Mortgage Market Guide Monday

A Look Into the Markets

This past week we watched interest rates improve nicely on the notion that central banks around the globe will be hiking rates less going forward. Let's break down what happened this week as we approach the important Fed meeting next Wednesday.

"Every breath you take, And every move you make, Every bond you break, Every step you take, I'll be watching you" ... Every Breath You Take - The Police

"We've made substantial progress in withdrawing accommodation" - European Central Bank (ECB) President, Christine Lagarde 10/27/22.

This was the line of the week. It suggests that the ECB is going to raise rates by less going forward. The global financial markets agreed as they are now pricing in a .50% ECB rate hike in December versus a .75% right before the announcement.

Why is this ECB move important?

Last Friday, the Wall Street Journal wrote an article that suggested our Federal Reserve is going to do the same thing next week...raise rates by .75% and shared that they will do less rate hikes going forward.

As a result of the "step down" or smaller future rate hike talk, yields around the globe moved lower.

3-Month T-Bill And 10-year Note Yield Inversion

There is a lot of chatter about yield curve inversions and the likelihood of a recession. Just this week the 3-month Bill and the 10-year Note yield inverted. This means, the 3-month T-Bill is yielding more than the 10-year yield. The Federal Reserve has acknowledged that they look at this metric as a sign of a recession ahead.

If there were another reason for the Fed to step down the size of future rate hikes, it is seen in the 3-month Bill and 10-year Note inversion.

The Case For The Fed "Step Down"

Besides other central banks around the globe signaling the likelihood of smaller rate hikes in the future, there are reasons the Fed could "step down" and reduce the size of rate hikes going forward.

Here they are:

  1. It is estimated that a Fed Rate hike takes about six months to have an impact on the economy. This means the Fed will likely raise the Fed Funds Rate by 3.50% in the second half of 2022 and those hikes have not even made an impact on an economy that is already slowing.
  2. The 3-month T-Bill/10-year Note yield inversion. The last time this happened back in 2019, the Fed "cut" rates six months later. We do not expect a rate cut, but we should certainly expect the Fed to pause on larger rate hikes and see what impact they now have since that a key metric has taken place, like this inversion.
  3. We can't afford it!!! With $31 trillion in government debt and $16.5 trillion household debt, we can't afford rates to move too high so the Fed will need to be careful with how high they lift rates.
  4. Housing has slowed dramatically and is a major driver of the economy. We do not need to see much lower rates to have a healthy housing market, we just need some clarity and stability and that could come with the Fed signaling a slowdown of larger rate hikes.

Looking Ahead

The main event is the Fed meeting next Wednesday at 2:00 p.m. ET. There will be multiple market reactions including one on the monetary policy statement, another at the 2:30 p.m. ET press conference from Fed Chair Powell and another more powerful one on Thursday morning. And if that were not enough, we will get the October Jobs Report next Friday.

Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 6% coupon, where currently closed loans are being packaged. As prices go higher, rates move lower and vice versa.

Prices have moved sharply higher over the last week, helping home loan rates also improve. Next week's Fed Meeting may determine if rates can continue to move lower and if we witnessed the peak in home loan rates.


Chart: Fannie Mae 30-Year 6.0% Coupon (Friday, October 28, 2022)


Economic Calendar for the Week of October 31 - November 4


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. 

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