Mortgage Rates Increase Significantly

January 13, 2022

Mortgage rates rose across all mortgage loan types, with the 30-year fixed-rate mortgage increasing by almost a quarter of a percent from last week. This was driven by the prospect of a faster than expected tightening of monetary policy in response to continued inflation exacerbated by uncertainty in labor and supply chains. The rise in mortgage rates so far this year has not yet affected purchase demand, but given the fast pace of home price growth, it will likely dampen demand in the near future.

Week of January 10, 2022 in Review

Inflation continues to set record highs and Fed Chair Jerome Powell made some notable remarks regarding the Fed’s stance on inflation. Plus, Jobless Claims hover at pre-pandemic levels as the labor market remains tight.

The Consumer Price Index (CPI) showed that consumer inflation rose by 0.5% in December while the year over year reading ticked higher from 6.8% to 7%! Core CPI, which strips out volatile food and energy prices, also rose on a monthly and annual basis.

Wholesale inflation increased in December as well, with the Producer Price Index (PPI) rising 0.2% from November. On a year over year basis, the index increased from 9.6% to 9.7%, which is a record high since the methodology for collecting this data was changed in 2010. Core PPI, which again strips out volatile food and energy prices, rose 0.5% in December, while the year over year figure rose from 7.7% to 8.3%, which is also a record.

The National Federation of Independent Business released important data that speaks to how inflation is impacting small businesses, while inflation may have also played a part in December’s weak Retail Sales figures, both of which are highlighted below.

Jerome Powell testified in front of Congress last week at his hearing for nomination to a second term as Fed Chair. Of particular note regarding inflation, he said, “We will use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”

Rising inflation is critical to monitor because it can have a big impact on Mortgage Bonds and home loan rates, which are tied to them. Read more about this below.

In other news, Jobless Claims continue to hover near pre-pandemic levels. There are now just under 1.95 million people in total receiving benefits, which is a healthy number and in stark contrast to the 19 million plus seen in the comparable week last year. Finding labor remains one of the biggest challenges for employers, so they continue to hold onto their workers and reduce the pace of firings, which reflects the current tight labor market.

Lastly, Wednesday’s 10-year Note Auction was met with average demand and did not impact the markets much. Thursday’s 30-Year Bond auction was also met with average demand. The bid to cover of 2.35 was higher than the one-year average of 2.30. Direct and indirect bidders took 82.1% of the auction compared to 81.4% in the previous 12.

Consumer Inflation Remains Red Hot

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.5% in December. This was in line with expectations and nudged the year over year reading higher from 6.8% to 7%.

Core CPI, which strips out volatile food and energy prices, rose by 0.6%, which was a bit hotter than expectations. As a result, year over year Core CPI jumped from 4.9% to 5.5%.

Within the report, rents rose 0.4% in December and increased from 3% to 3.3% on a year over year basis. While this data has started to increase, the CPI report is still not capturing the double digit increases year over year that many other rent reports are showing.

Owners’ equivalent rent increased 0.4% and the year over year figure rose from 3.5% to 3.8%. However, note that this data is based on a survey that asks homeowners, “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?” Understandably, this is very subjective and many people would be guessing how much their home would rent for.

Remember, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise. This is why keeping an eye on inflation remains critical. 

Wholesale Inflation Reaches Another Record High

The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 0.2% in December, though this was half of expectations. On a year over year basis, the index increased from 9.6% to 9.7%, which is a record high since the methodology for collecting data was changed in 2010.

Core PPI, which again strips out volatile food and energy prices, rose 0.5% in December, coming in line with what was forecasted. However, the year over year figure was hotter than expectations and rose from 7.7% to 8.3%, which is another record.

Producer inflation continues to rise, which often leads to hotter consumer inflation levels, as producers pass those higher costs along to consumers.

Also of note, the Fed’s Beige Book showed that every district reported wage pressured inflation, many as much as 10%. This is another factor that contributes to higher producer prices, as they have to pay employees more to retain them.

Additionally, Cass Freight expenditures, which measures the total amount spent on freight by companies, rose to a new record, up 44% year over year. This also contributes to higher prices and producer inflation.

