MBS Weekly Market Commentary Week Ending 8/26/22

Federal Reserve goal to push inflation down closer to 2%

Even though actions speak louder than words, traders this week remained hesitant to make any huge bets ahead of Fed Chairman Powell’s speech today in Jackson Hole. Amid early signs of a housing slowdown and fears of a recession, his speech was be parsed through for any clues on how hawkish the Federal Reserve will be in the face of mounting economic challenges.

Powell reiterated the central bank’s resolve to push inflation down closer to its 2% goal despite the likely cost of pushing the unemployment rate up from its current half-century low of 3.5%, saying “Restoring price stability will likely require maintaining a restrictive policy stance for some time,” in remarks at the Kansas City Fed’s annual policy forum.

To provide some context, at this same Wyoming gathering two years ago (when inflation had been stubbornly lagging the Fed’s 2% goal for years), Powell introduced the central bank’s new inflation averaging policy that would tolerate inflation running above its 2% goal for some time in order to push the unemployment rate lower. By the Fed’s preferred measure, inflation is currently about triple that; PCE this morning came in at an annual rate of 6.3%.

“Clear progress” toward maximum employment

At this event last year, Powell said the bank’s test for inflation was met and the economy had made “clear progress” toward maximum employment. This was before the Fed dropped the “transitory” moniker regarding inflation.

Since then, the Fed has gotten more aggressive by starting to shrink its balance sheet and raising its policy rate four times. The federal funds rate target range sits at 2.25-2.50%, the same level it was in May 2019 at the height of the last tightening cycle.

The question remains how much the Fed will decide to put the brakes on the economy and cause demand to subside?

From the Jackson Hole event this year, bond market participants, investors, portfolio managers, and economists will all look for clues as to whether Powell thinks the FOMC will pause rate hikes any time soon.

While that doesn’t appear to be in the cards, the Fed Chairman said that Fed officials will base their decisions on incoming data. He also repeated that many of the factors that drive inflation are outside of the Fed’s control. The bottom line is that rate hikes will continue as the Fed prioritizes driving down inflation rather than economic growth.

Uncertainty surrounding the pace and size of rate hike

Yes, the question remains how much the Fed will decide to put the brakes on the economy and cause demand to subside. Current bets for the September FOMC meeting are split roughly between a third 75 BPS rate hike in a row and 50 BPS, though sentiment has shifted toward 50 BPS over the past two weeks and the latest market predictions are estimating 125-150 BPS in tightening by the end of the year.

Kansas City Fed President George said this week that the fed funds rate is not at a restrictive level at this time and that the Fed could hold the rate above 4.00 percent. St. Louis Fed President Bullard, one of the FOMC’s most hawkish members, said that rates are not high enough now and that he is targeting a fed funds rate range between 3.75 percent and 4.00 percent for the end of the year.

For our clients, the uncertainty surrounding the pace and size of rate hikes increases the importance of trading as much as possible throughout the day to match incoming loans. While we’re all (Fed members included) still struggling to understand a crazy economy hit by pandemic and war that is showing conflicting signs of strength and weakness, that is no excuse for lacking sound margin management practices. There were times in the past where it was okay to wait until the end of day to put on trade and cover hedge, but with current volatility of more than a half point a day in some cases, it’s best to lock in your margin frequently.

Looking for more tips on how to navigate this period of increased volatility? 

Hopefully, you attended our webinar on Improving Profitability to Counter Market Headwinds. We have also published several blogs over the last few weeks, including Strategies for Mitigating Risk in a Volatile Market, which provide more subject matter on the current market. 

We’re here to help. We are consistently voted the top hedge provider in the industry because we genuinely care about our clients’ success. Independent industry surveys/benchmarks for client loyalty and satisfaction time and time again validate our mission statement of values. We bring the best talent, the best technology, and we apply it in a thoughtful way for each and every client.

Contact us to learn how we can help your business and your bottom line.

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.

 Join Newsletter or Follow MCT on Social Media:

Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

Sign up for daily mbs market commentary and review previous commentaries by visiting our commentary category page. Join our email list for further MBS market news, subscribe to receive educational articles, whitepapers, relevant updates, and mortgage market commentary. 

MBS Weekly Market Commentary Week Ending 2/3/23

As strong as economists may have thought the job market was, it’s even stronger. In addition to headline non-farm payrolls in January (517,000) beating estimates by around 300,000, employment numbers were revised higher for the past two months. Yes, a tight labor market is anathema to any sort of quick stop to the Federal Reserve’s rate hiking cycle, but the growth rate in average hourly earnings is declining, which will be welcome news to Fed Chair Powell and his colleagues. There exists a raging debate among economists over whether we’ll need a sharp rise in unemployment to keep inflation low.

MBS Weekly Market Commentary Week Ending 1/27/23

Even with the most aggressive pace of rate hikes in over a generation during the past year, recent data suggests that there’s still a path to a “soft landing” for the Federal Reserve. The U.S. economy posted the kind of mild slowdown in the last quarter of 2022 that the Fed wants to see as it attempts to tame inflation without choking off growth. Gross domestic product beat expectations to rise at a 2.9% annualized pace, down from 3.2% in the third quarter and a long way from a recession.

MBS Weekly Market Commentary Week Ending 1/20/23

Have you heard? Inflation was so 2022. All jokes aside, after we learned last week that U.S. inflation cooled for the sixth consecutive month (the consumer price index dropped 0.1% in December compared to the month prior), expectations are now that the Federal Reserve is likely to downshift rate hikes to 25 BPS going forward, beginning at next month’s FOMC meeting.

MBS Weekly Market Commentary Week Ending 1/13/23

Pay attention to the bond market rather than the Fed. That’s what I’m hearing as we learned this week that inflation continued to ease in December, though much focus was also on Wells’ exit from the correspondent space and its ramifications. The headline CPI (-0.1% month-over-month, +6.5% year-over-year) posted the slowest inflation rate in more than a year and core inflation (+5.7% year-over-year), which excludes food and energy, also posted the smallest advance in a year.

MBS Weekly Market Commentary Week Ending 1/6/23

While it’s back to business as usual, it was a fairly quiet week as we settled into the new year. Fast inflation and high interest rates dominated the narrative and upended markets across the world last year. When the dust settled, 10-year Treasuries were 200+ BPS higher than the start of the year, the curve inverted in a bearish fashion faster and farther than ever, implied volume spiked, and mortgage spreads were pushed from stubbornly rich to suddenly cheap. The result was an entire trade-able universe moving out of the money, originations grinding to a halt, and duration becoming a function of illiquid trade flows.