News

Jan 7, 2022

Mortgage Rates Rise - 2022/01/07

Concerned about higher inflation, investors began the year by pushing up bond yields. Wednesday’s more hawkish (in favor of tighter monetary policy) than expected Fed minutes then sparked another round of bond selling. As a result, mortgage rates ended the week at the highest levels since April of last year.

Early in the pandemic, the Fed initiated a new bond purchase program to help stimulate the economy. Given the progress of the recovery and the rise in inflation, the Fed is now in the process of winding down that program and is on track to conclude it around the end of March. With that in mind, investors have been looking for guidance on the timing for additional tightening measures including federal funds rate increases and a reduction in the massive portfolio of bonds accumulated on the Fed’s balance sheet during the purchase programs.

Based on the minutes from the December 15 Fed meeting released on Wednesday, investors moved forward their expectations for these other tightening measures. The first rate hike is now expected shortly after the bond purchase program ends, along with at least two more before the end of the year. In addition, all Fed officials expressed support for a reduction in the enormous balance sheet holdings of Treasuries and mortgage-backed securities (MBS) “at some point” after the first rate hike. This sooner than anticipated reduction in Fed demand for MBS caused mortgage rates to rise.

The closely watched Employment report released on Friday revealed mixed results. Against a consensus forecast of 420,000, the economy gained just 199,000 jobs in December. However, revisions added 141,000 jobs to the figures for prior months, offsetting most of the shortfall. The gains were broad-based across a wide range of industries, led by the leisure and hospitality sectors. The economy now has roughly 3 million fewer jobs than in February 2020 prior to the start of the pandemic.

The other major components of the report were stronger than expected. The unemployment rate, which is based on a survey of individuals, declined from 4.2% to 3.9%, below the consensus forecast of 4.1%, and the lowest level since February 2020. Average hourly earnings, an indicator of wage growth, exceeded expectations and were an impressive 4.7% higher than a year ago.

A couple of other significant economic indicators released this week from the Institute of Supply Management (ISM) remained at very high levels as expected. The national services sector index came in at 67.6 and the national manufacturing index at 58.7. Levels above just 50 indicate that the sectors are expanding, and readings above 60 are rare. Supply chain issues have had a greater impact on manufacturing companies that need materials to produce goods than on companies providing services such as computer programming or banking.

Next Week

Looking ahead, investors will closely follow news on the omicron variant and will look for additional Fed guidance on the timing for future rate hikes and balance sheet reduction. Beyond that, the Consumer Price Index (CPI) will be released on Wednesday. CPI is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services. Retail Sales will come out on Friday. Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key indicator of growth.

Date Upcoming Report
Wed 1-12 CPI
Fri 1-14 Retail Sales
Fri 1-14 Import Prices

Index Weekly Change
10yr Treasury +0.25
Dow -200
NASDAQ -500

Central Bank Meetings - 2021/12/17

This week was packed with major economic news, most notably US and European central bank meetings. While daily volatility was high, however, these influences were mostly offsetting, and mortgage rates ended the week a little lower.

Early in the pandemic, the Fed put in place extremely accommodative policy measures to help the economy recover. Now, with inflation running at the highest levels in decades, the Fed announced Wednesday that it will remove those measures more quickly than indicated at the last meeting in early November. First, it will double the pace at which it will taper (scale back) its bond purchases, meaning that the program will conclude around March or April. In addition, officials forecast that they will increase the federal funds rate three times by the end of the year and another three times in 2023.

By contrast, the European Central Bank (ECB) announced Thursday that it will tighten monetary policy more slowly than expected. The ECB, which implemented several different bond purchase programs last year, will allow some to end as originally scheduled early in 2022, but others will be extended at least through October.

Consumer spending accounts for over two-thirds of US economic activity. In October, retail sales jumped a massive 1.7% from September, which was far above the consensus forecast. However, sales rose just 0.3% in November, which was well below expectations. Many economists had predicted that due to shortages of a wide range of products this year, consumers would start doing their shopping earlier than usual, and they appear to have been correct. Looking at the two-month period as a whole, it has been a strong holiday season so far.

With the ongoing severe need for a larger inventory of homes for sale in many regions, the monthly report on housing starts has gained in importance, and the latest results were quite encouraging. In November, overall housing starts far exceeded expectations with an impressive 12% increase from October to the highest level since March. Strength was seen in both single-family and multi-family units. Building permits, a leading indicator, posted a solid gain of 4% from October. Rising prices and shortages for materials, land, and skilled labor continued to present challenges to builders.

Next Week

Looking ahead, investors will closely follow news on the omicron variant and will look for additional guidance on the pace for tapering bond purchases and the timing for future rate hikes. Beyond that, Existing Home Sales will be released on December 22 and New Home Sales on December 23. The core PCE price index, the inflation indicator favored by the Fed, also will be released on December 23. Mortgage markets often are more volatile during the last two weeks of December due to reduced daily trading volume

Date Upcoming Report
Wed
12-22 Existing Home Sales
Thu 12-23 New Home Sales
Thu 12-23 Core PCE

Index Weekly Change
10yr Treasury
-0.08
Dow
500
NASDAQ
400