months when many take vacations, thereby creating lower trading volume, larger price swings, and more risk.
As you could imagine, the pain in stocks was a gain for bonds. The 10-year yield declined to 1.56%, down nicely from 1.75% from just a few weeks ago.
If the summer selloff in stocks continues, we may see further improvement in rates.
Opportunity knocks again
With the recent improvement in rates, many more people can still benefit from a refinance and it will certainly help drive the purchase market. However – any rate improvement could be short-lived – here’s three reasons why locking at today’s rates may make sense:
- Treasury Secretary Janey Yellen’s comments for higher rates was honest. Lumber and other commodity prices are soaring – higher rates would cool that off.
- There is growing pressure on Fed Chair Powell to start “tapering” bond purchases. Again, in response to “frothy” assets like stocks and real estate.
- We are going to see higher inflation numbers over the next few weeks – what we don’t know is how high the numbers will be or how bonds will react. Bonds do not like inflation – it’s like kryptonite to Superman…a killer.
Bottom line: Rates have improved of late, but the good times may be relatively short-lived. Those thinking about locking in today’s rates should do so.
Last Week in Review: No News is Good News
In the absence of any meaningful economic reports this past week, we watched bond prices rise while rates inched lower. Oh yeah!!!
Let us break down what is going on and look into this week as the boredom ends.
The Path of Least Resistance
Rates have been steadily improving over the past few weeks as consumer inflation fears have waned. With a nice trend in place and no news to knock bonds down, prices continued their path of least resistance: higher. How high? Mortgage-backed securities, which are where home loan rates are derived, closed at their highest level since March 2nd this past week, and the 10-year yield hovered near 1.55%, also the lowest in nearly two months.
FOMC Blackout Period
The Federal Open Market Committee (FOMC), which meets eight times per year to discuss economic conditions and determine whether to hike or lower the Fed Fund Rates, can always move the market when they speak or during interviews.
However, the FOMC has established a blackout period where FOMC members are to limit their public speaking and interviews. The current period is April 17 through 29th. When Fed members are not talking or sharing their views, the markets can’t react to any perceived positive or negative statements. The quiet ends next week when the Fed delivers their Monetary Policy Statement on Wednesday at 2:00 p.m. ET. More on that below.
Bonds Regaining Some Shine
A couple of interesting trends happened this week which could bode well for rates in the near-to-intermediate term. First, stocks struggled a bit this past week, and when they dropped, rates also declined. This is a typical market reaction, but something we have not seen much of this year during the steady increase in rates. If stocks continue to stumble and we see a seasonal, “Sell in May and go away,” reaction, it could leave room for further rate improvement.
Second, the 20-year bond auction this past week was well received. This means the buying appetite for Treasury securities was very good despite the recent improvement in rates/yields. If this trend continues, it will help keep long-term rates relatively low.
Housing en Fuego
March existing-home sales showed the median price rose by an annual record-breaking pace of 17.2%. This scorching rise is due mainly to an anemic 2.1 months of available inventory for sale.
Homes sold in 18 days on average, another record low.
This is all good news for someone selling a home, but as we know, it is rough for folks purchasing one.
With rates ticking back down, vaccinations administered, and economies reopening, we should expect continued strength in housing and hopefully more inventory available for sale.
Bottom line: This is an amazing moment to take advantage of the current interest rates as the present improvement in rates could be short-lived.
Last Week in Review: 3 Things the Financial Markets are Saying
When stocks rise, rates typically decline. When inflation moves higher, rates typically increase. As the economy reopens, rates will rise.
Well, stocks rallied to all-time highs, inflation spiked, and the economy continues to reopen. However, rates improved to the best levels in a month.
There are three things the financial markets are saying this week that are important for interest rates, stocks, and the economy in general.
1. Higher Inflation May Be a Short-Term Phenomena
The March Consumer Price Index (CPI) came in at 2.6% year-over-year, the highest level since August 2018. All signs are pointing to even higher consumer inflation in the next three months. BUT the market is forward-looking. Bonds are already looking at where inflation is going to be four months from now. At the moment, the bond market is not worried about inflation, because if it was, rates would be higher.
2. The Fed Has Our Back
Despite a vocal slip midweek where Fed Chair Powell said they would taper bond purchases “well in advance” of hiking rates, stocks are basking in the glow of the notion the Fed is still “not even thinking about, thinking about” hiking rates or tapering its bond purchase program.
3. Economic Reopenings Are Stimulus
The economic reports this past week highlighted pent-up consumer demand and the positive impact of states reopening their economies. Retail Sales, a measure of consumer spending activity, rose a scorching 9.8% on a month-to-month basis. Moreover, Initial Jobless Claims, those seeking first-time unemployment benefits, fell to the lowest level since the early days of COVID.
Bottom line: The financial markets are saying inflation is not a problem yet, and the consumer is going to drive economic growth. And during it all, the Fed will keep rates low, helping the recovery further and putting upward pressure on stocks. This is an amazing moment to take advantage of the current interest rate environment, as the present improvement in rates could be short-lived.
