Weekly Market Recap

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Week Ending: July 29, 2022

Economic growth during the second quarter was weaker than expected, which was favorable for mortgage markets this week. The Fed meeting revealed no surprises and caused little reaction. As a result, mortgage rates ended the week a bit lower.

As expected, the Fed raised the federal funds rate by 75 basis points on Wednesday, matching the largest increase since 1994 seen at the last meeting, and indicated that more rate hikes are coming to fight inflation. Neither the meeting statement nor Chair Powell’s comments during the press conference revealed any unexpected shift in policy. What emerged was the message that officials will evaluate incoming economic data to determine the size of rate hikes going forward, meaning that investors should no longer count on receiving precise guidance in advance. Investors are now split about whether there will be an increase of 50 or 75 basis points at the next meeting in September.

Gross Domestic Product (GDP) is the broadest measure of economic activity. During the second quarter, GDP fell at an annualized rate of 0.9%, well below the consensus forecast for an increase of 0.5%, but an improvement from a decline of 1.6% during the first quarter. A wide range of components had negative readings including inventories, private investment, and government spending. Consumer spending on goods also declined, but this was more than offset by increased spending on services.

The PCE price index is the inflation indicator favored by the Fed. In June, core PCE was up 4.8% from a year ago, a little higher than expected, and up from 4.7% last month. For comparison, the annual rate of increase was below 2.0% during the first three months of 2021. One of the big questions for investors is how quickly inflation will moderate as disruptions due to the pandemic and the conflict in Ukraine are resolved.

Looking ahead, investors will look for additional Fed guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, the key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. Before that, the ISM national manufacturing sector index will come out on Monday and the ISM national services sector index on Wednesday.

Copyright @ 2022 MBSQuoteline

Week Ending: July 22, 2022

During a light week for economic news, the biggest event was the European Central Bank (ECB) meeting. The ECB surprised some investors with its aggressive move to tighten monetary policy to fight inflation, which was favorable for mortgage markets. As a result, mortgage rates ended the week lower.

On Thursday, the European Central Bank (ECB) raised rates by 50 basis points, its first increase in eleven years. Many investors had expected a smaller rate hike of only 25 basis points. The main reason for the monetary policy tightening is that inflation in the eurozone is at record high levels. Since raising the short-term rates controlled by the central bank slows economic growth, it reduces future inflationary pressures, which is good for mortgage rates.

Sales of existing homes fell for the fifth straight month in June to the lowest level since June 2020 and were 14% lower than last year at this time. On a more positive note, inventory levels were 2% higher than a year ago, the first annual increase in three years, but still were at just a low 3.0-month supply nationally. The ever-climbing median existing-home price was 13% higher than a year ago at a record $416,000.

While more inventory is badly needed in many regions, the latest data was not encouraging. In June, housing starts of single-family units dropped 8% from May to the lowest level in two years. A separate survey of home builder sentiment from the NAHB declined far more than expected to the lowest reading since May 2020. Higher prices and shortages for land, materials, and skilled labor again were listed as major issues holding back a faster pace of construction.

Higher mortgage rates have taken a large toll on mortgage application volumes, which are now at the lowest level since 2000. According to the latest data from the Mortgage Bankers Association (MBA), average 30-year fixed rates are over 2.5% higher than a year ago. Purchase applications are down 19% from last year at this time, and applications to refinance a loan have plunged a shocking 80% from one year ago.

Looking ahead, the next Fed meeting will take place on Wednesday. Investors anticipate a 75 basis point rate hike and will look for additional guidance on the pace of future rate hikes and bond portfolio reduction. Beyond that, New Home Sales and Consumer Confidence will be released on Tuesday. Second quarter GDP, the broadest measure of economic activity, will come out on Thursday. The core PCE price index, the inflation indicator favored by the Fed, will be released on Friday.

Copyright @ 2022 MBSQuoteline