Small Businesses and Retailers Feeling Inflation Pressure

While the December National Federation of Independent Business Small Business Optimism Index rose slightly, the internals on inflation and compensation were most important.

Those expecting higher prices did fall 2 points to 57, but this reading is off the highest level in 43 years. In addition, 22% of companies say that inflation is the single most important problem in operating their business – the highest level in 41 years!

Positions not able to fill remained near record highs and as a result, the current compensation component rose to a fresh record at 48, compared to the average since 1984 at 22. Future compensation plans held at its record high. Employers are not able to find workers and are forced to pay their existing base and new talent more. This speaks to wage-pressured inflation.

Meanwhile, December’s Retail Sales were disappointing, especially given that December is usually a strong month for retail. Overall, sales were down 2% but Core sales, which strip out autos and gas, fell a sharp 3.1%. While some of this decline could be attributed to Omicron or people shopping early for the holidays due to supply chain issues, inflation may also be the main cause.

Since last March, the cost of goods has risen by 10.7%. If we don’t see a recovery in the upcoming reports as Omicron subsides, we will know that December’s decline in sales was due to inflation.

Fed Factors to Watch For

Jerome Powell testified at his re-nomination hearing that the Fed will “use our tools to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”

The main tool the Fed uses to curb inflation is hiking its benchmark Fed Funds Rate, which is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. So counterintuitively, when the Fed hikes its benchmark Fed Funds Rate, this can be good for interest rates because it curbs inflation.

The Fed has previously said that they would not shock the markets by hiking their benchmark Fed Funds Rate and tapering their ongoing purchases of Treasuries and Mortgage-Backed Securities (MBS) at the same time. These are purchases that began back in 2020 during the heart of the pandemic to stabilize the markets and aid in our recovery. As inflation heated up last year, the Fed came under pressure to start tapering, or reducing, these purchases, which they are currently on pace to complete in March. This means they may begin hiking the Fed Funds Rate at or before the next FOMC meeting, which is in May.

Another important factor to note is that the Fed holds about $9 trillion in Mortgage Bonds and Treasuries, which means that they receive principal payments from those holdings which would normally reduce the amount of their balance sheet over time. Some of those securities would naturally mature as well.

But the Fed has been taking these proceeds and reinvesting them back into Mortgage Bonds, which has prevented their balance sheet from getting smaller. These reinvestments amount to a massive additional $70 billion per month.

The bottom line is that timing of when the Fed starts to hike the Fed Funds Rate and how they handle the reduction of their balance sheet will be critical to monitor in the months ahead, as these actions will certainly impact inflation, Mortgage Bonds and interest rates.

 Jobless Claims Remain Near Pre-Pandemic Levels

Initial Jobless Claims moved higher in the latest week, as the number of people filing for unemployment benefits for the first time rose 23,000 to 230,000. Remember that since this reading shows the pace of firings and people filing for benefits, the lower the number the better. And despite the increase, this is still a low level of initial claims.

But the real story is Continuing Claims, which measure individuals who continue to receive benefits. They fell 194,000 to 1.56 million, meaning this data is now back at pre-pandemic levels.

There are now 1.95 million people in total receiving benefits, which is a healthy number and in stark contrast to the 19 million seen in the comparable week last year. While these numbers may still be influenced by the holidays, they do reflect that the labor market remains tight. Finding labor remains one of the biggest challenges for employers, so they continue to hold onto their workers and reduce the pace of firings.

What to Look for This Week

After the market closures Monday in honor of the Martin Luther King, Jr. holiday, housing reports will dominate headlines.

On Tuesday, we’ll get a read on how confident builders are feeling this month when the National Association of Home Builders releases its Housing Market Index. December Housing Starts and Building Permits will be reported on Wednesday, while Existing Home Sales data follows on Thursday.

We’ll also get an update on manufacturing for the New York region when the Empire State Index for January is released on Tuesday. The Philadelphia Fed Index follows on Thursday.

The latest Jobless Claims data will also be reported as usual on Thursday.

Technical Picture

After breaking beneath support at 102.344 on Friday, Mortgage Bonds continued to slide lower and tested the next floor at 102.198. The 10-year bounced higher off 1.71%, broke above the next ceiling at 1.76%, and has more room to go until the next ceiling at 1.82%. We must remain on guard as there is still more room for yields to move higher, which could pressure Mortgage Bonds lower.

