Do Wall Street Rates Still Need The Fed? A Component of Inclusive Markets that Stole a Massive Comeback on Thursday
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Markets plunged on Thursday morning after red-hot inflation data raised fears on Wall Street that the Federal Reserve would continue hiking interest rates aggressively. Then, something strange happened.
Stocks staged a massive comeback. The Dow Jones Industrial Average surged 1,500 points from peak to trough and the S&P 500 posted its widest trading range since March 2020, ending the day up more than 2%.
The consumer price index rose 0.4% in the month of September, double the estimate from analysts. Inflation was up on an annual basis.
“For investors, the Fed’s tightening still presents the risk of pushing the economy into a recession in 2023,” he said. Most economic indicators show signs of resilience. Additionally, this week’s Consumer Price Index data showed continued moderation in the price growth trajectory.”
So what explains the sharp divergence between markets and seemingly terrible inflation data? The stronger-than expected inflation report may mean that prices are close to their peak. The market is showing how desperate investors are to know what the Fed will do next.
The Big Picture: The Ubiquitous Implications of the 2008 Financial Crisis on Global Household Wealth in the 21st Century
The big picture: Household wealth is on track for its first significant reduction since the financial crisis in 2008, according to a new report by financial services company Allianz.
Global assets are set to decline by more than 2% in 2022, Allianz reports. That means households, on average, will lose about a tenth of their wealth this year.
The report paints a bleak picture. The current outlook shows stagnant growth in the future, but the 2008 financial crisis was marked by a relatively quick turn around. The growth of financial assets is going to be less than the last three years.
Russia has hampered the potential for an economic recovery because of its war on Ukraine. Inflation is rampant and central banks around the world are raising borrowing costs. Stock markets are likely to end the year in the red– 2021 “might have been the last year of the old ‘new normal’, with low interest rates and bullish stock markets,” wrote Allianz researchers.
Global household debt has been on the rise. “The context of rising interest rates and the higher cost of living could pose a risk to household balance sheets,” reported researchers.
The takeaway: Allianz calls these changes a “tectonic shift” in global wealth that will take years to recover from. Today’s release of US retail sales for September will likely shed more light on the state of the consumer, as will earnings reports from some of the country’s largest lenders — JPMorgan
(JPM), Citigroup
(C), Wells Fargo
(WFG) and Morgan Stanley
(MS) all report this morning.
The upward shift has been swift: Just a year ago, the 30-year fixed rate stood at 3.05%. Mortgage rates doubled in the past year, as the Federal Reserve hiked interest rates to tame inflation.
Anna reports that the combination of the central bank’s rate hikes, investor’s concerns, and economic news has made mortgage rates volatile over the past several months.
Freddie Mac’s chief economist, Sam Khater, said there was a tale of two economies in the data. Strong job growth and wage growth is keeping consumers positive, while recession fears and housing affordability are driving down housing demand.
Mortgage Rates and Homebuying Cost: The Impact of a New Mortgage Option on the U.S. Economy and Consumers: An Analysis with the MBA
Doing the math: A year ago, a buyer who put 20% down on a $390,000 home and financed the rest with a 30-year, fixed-rate mortgage at an average interest rate of 3.05% had a monthly mortgage payment of $1,324, according to calculations from Freddie Mac.
“Next year will be particularly challenging for the US and global economies,” said Mike Fratantoni, chief economist and senior vice president for research and industry technology. “The sharp increase in interest rates this year – a consequence of the Federal Reserve’s efforts to slow inflation, will lead to an equally sharp slowdown in the economy, matching the downturn that is happening right now in the housing market.”
The new option will include items that are currently available on the Basic plan but will have more commercials per hour than the current plan. Those ads will be 15 or 30 seconds in length and will play before and during TV series and movies.
The company lost billions of dollars in market cap after that news. Hundreds of employees were laid off, and doubts ran rampant about the platform’s future, raising questions about the viability of the entire streaming marketplace.
▸ Third quarter earnings from Bank of America
(BAC), Goldman Sachs
(GS), Johnson & Johnson
(JNJ), United Airlines
(UAL), American Airlines
(AAL), Tesla
(TSLA), AT&T
(T), Verizon
(VZ) and Netflix
(NFLX).
According to Bob Broeksmit, the president and CEO of the MBA, the downward trend in mortgage rates will continue. These lower rates, he said, “along with moderating home prices, should encourage more homebuyers to return to the market in early 2023.”
MBA’s economists also said they expect the US to enter into a recession in the first part of next year that will be driven by tighter financial conditions, reduced business investment and slower growth globally. That will, in turn, push the unemployment rate up from its current 3.5% to 5.5% by the end of next year, according to the forecast.
