This past week we experienced a couple of soaring inflation numbers which has injected new uncertainty surrounding inflation peaks, Fed rate hikes and the likelihood of a recession. Let's discuss what happened and what to watch for in the coming weeks.
Consumer Prices Soaring
The headline Consumer Price Index (CPI) for June showed prices climbed a scorching 9.1% year over year. Headline inflation includes both food and energy. When you take out food and energy costs, Core CPI came in at 5.9% year over year. Both numbers were well above expectations and put into question whether inflation has peaked.
The Federal Reserve wants core inflation to run at 2 to 2.5% in the long run, so 5.9% is more than double the Fed's comfort zone.
How does the Fed lower inflation? They hike the Fed Funds Rate and shrink their balance sheet, which slows demand and removes liquidity in the financial system.
The problem? A sizable portion of our inflation is energy based which seeps through the entire food and supply chain through shipping and manufacturing plants. Fed rate hikes do not lower oil prices. There are only two ways to lower oil prices:
Recession Signals Emerge
It's important to remember that the Fed controls short term rates, and the Treasury market controls the Fed. Short term rates have nudged higher but longer-term rates like the 10-year yield and home loan rates have not gone up nearly as much. This despite the likelihood of more Fed rate hikes ahead.
In response to the high CPI print, the chance of a full 1.00% rate hike at the July meeting stands at 85%. As a result, the 2-year yield soared to 3.25% and the 10-year moved up to 2.99%. The 25+ basis point yield curve inversion, where the 2-year yield is 25bp higher than the 10-year, is the widest since the spring of 2000...right before a recession.
Back in June, JPMorgan CEO, Jamie Dimon told the world to "brace for an economic hurricane" as some rough conditions were on the horizon. The firm reported quarterly earnings this week and it missed both revenue and earnings forecasts. This miss has elevated fears that more corporations are going to miss earnings which caused stocks to decline sharply on Thursday with some of the money finding the U.S. bond market.
Besides rates likely peaking because of a recession or near recession, there is some more good news.
Oil prices collapse
There are two ways for energy prices to move lower:
We are watching the latter take place as heightened recession fears have pushed oil to $92 a barrel, the lowest levels since February.
Should oil move lower still, we should expect headline inflation to move lower in the months ahead which would be a welcome sign.
Long-term rates have stabilized but we should not expect much more improvement until inflation moderates further. With that said, if you are interested in purchasing a home, it remains a great time with rates well beneath the rate of inflation.
Next week brings some housing data. These reports could further confirm whether the economy is at or near a recession. The Fed wanted to remove some froth from the housing market by talking up rates. It appears to have been successful in that endeavor. There will be limited Fed speak as we approach the quiet period, one week before the next Fed Meeting on July 27th.
Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 4.5% coupon, where currently closed loans are being packaged. As prices push higher, rates move lower and vice versa.
You can see the right side of the chart; prices fell to new 2022 price lows, meaning 2022 rate highs but bounced sharply higher after the big Fed rate hike in mid-June and then gave up some of those gains in response to the recent high inflation readings. It does appear the mid-June price lows will represent the rate peaks for 2022.
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.
If you are ready to start your buying or selling process
give us a call. We're happy to answer all your questions.