Week of January 3, 2022 in Review

There was good news when it came to job growth in December – despite the disappointing headline figure from the Bureau of Labor Statistics. Home prices also continued to appreciate in November, but it was the minutes from the Fed’s December meeting that really added some fireworks to the markets last week.

The Bureau of Labor Statistics (BLS) reported that there were only 199,000 jobs created in December, which was half the job gains that were expected. However, there were positive revisions to the figures for October and November adding 141,000 new jobs in those months combined, which makes up for some of the miss on the headline figure. Yet this headline figure is far from the whole story when it comes to job growth in December, as explained below.

Private sector payrolls nearly doubled expectations in December, with the ADP Employment Report showing that there were 807,000 jobs created. Job gains were reported across all sizes of businesses. Both goods-producing and service-providing sector companies showed gains, with services contributing the majority share at 669,000 jobs.

On another positive sign, Jobless Claims remain near pre-pandemic levels with the number of first-time filers hovering near 52-year lows. There are now 1.722 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.

In housing news, CoreLogic’s Home Price Index report for November showed that home prices rose by 1.3% from October and 18.1% year over year. Detached homes appreciated at an even higher pace of 19.4% year over year. The ongoing dynamic of strong demand for homes and tight inventory remains supportive of home prices.

Meanwhile, Apartment List’s National Rent Report for December showed that rents were up almost 18% year over year, which is a record. However, the national index did fall by 0.2% in December, marking the only time rents declined month over month last year.

But perhaps the biggest news of last week came on Wednesday when the minutes from the Fed’s December meeting were released. Don’t miss the important details below.

More to the Jobs Report Than Meets the Eye

The Bureau of Labor Statistics (BLS) reported that there were only 199,000 jobs created in December, which was half the job gains that were expected. However, there were positive revisions to the figures for October and November adding 141,000 new jobs in those months combined, which makes up for some of the miss on the headline figure.

Yet this was a tale of two reports, as there are two surveys within the Jobs Report and there is a fundamental difference between them. The Business Survey is where the headline job number comes from and it’s based predominately on modeling.

The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. The Household Survey also has a job loss or creation component, and it showed there were 651,000 job creations, while the labor force increased by almost 168,000. The number of unemployed people decreased by 483,000, causing the Unemployment Rate to fall from 4.2% to 3.9%.

Why was there a big disconnect between the two reports?

The Household Survey includes self-employed workers whose businesses are unincorporated, unpaid family workers, agricultural workers and private household workers who are excluded by the Business Survey. And with the big surge we’ve seen in self-employment, this could account for some of the disconnect.

The U-6 all-in Unemployment Rate improved from 7.7% to 7.3% and is more indicative of the true Unemployment Rate.

Average hourly and weekly earnings were both up roughly 4.7% year over year. Wage growth is running even hotter if you annualized the pace over the last six months at 6%. You have to look back to the 1990s to see wages growing at 6% year over year, which shows how tight the labor market is.

December Private Payrolls Nearly Double Expectations

The ADP Employment Report, which measures private sector payrolls, showed that there were 807,000 jobs created in December – almost double what economists had forecasted. While November’s figures were revised lower from 534,000 to 505,000 new jobs in that month, this was certainly a solid report.

Both goods-producing and service-providing sector companies showed gains, with services contributing the majority share at 669,000 jobs. Leisure and hospitality had the biggest gains with 246,000 jobs, followed by trade, transportation, and utilities at 138,000, and professional and business at 130,000. On the goods-producing side, construction also showed strong gains at 62,000.

Job gains were reported across all sizes of businesses, with the majority of those reported at large businesses. Small businesses (1-49 employees) gained 204,000 jobs, mid-sized businesses (50-499 employees) gained 214,000 jobs, and large businesses (500 or more employees) gained 389,000 jobs.

ADP’s Chief Economist, Nela Richardson, noted, “December’s job market strengthened as the fallout from the Delta variant faded and Omicron’s impact had yet to be seen.”

We will see if this means we will have a lower job growth figure for January when that data is released on February 2.

