September 22nd, 2022 - Market Update
Current position: Locking
Stocks and Mortgage Bonds are both moving lower this morning, following the Fed's highly anticipated Statement and Press conference yesterday.
The Fed hiked the Federal Funds Rate by 75bp, as expected, and continued to beat the drum that inflation is still far too elevated.
Initially, the markets sold off, but often times there can be a ton of volatility on Fed day. The Bond market came all the way back, helped by comments from Powell that the Fed will not be selling Mortgage Backed Securities anytime soon, and closed the day slightly positive, but is now sharply lower once again today.
The market appears to be digesting the Fed's projections negatively, as it shows the Fed is losing control and does not have a good handle on inflation. The Fed now expects an additional 125bp of hikes this year, which may be 75bp in November and 50bp in December.
Additionally, the Fed anticipates Core PCE inflation to be at 4.5% at the end of 2022, which is not a lot of progress from currently levels towards their goal of 2%. Between the significant revision in Fed hike expectations and increase in inflation expectations, the market is believe the Fed does not have control on inflation, which the Bond market hates.
On the recession front, Powell said, "The chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer. Nonetheless, we're committed to getting inflation back down to 2%."
This can be seen in their projections for growth, which was revised lower from 1.7% in 2022 to 0.2%. They also believe the unemployment rate will go up to 4.4% next year.
While the market believes the Fed does not have control on inflation based on their actions, they still may be overshooting their tightening, as it takes time for the Fed hikes to have an impact. This can be seen in the 10-year/2-year Treasury inversion, which went to -56bp yesterday. This is the steepest inversion we have seen since the 1982 and signals from the market that we are headed for a recession.
Fannie Mae updated there origination forecasts - They believe total origination volume will be 2.44T in 2022 and 2.17T in 2023. While the new figures are about a 40% decline from 2020 and 2021, the overall figure is still quite high historically. We do have to keep in mind that with higher loan amounts, it may mean less transactions than previously. Fannie Mae also expects there to be a recession in Q1 2023.
Initial Jobless Claims which measures individuals filing for unemployment benefits for the first time increased by 5.000 last week to 213.000 and after the 5k negative revision to last week, there is really no change. Continuing Claims, which measures those who continue to receive benefits after their initial claims, decreased by 22.000 to 1.38M.
CoreLogic released their Single-Family Rental Index, showing that rents increased by 12.6% year over year in July, which is a slight moderation from 13.2% in June.
Adjusted with recent market movement:
Mortgage Bonds have broken beneath support at the 98.516 floor and are still searching for a bottom. The 10-year is trading at 3.70% and still has room to go higher until reaching 3.75%. Begin the day locking.
Source: MBS Highway
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