The demand and supply factors that could limit the downside are found in the US home prices. Millennials, the largest generational cohort since the baby boomers, have gotten older and are looking to buy their first homes. Unfortunately for them, there aren’t enough to go around. But this means high prices, even though they’re starting to fall and will continue to do so, will likely be somewhat sticky. As was the case in 2008, demand from the young people will help keep prices from falling. This decline is very unlikely to cause another financial crisis.
“The national mortgage delinquency rate reached a record low in the second quarter of 2022, but will likely increase with the uptick in unemployment and the destruction caused by Hurricane Ian in Florida, South Carolina, and other nearby states,” said Marina Walsh, vice president of industry analysis.
“Origination volumes have declined, revenues have dropped, and expenses continue to rise,” said Walsh. Reducing staffing levels, exiting less profitable channels and exiting the business altogether are some of the ways in which bankers have begun to shrink excess capacity.
The decrease in production volume from the record levels of 2020 and 2020 will cause a 25% to 30% decrease in mortgage industry employment from peak to trough.
Consumer loans. Changes in credit card rates will closely track the Fed’s moves, so consumers can expect to pay more on any revolving debt. Car loan rates are expected to rise, too. Private student loan borrowers should get accustomed to paying more.
There are mortgages. Mortgage rates don’t move in lock step with the federal funds rate, but track the yield on the 10-year Treasury bond, which is influenced by inflation and how investors expect the Fed to react to rising prices. Rates on 30-year fixed-rate mortgages have climbed above 6 percent for the first time since 2008, according to Freddie Mac.
The base rate is linked to the yield on the 10-year Treasury note and is used by a lot of people who want to move to another home within a few years of getting a mortgage. The second rate is tied to the difference between the yield on the notes and mortgage-backed securities, or M.B.S. The difference is called the “spread” on Wall Street.
Finally, there is an additional amount of interest charged that reflects the profits that lenders, servicers and other players make in the mortgage chain.
Many banks and other lenders don’t hold on to the mortgages they originate. Instead, they package them into bonds that they sell to investors. The interest and prepayments that homeowners make are then sent to the investors. Money from selling bonds allows for more mortgage loans to be made.
Normally, the spread between Treasuries and mortgage-backed securities isn’t much different. But that changes when interest rates rise, especially as swiftly as they have now.
Therefore, the spread — or the amount bond investors now expect to be paid compared with a Treasury note — widens. The spread has more than doubled this year to 1.7 percent. The wider the spread, the more consumers pay because lenders pass on to them the cost of those increased rates.
The Great Depression of the U.S. Homebuilding Industry: Recent Developments and Implications for the Future of the Homebuilding Economy and Financial Markets
Editor’s Note: Erik Lundh is a principal economist at The Conference Board. The opinions expressed in this commentary are his own. CNN has more opinion.
Additionally, years of rampant demand spurred builders to overbuild in the early 2000s, flooding the country with a home surplus. It took several years for demand to be met because of the huge amount of housing stock that had been amassed. This caused chronic under building over the next few years, which crushed the homebuilding industry.
New regulations were introduced in the years after the financial crisis. Banks are now required to be better capitalized; lending standards are much more rigorous, leading to higher-quality loans; most mortgages are fixed-rate; and financial derivatives, such as asset-backed securities, are better regulated. This makes sure the financial system doesn’t go through another housing downturn.
A spike in refinance activity occurred over the last few years due to ultra-low interest rates. This pushed down monthly payments for a lot of homeowners.
Additionally, Americans have more equity in their homes than they did leading up to the last financial crisis. The loan-to- value ratio, which measures the amount of mortgage relative to the value of a home in the US, has fallen to just 42%, a 12-year low. This creates more of a “cushion” for prices to decline before home values fall below the loans that underpin them. Thus, if a home is sold at a loss, it’ll likely hit homeowners before it hits the banks.
Inflation, Mortgage Applications, and Homebuying: An Empirical Study of Mortgage Rates in the U.S. Department of Labor Statistics
The bureau of labor statistics said that inflation was at its lowest level in nearly a year in November.
The average mortgage rate is based on mortgage applications that Freddie Mac receives from thousands of lenders across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers who put down less money upfront or have less-than-perfect credit will pay more than the average rate.
With prices rising at a high rate, the central bank is sticking to its guns on rate hikes and Powell mentioned it in his remarks, Ratiu said.
What this means for real estate markets is that the continued cooling in inflation measures should ease the upward pressure on mortgage rates, said Ratiu.
“With more homes available for sale, and more of them sporting price cuts, some buyers are running the math and finding that the slide in rates is offering better options within their budgets,” said Ratiu.
Mortgage applications increased last week as buyers looked to take advantage of the recently lower rates, according to the Mortgage Bankers Association.
“Overall, applications increased, driven by increases in purchase and refinance activity,” said Joel Kan, MBA’s vice president and deputy chief economist. “However, with rates more than three percentage points higher than a year ago, both purchase and refinance applications are still well behind last year’s pace.”