The bottom line is that of the 19.6 million private sector jobs lost in March and April 2020, we’ve since recovered about 15.6 million of them.

Initial Jobless Claims Remain Near 52-Year Low

The number of people filing for unemployment benefits for the first time ticked higher by 7,000 in the latest week, as Initial Jobless Claims were reported at 207,000. Note that this is still a low level of claims and not far off 52-year lows. Remember that since this reading shows the pace of firings and people filing for benefits, the lower the number the better.

Continuing Claims, which measures individuals who continue to receive benefits, rose 36,000 to 1.754 million, just off the previous week’s pandemic-era low.

There are now 1.722 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year. It also reflects that the labor market remains tight. Employers are having a hard time finding new workers and are reducing their pace of firings.

Fed Minutes Move Markets

The Fed released the minutes from their December 15 meeting, which showed that they discussed reducing their balance sheet and that they are serious about removing accommodation more aggressively.

The Fed also discussed hiking their benchmark Fed Funds Rate faster and the market estimate is now showing a 76% chance of the first hike in March. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates.

So, what does this mean?

Remember that back in 2020 during the heart of the pandemic, the Fed began buying $40 billion in Mortgage-Backed Securities (MBS) and $80 billion in Treasuries each month to inject liquidity into the markets and keep long-term rates lower. These ongoing purchases were meant to stabilize the markets and aid in our recovery.

As our recovery proceeded, the Fed came under pressure last year to start tapering, or reducing, these purchases. In their meeting last November, the Fed initially announced that they would begin tapering their purchases of MBS and Treasuries by $15 billion per month. However, in December the Fed decided to accelerate the reduction of their purchases of MBS and Treasuries from $15 billion per month to $30 billion. 

But what was unclear was how the Fed would handle their $8.8 trillion balance sheet, of which MBS and Treasuries make up roughly $8.3 trillion. The Fed receives money from the Bonds that they hold each month, which they have been reinvesting back into MBS. This has totaled roughly $70 billion per month, which has prevented their balance sheet from running off or reducing over time.

In the minutes from December’s meeting, almost all participants said they want to reduce their balance sheet shortly after the Fed Funds Rate hike, which likely means sometime between April and June. They also discussed letting MBS run off faster than Treasuries. The last time the Fed went through a tightening cycle, they waited two years to reduce their balance sheet, which is something they addressed and said they don’t want to do this time around.

What are the Fed’s options?

They could sell MBS and Treasuries, stop reinvestments altogether, or allow some fixed amount to fall off each month. With their intention to not spook the markets too much, they will likely choose the latter. Their comments showed many supported having monthly caps on the reduction, which is what we would expect.

The Fed addressing their balance sheet is what really impacted the equity and Bond markets last week. The timing of when the Fed hikes its benchmark Fed Funds Rate and when it reduces its balance sheet will certainly impact both Mortgage Bonds and mortgage rates this year – and will be something to closely monitor in the months ahead.

Home Price Appreciation Continues

CoreLogic released their Home Price Index report for November, showing that home prices rose by 1.3% from October and 18.1% year over year. Detached homes appreciated at an even higher pace of 19.4% year over year.

Within the report, the hottest markets were Phoenix (+31%), Las Vegas (+24%), and

San Diego (+22%).

CoreLogic forecasts that home prices will remain flat in December and appreciate 2.8% in the year going forward. Yet, they remain conservative in their forecasting and continue to miss on the low side. For example, CoreLogic had forecasted prices for November would rise by 0.2% from October and they actually increased by 1.3%.

Even though CoreLogic only forecasts a 2.8% gain in home prices over the next year, they are certainly the outlier compared to other forecasts. Goldman Sachs expects 16% gains, Zillow anticipates 14%, and Fannie Mae sees prices rising by roughly 7.5%. Mid to high single digit appreciation is definitely attainable and is still very meaningful for wealth creation. For example, a $400,000 home that appreciated by 8% would result in $32,000 in appreciation gain in just one year.

And of note, Apartment List released its National Rent Report for December, which showed that rents were up a record almost 18% year over year. To put this in context, annual rent growth averaged just 2.3% in the pre-pandemic years from 2017-2019. However, the national index did fall by 0.2% in December, marking the only time rents declined month over month last year. While December’s monthly reading could include some seasonality, it will be important to see if there are any more signs of slower pricing pressures.

