MBS Weekly Market Commentary Week Ending 12/23/22

Hitting the Monetary Throttle

MCT would like to wish everyone a Merry Christmas and Happy Holidays. Talk to close the year has been dominated by the Federal Reserve’s most aggressive policy tightening in four decades and its impact on the economy, and for us the residential housing market.

Policymakers’ initial instinct during the pandemic was to enact relief measures as a form of economic preservation, stimulating the economy to keep the pandemic from setting off a deep recession. Stimulus packages are meant to elevate spending and demand, but if supply can’t keep up with the new demand, prices will rise, and have risen. Central banks were slow to respond, believing that the inflation would fall as the pandemic faded, but inflation was essentially allowed to increase unchecked.

America not only spent among the most of any country in the world on economic relief, but the Fed viewed rising prices as a temporary phenomenon, not acknowledging until late last year that inflation was persisting. While the inflation numbers are the motivating factor for Fed policy, the strength of the labor market has been the justification for its four sequential 75 BPS rate increases before pivoting to 50 BPS at the December FOMC meeting. This latest hike won’t be the Fed’s last; the Fed’s updated economic projections assume high inflation will stick around a little longer than previously expected.

Just How Tight is the Labor Market?

The labor market is indeed tight when you look at job openings, the unemployment rate and wage increases, affirming the Fed’s aggressive course. Further robust job numbers going forward give the central bank more leeway to enact and maintain a restrictive monetary policy. However, if the labor market isn’t as tight as the Fed thinks, then it has probably overshot proper monetary policy at this point. We have seen some softening in labor market conditions recently and high continuing jobless claims suggests that it may be becoming more difficult to find a job as employers are taking a more cautious-minded approach with their hiring plans.

30-year mortgage lending rates have rallied as of late, down around 100 BPS since hitting a 2022 high of 7.16% in late October,

Wages have risen at a rapid pace over the last couple of years and Americans are bringing home more money than ever, but are poorer than they have ever been. It is important to understand that real wages matter, not nominal wages. Home affordability is becoming more and more a function of incomes. Incomes rising at the fastest rate in decades helps blunt the impact of rising payments, and wages are “sticky,” meaning they don’t fall easily. For the housing industry, that fortunately means October and November will almost certainly be the peak of unaffordability as rates continue to fall and home price appreciation slows, squaring the circle so to speak.

Focus on the Data

The recent rally in 30-year mortgage lending rates, down around 100 BPS since hitting a 2022 high of 7.16% in late October, helps. This week ahead of the holidays is always a quiet one for trading, however we received a lot of meaningful housing data (homebuilder sentiment – down, existing home sales – worse than expected, housing starts – above forecast, and new home sales – above expectations), as well as the third revision to last quarter’s GDP (revised upward more than expected) and personal incomes / spending (the Fed’s preferred PCE index showed the annualized U.S. inflation rate falling to 5.5% in November).

That’s obviously a mixed bag of data for the Fed to parse through and determine monetary policy upon, an unenviable job. There will be no Federal Reserve speakers on schedule through the end of the year, so no market-moving headlines should come from that space until 2023. In fact, the next FOMC rate decision isn’t until February 1. I would remind you that in addition to recommending enjoying your time with friends and family over the holidays, that quantitative tightening has just gotten under way and there is a long way to go before we see 2% annualized inflation again.

10-Year Treasury Yield Curve

Compare this chart with the mortgage rates chart to see how the 10-year treasury and mortgage rates are correlated. Read more below to learn how mortgage rates are tied to the 10 year treasury yield. View raw data on U.S. Department of the Treasury website.


Mortgage Rates Today

The current MBS daily rates are shown below in this chart for 5/1 Yr ARM, Jumbo 30 Yr, FHA 30 Yr, 15 Yr Fixed, 30 Yr Fixed. Sign up for our MBS Market Commentary to receive daily mortgage news in your inbox.

About the Author

Robbie Chrisman, Head of Content, MCT

Robbie started his mortgage industry career with internships during high school and college at Peoples National Bank in Colorado, and RPM & Bay Equity in the San Francisco Bay Area. After graduating from The University of Texas at Austin with a degree in Finance in 2014, he went to work at SoFi, where he rose to Director, Capital Markets assisting in the creation of SoFi’s residential mortgage division before leaving to work for TMS in Austin, Texas. From there, he went to work for FinTech startup Riivos in San Francisco and now is the Head of Content at Mortgage Capital Trading (MCT) in San Diego.

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Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

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MBS Weekly Market Commentary Week Ending 3/31/23

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MBS Weekly Market Commentary Week Ending 3/24/23

The FOMC raised its benchmark rate by 25 basis points to a new range of 4.75%-5.00% on Wednesday, a middle ground policy move made in the hope of tampering inflation without further harming the banking system. The raise marks the 9th consecutive rate hike since the Fed began hiking in May of last year and brings the target fed funds rate range to the highest level since September 2007. While the central bank’s monetary policy has been aimed at correcting inflation, it has also revealed hidden weaknesses (e.g., entities whose balance sheets relied on low interest rates).

MBS Weekly Market Commentary Week Ending 3/17/23

Next week will reveal the Fed’s resolve on continuing to beat the drum on their aggressive inflation fight. The word until now has been that the central bank will keep hiking interest rates until inflation is under control.

MBS Weekly Market Commentary Week Ending 3/10/23

Events this week likely will lead to a higher peak interest rate than investors had been expecting just weeks ago. Central bankers appear worried about a cycle in which workers seek higher pay to offset inflation’s bite, and in turn trigger more price increases. In fact, inflation remains high because people have jobs and earn enough income to cover stubbornly expensive housing costs. Robust hiring is good for the economy and workers, but elevated pay growth puts added pressure on the Fed to bring down earnings. 

MBS Weekly Market Commentary Week Ending 2/10/23

The week after the jobs report is generally pretty data-light, and this week was no exception. With a dearth of data, market movement hinged on “Fed speak” and consumer sentiment. We saw some volatility return to bond markets as investors built in expectations for a more hawkish Fed. As a reminder, the Fed raised its benchmark rate last week to a range of 4.5% to 4.75%. Let’s run through what we’ve learned in the wake of that decision and a robust U.S. payrolls report that took some wind out of investors’ sails that had hopes for rate cuts by summer.

MBS Weekly Market Commentary Week Ending 2/3/23

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