Last Week in Review: Markets Cheer the Fed Minutes
This past week the financial markets reacted to the Fed minutes from the March Fed meeting. Heading into the release last Wednesday, the markets were on edge for three reasons:
- Would the Fed signal tapering of bond purchases?
- Would the Fed hint that rates will be hiked sooner than expected?
- Were inflation concerns elevating?
Well, market fears quickly turned to cheers as the Fed minutes reinforced that they are not “taking the punchbowl away” and they are not even thinking about raising rates or tapering bond purchases.
The main reason for the Fed’s position? The minutes revealed that “Participants noted that it would likely be some time until substantial further progress toward the Committee’s maximum-employment and price-stability goals would be realized.”
This line and more talk downplaying higher inflation fear longer-term allowed stocks to rally to all-time highs, while also allowing rates to also improve week-over-week.
On top of telling the markets the Fed will continue to buy bonds every day to help keep rates low, they upped their growth forecast for the economy. They now forecast GDP to average 6.5% in 2021, up sharply from their 4.2% forecast just made in December.
The Fed also sees unemployment declining to 4.5% by year-end, which is closer to the 3.4% low seen in February 2020, and they see inflation running at 2.2%, slightly above their target longer-term run rate of 2%.
The Fed is the most important thing to follow in the markets right now. When they are telling the markets they are not even “thinking about…thinking about” raising rates or tapering their bond purchases, this gives reason to “party like it’s 1999.”
What does it mean for you? Long-term rates like mortgages are not likely to move too high anytime soon.
This is a good story for millions who could still refinance as well as fuel continued opportunity in housing. Lastly, for new construction, there is no pressure just yet to lock any of those.
Bottom line: Rates have improved week-over-week, and the trend may very well continue. However, like we experienced several weeks ago, any further rate improvement may be modest and short-lived. As economies reopen, we should expect rates to continue to increase further over time.
Last Week in Review: Markets React to the American Job Pain
This past week was filled with a lot of market-moving news for the mortgage and housing industry. By week’s end, interest rates continued to stabilize, while stocks set new all-time highs. Let’s break it all down:
Enormous Government Spending on the Way
On Wednesday, President Biden laid out his $2.3T infrastructure proposal called the American Jobs Plan. Whether you like it or hate it, this plan calls for both big spending and tax increases.
This plan is a long way from passage, and it will likely be met with tons of both praise and criticism in the days and weeks ahead, thereby inviting market volatility.
Stocks generally do not like higher taxes, and bonds/rates do not like additional bond issuance, which will be needed to fund any plan, so seeing both initially improve was surprising, yet welcome.
Home Sales Not Pending
Pending home sales is a measure of signed contracts for existing homes. The February Existing Home Sales data showed 1.03M homes for sale, which is down a whopping 29% from a year ago, representing the largest year-over-year decline on record. It also represents the lowest supply of available homes on record.
The lean amount of supply, low interest rates, and scorching demand continues to drive home prices higher, as evidenced by the 11% year-over-year price increase reported by Case Shiller.
Private Sector Jobs Returning
The ADP Report on Wednesday showed a whopping 517,000 private-sector jobs created. This figure met frothy expectations and the largest monthly increase since September. The main driver of the increase is the reopening of more economies across the U.S. More vaccinations, coupled with declining cases and further reopenings should continue to drive better job figures in the months ahead.
Bottom line: Rates remain historically low. With the anticipation of better days ahead and so much stimulus, we should expect a further uptick in rates from here.
Last Week in Review: Rates May Have Just Peaked… This Is Why
We watched long-term interest rates improve nicely this past week from the highest levels in over a year. The recent chatter about higher inflation has cooled down, allowing other themes to come in and influence stocks and interest rates. It was mostly negative and bond-friendly. Let us break down what happened.
Bonds and rates love bad news and slower economic conditions, so when the talk of “largest tax increase in decades” went across the wires this week, stocks and rates moved lower with the 10-year Note yield dropping to 1.59% from 1.75% just days earlier.
It’s far from clear what and who will be taxed, but what is clear is that corporate tax rates are going up, and that has a negative effect on stocks – hence the pullback. Taxes, whether you love them or hate them, hamper economic growth and weigh on consumer demand, which lowers inflation pressures: another positive for rates.
“Vaccination is a national priority” – French President Emmanuel Macron
Another big negative and uncertain event has been the sharp rise in COVID cases throughout Europe. The main cause of the spike appears to be a slow vaccination rollout.
Fresh lockdowns throughout the region could cause economic harm and elevate uncertainty, which again may cause stocks and rates to move lower.
The Buck Is Strong
Despite enormous spending by the U.S. government and much more on the way, the U.S. dollar has strengthened against other global currencies, touching the highest level since November 2020.
Why does this matter? Many commodities, like oil, are priced in U.S. dollars, so as the dollar gets stronger, it has put downward pressure on the price of a barrel of oil. This has an effect of lowering inflation pressures, because so many products are made of oil.
A strong dollar also makes our imports cheaper, which also lowers inflation pressures which bonds and rates love.
Bottom line: Rates have improved week-over-week and the trend may very well continue. However, like we experienced several weeks ago, any further rate improvement may be modest and short-lived. As economies reopen, we should expect rates to continue to increase further over time.