What to Look for This Week

The week kicks off on Tuesday with an update on how small businesses are feeling when the National Federation of Independent Business Small Business Optimism Index for December is reported.

Then, all eyes will be on two critical inflation reports when December’s Consumer Price Index is released on Wednesday, followed by the Producer Price Index on Thursday.

The latest Jobless Claims figures will also be reported on Thursday, while December’s Retail Sales will be delivered on Friday.

Investors will also be closely watching Wednesday’s 10-year Note and Thursday’s 30-year Bond auctions for the level of demand.

Technical Picture

Mortgage Bonds have broken beneath support at 100.90, which is a negative sign. They are trading in an extremely wide range with 100.90 acting as a ceiling and 99.80 acting as our next floor of support.

Week of December 27, 2021 in Review

The last economic reports of 2021 showed that home prices continue to rise, while jobless claims reflect healthy, pre-pandemic levels.

The high demand for homes around the country continues to help prices appreciate. The Case-Shiller Home Price Index showed that home prices rose 0.8% in October and 19.1% year over year. This annual reading was slightly lower than the 19.7% rise reported for September.

The Federal Housing Finance Agency (FHFA), which measures home price appreciation on single-family homes with conforming loan amounts, also reported that home prices rose 1.1% in October and 17.4% when compared to October 2020. The annual reading again was just below 17.7% from the previous report.

While the year over year appreciation figures are declining, this does not mean home prices are moving lower. Don’t miss our important expectation below.

Pending Home Sales, which measures signed contracts on existing homes, fell 2.2% in November. This was short of the 0.5% expected increase. Sales are now down 2.7% year over year but are still quite strong when considering the lack of inventory and tough comparisons to last year due to the pandemic.

There was good news from the labor sector, as Jobless Claims continue to reflect pre-pandemic levels. The number of people filing for unemployment benefits for the first time fell by 8,000 in the latest week, as Initial Jobless Claims were reported at 198,000, which is near a 52-year low. Continuing Claims, which measures individuals who continue to receive benefits, decreased 140,000 to 1.716 million, once again reaching a pandemic-era low.

There are now 2.177 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.

And of note, investors were closely watching two auctions for the level of demand. Tuesday’s 5-Year Treasury Note auction was met with above average demand. The bid to cover of 2.41 was higher than the one-year average of 2.37. Direct and indirect bidders took 80% of the auction compared to 76% in the previous 12. However, Wednesday’s 7-Year Note auction was met with below average demand. The bid to cover of 2.21 was lower than the 1-year average of 2.29. Direct and indirect bidders took 78.8% of the auction compared to 78.1% in the previous 12.

What’s Really Going on With Home Price Appreciation?

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 0.8% in October and 19.1% year over year. This annual reading was slightly lower than the 19.7% rise reported for September.

So, why are the year over year appreciation figures declining? Does this mean home prices are moving lower?

The pace of appreciation month over month is decelerating, but we are still seeing home price gains. For example, in October 2020 home prices rose 1.51% while in October 2021 they rose 0.8%. Because the data for October 2021 shows a slower pace of appreciation then what was reported for October 2020, the year over year figure declined. But home prices are still rising.

The top three performing cities were Phoenix (+32%), Tampa (+28%) and Miami (+26%). Even the three worst-performing cities, including Chicago, Minneapolis, and Washington, saw 11.5% to 12% gains.

The Federal Housing Finance Agency (FHFA) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. While you can have a million-dollar home with a conforming loan amount, the report most likely represents lower-priced homes, where supply has been tight and demand strong.

Home prices rose 1.1% in October and were up 17.4% year over year. This is down from the 17.7% year over year reading reported for September.

Pending Home Sales Decline in November

Pending Home Sales, which measures signed contracts on existing homes, fell 2.2% in November, which was short of the 0.5% expected increase. Sales are now down 2.7% year over year but are still quite strong when considering the lack of inventory and tough comparisons to last year due to the pandemic.

