September 26th, 2022 - Market Update
Current position: Locking Bias
Stocks and Mortgage Bonds are both lower and the 10-year is once again testing 3.75%. It's another rocky start to the week for mortgage rates. The big question is, how long will this last and when will we start to see both inflation and mortgage rates come down?
The Fed has made it clear that they are going to continue to tighten the economy until we see meaningful strides towards 2% inflation as measured by the Core PCE report. We can get some clues as to when this is going to come down by taking a look at our monthly inflation readings on the Core Consumer Price Index chart we have shared previously.
If we start to see inflation readings come out around 0.1% to 0.2%, which would be more indicative of recession like inflation readings, especially with the Fed continuing to constrict the economy, we can start to see some meaningful improvements lower after getting past September.
The September 2021 reading, which will be replaced with the new September 2022 reading, which we will receive next month, is low at 0.3%. If we see a 0.1% reading, you could see year-over-year core inflation decline from 6.3% to 6.1%. But the October reading from 2021 jumps up to 0.6% and the following readings after that are all quite similar. That means that by January, you could see core inflation come down by 2%, and by the end of the second quarter, core inflation could be near 3%. If this were to unfold, things will get much better over the next 6 months and Mortgage Rates will follow.
It's an action-packed news week, highlighted by Housing Data, the final Q2 GDP reading, and the Fed's favorite measure of inflation, PC (Personal Consumption Expenditures). On the housing front, new appreciation reading from Case Shiller and FHFA, New Home Sales, and Pending Home Sales, will all be released.
Post Fed meeting there is a lot of Fed talk this week from both voting and non-voting members. Their comments will be closely followed, as many in the markets are looking for cracks in the Fed's resolve to continue tightening as the markets move lower - The Dow officially went into bear market territory this morning.
The Fed has made it clear that they will stop at nothing to fight inflation, even if it means short term pain. We heard from Atlanta Fed President Bostic recently, and he said he believes the Fed has the green light to continue being aggressive because the unemployment rate remains low. He also said that he feels the Fed can get inflation to their 2% target, while avoiding deep, deep pain and thinks that we may see less job losses than previously.
Mortgage Bonds are down 62bp and are trying to find a bottom. Bonds are trying to remain above the low set earlier today at 97.42, but it is not a strong floor. The 10-year is trading at 3.765% and if it is not able to remain beneath 3.78%, the next stop is 4%.
Begin the day with a Locking Bias.
Source: MBS Highway
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