Lawrence Yun, chief economist for the National Association of Realtors, said, “There was less pending home sales action this time around, which I would ascribe to low housing supply, but also to buyers being hesitant about home prices.” He added, “While I expect neither a price reduction, nor another year of record-pace price gains, the market will see more inventory in 2022 and that will help some consumers with affordability.”

Yun also noted that housing demand remains high, and that homes placed on the market for sale go from “listed status” to “under contract” in approximately 18 days.

Initial Jobless Claims Near 52-Year Low

The number of people filing for unemployment benefits for the first time fell by 8,000 in the latest week, as Initial Jobless Claims were reported at 198,000. Remember that since this reading reflects the pace of firings and people filing for benefits, the lower the number the better.

Continuing Claims, which measures individuals who continue to receive benefits, decreased 140,000 to 1.716 million, once again reaching a pandemic-era low.

There are now 2.177 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year. It also reflects that employers are having a hard time finding new workers and are reducing their pace of firings.

What to Look for This Week

Labor sector news will dominate the headlines during the first full week of 2022. On Wednesday, the ADP Employment Report will give us an update on private payrolls for December. Thursday brings the latest Initial Jobless Claims data. Then ending the week on Friday, the highly anticipated Bureau of Labor Statistics Jobs Report for December will be released, which includes Non-farm Payrolls and the Unemployment Rate.

Also of note, we’ll get an update on manufacturing when the ISM Index for December is reported on Tuesday. Tuesday also brings more news on home price appreciation when CoreLogic releases its November Home Price Index report, Plus, the minutes from the Fed’s December meeting will be released on Wednesday.

Technical Picture

Mortgage Bonds rebounded late last week and ended 2021 in a range between support at 101.79 and a ceiling of resistance at their 25-day Moving Average. The 10-year broke beneath its 50-day Moving Average and is now trading in a range beneath it and a floor at the 200-day Moving Average.

Week of December 20, 2021 in Review

Inflation and home sales were on the rise in November, while Jobless Claims continue to reflect healthy, pre-pandemic levels.

The Fed’s favorite measure of inflation, Personal Consumption Expenditures, showed that headline inflation rose 0.6% in November, which was hotter than anticipated. Year over year, the index increased from 5.1% to 5.7%, which is the hottest reading in almost 40 years! Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.5% while the year over year reading increased from 4.2% to 4.7%.

Rising inflation is crucial to monitor – don’t miss our important explanation about this.

In housing news, sales of existing homes rose for the third month in a row, up 1.9% from October to November to an annual pace of 6.46 million units. The lack of homes for sale continues to remain a challenge around the country, as there were only 1.1 million homes for sale at the end of November. This is down nearly 10% from October and 13.3% year over year.

New Home Sales were also up 12.4% from October to November, but there is more to this headline number. Meanwhile, multiple reports show that rents continue to rise, which further highlights the benefits of homeownership. Don’t miss the details about both of these stories below.

There was good news from the labor sector, as Jobless Claims continue to reflect pre-pandemic levels. There are now 2.137 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.

Lastly, the third reading of Gross Domestic Product (GDP) for the third quarter showed a slight revision higher from 2.1% to 2.3%, though this is still pretty anemic considering all of the stimulus. Investors were also closely watching last week’s 20-year Bond auction, which was met with above average demand. The bid to cover of 2.59 was higher than the one-year average of 2.34. Direct and indirect bidders took 85.6% of the auction compared to 78.2% in the previous 12.

Annual Inflation Reaches Hottest Level in Nearly 40 Years

The Fed’s favorite measure of inflation, Personal Consumption Expenditures, showed that headline inflation rose 0.6% in November, which was hotter than anticipated. This caused the year over year reading to increase from 5.1% to 5.7%, which is the hottest reading in almost 40 years!

Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.5%, which was also above the consensus. The year over year reading increased from 4.2% to 4.7%.

Remember, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise. This is why keeping an eye on inflation remains critical.

Existing Home Sales Rise for Third Consecutive Month

Existing Home Sales, which measure closings on existing homes, were up 1.9% from October to November to an annual pace of 6.46 million units.

However, the low inventory of homes around the country remains a challenge for many buyers, as there were only 1.1 million homes for sale at the end of November. This is down nearly 10% from October and 13.3% year over year. Inventory is nearing the record low levels of just above 1 million that were seen earlier this year. The continued strong demand for homes and near record low inventory remains supportive of home prices.

The median home price was reported at $353,900, which is up almost 14% year over year. Remember that the median home price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it.

First-time homebuyers accounted for 26% of sales, which is down from 29% in October. This decline is concerning and it’s important to monitor if this is related to seasonal factors or part of a bigger theme. First-time homebuyers, after all, are the engine of the housing market.

Cash buyers remained stable at 24%, while investors purchased 15% of homes, which is down from 17%. Foreclosures and short sales accounted for less than 1% of all transactions.

The Real Scoop on New Home Sales

New Home Sales, which measure signed contracts on new homes, were up 12.4% from October to November at a 744,000 annualized pace. However, this doesn’t tell the whole story. Sales for October were revised lower from 745,000 to 662,000, so when factoring this in, New Home Sales are really unchanged from October’s original reporting.

Year over year sales were down 14%, but the annual comparisons to November 2020 are tough because of the abnormalities in the market due to the pandemic.

The median home price came in at $416,900, which is up from $407,700 in October, and up 19% from last year. Again, the median home price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it. A greater amount of higher-priced homes are being built because there is no margin in lower-priced homes, so naturally the median price is being driven higher.

Rents Continue to Rise

CoreLogic released their Single-Family Rent Index, showing that rents were up nearly 11% year over year in October, marking the sixth consecutive record high within this report. Detached rentals, which are in higher demand, rose by over 12% while attached rentals were up 9%.

Despite the challenges homebuyers are facing due to high demand, low inventory and an uptick in rates, there are still tremendous benefits in homeownership. Rents are rising aggressively, and renewals can continue to rise each year.

For instance, Realtor.com also reported data showing that rents were up almost 20% year over year in November. The national median rent reached $1,771, up almost $300 per month from last year. If we were to reverse engineer this at a 3.25% interest rate, it would equate to $70,000 in additional buying power for housing.

Remember that demographically, people are entering their 30’s in record-high numbers at almost 5 million per year, which should continue to provide robust demand for purchases and rentals.

Jobless Claims Reflect Pre-Pandemic Levels

The number of people filing for unemployment benefits for the first time was unchanged in the latest week, as Initial Jobless Claims were reported at 205,000. This follows the 52-year low that was reported a few weeks ago and is a healthy level. Remember that since this reading reflects the pace of firings and people filing for benefits, the lower the number the better.

Continuing Claims, which measures individuals who continue to receive benefits, decreased 8,000 to 1.859 million, once again reaching a pandemic-era low.

There are now 2.137 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year. It also reflects that employers are having a hard time finding new workers and are reducing their pace of firings.

Family Hack of the Week

You’ll kick the new year off on a delicious note with these Cinnamon Rolls from our friends at Allrecipes – perfect for brunch on New Year’s Day, or any day of the year!

Preheat oven to 400 degrees Fahrenheit. Brush a 9-inch square baking dish with 2 tablespoons melted butter.

In a large bowl, whisk 2 cups all-purpose flour, 2 tablespoons sugar, 2 teaspoons baking powder and 1 teaspoon salt. Work 3 tablespoons of softened, unsalted butter into flour mixture. In a separate bowl, beat 3/4 cup milk and 1 egg together. Pour this into the flour mixture and stir with a rubber spatula until a soft dough forms.

Flour a work surface and roll dough into a 1/4-inch thick rectangle. Brush surface of dough with 2 tablespoons melted butter.

In a small bowl, whisk 1/2 cup white sugar, 1/2 cup brown sugar and 1 tablespoon cinnamon. Sprinkle 1/2 of the cinnamon sugar mixture into bottom of prepared baking dish and 1/2 on top of dough. Roll dough to form a log, cut into 18 rolls and place rolls into baking dish. Bake until the rolls are set, approximately 20 to 25 minutes.

While the rolls are baking, beat 1 cup confectioner’s sugar, 4 ounces cream cheese, 1/4 cup softened butter and 1/2 teaspoon vanilla extract until smooth. Once rolls are removed from oven, add frosting to them while hot and enjoy!

What to Look for This Week

Important housing data is ahead this week, beginning Tuesday when the latest home price appreciation figures for October from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index are reported. Pending Home Sales for November follow on Wednesday.

On Thursday, be sure to look for the latest Jobless Claims data along with regional manufacturing news from December’s Chicago PMI.

Technical Picture

Mortgage Bonds remain in their downtrend, but support at 101.922 held at the end of last week. The 10-year broke above a duel ceiling comprised of the 200-day and 25-day Moving Averages. The next level of resistance is up at the 50-day Moving Average.

Week of December 13, 2021 in Review

Inflation continues to climb while the demand for homes has helped builders remain confident. Plus, the Fed’s meeting brought important updates!

Annual wholesale inflation reached its highest level in 41 years, as the Producer Price Index (PPI) rose 0.8% in November and increased from 8.6% to 9.6% on a year over year basis. Core PPI, which strips out volatile food and energy prices, rose 0.7% in November while the year over year rate increased to 7.7%, up from an already hot 6.8%. Wholesale inflation continues to move higher, which can lead to hotter consumer inflation levels if producers pass those higher costs along to consumers.

Inflation also seemed to impact Retail Sales in November, which rose a modest 0.3% after the 1.8% gain seen in October. However, consumer demand remains strong, as sales were 18.2% higher than November of last year. Low unemployment, rising wages and savings from stimulus payments have enabled spending. Plus, some of the slowness in November’s sales may also be due in part to consumers shopping for the holidays early to avoid empty shelves.

In housing news, builder confidence rose for the fourth month in a row per the National Association of Home Builders Housing Market Index. This near real-time read on builder confidence increased 1 point to 84 in December, tying the highest reading of the year that was previously recorded in February. Despite inflation concerns and ongoing production bottlenecks that builders are facing, confidence has risen in recent months due to the continued high demand for homes around the country.

And there was some good news regarding construction in November. Housing Starts, which measure the start of construction on homes, rose by almost 12% and even more importantly, starts for single-family homes were also up 11.3%. Building Permits, which are a good forward-looking indicator for Housing Starts, also increased. However, one of the biggest takeaways is that the backlog of homes continues to grow. Homes authorized but not yet started increased by 1.5% in November and they were up 46% year over year.

Jobless Claims continue to hover near pre-pandemic levels. There are now just under 2.5 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.

Also of note, manufacturing activity in the New York region remained strong this month, as the Empire State Index rose 1 point to 31.9. This was above the expected reading of 25. However, the Philadelphia Fed Index showed that manufacturing activity in that region fell to 15.4 in December from 39 in November, coming in much lower than expectations amid elevated inflation. However, any reading over zero on both indexes indicates improving conditions.

Lastly, the Fed held their two-day Federal Open Market Committee meeting and made some important announcements about tapering and inflation. Read on for more details about this.

Wholesale Inflation Reaches 41-Year High

The Producer Price Index (PPI), which measures inflation on the wholesale level, rose 0.8% in November and increased from 8.6% to 9.6% on a year over year basis. This is the highest level in 41 years!

Core PPI, which strips out volatile food and energy prices, rose 0.7% in November. The year over year rate increased to 7.7%, up from an already hot 6.8%.

There are no signs of producer prices easing, which often leads to hotter consumer inflation levels, as producers pass those higher costs along to consumers.

Remember, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise. Though many factors influence the markets, keeping an eye on inflation remains critical.

On a related note, the National Federation of Independent Business Small Business Optimism Index rose slightly in November. But the important components within the report showed that current and future compensations plans held at record highs and plans for higher prices rose to the highest level since 1979. This makes sense with the significant increase in producer prices and sounds like more inflation may be on the horizon.

In addition, the Cass Freight Index showed that shipping costs rose to a new record high, up 8% in November and 44% year over year. From an inflation standpoint, we are continuing to see supply chain disruptions, causing higher prices and contributing to higher goods.

Fed Changes Taper Plan

Back in November, the Fed announced that they would begin tapering, or reducing, their purchases of Mortgage Backed Securities (also referred to as Mortgage Bonds or MBS) and Treasuries starting by $15 billion dollars a month. These purchases that began during the pandemic have been ongoing to help stabilize the markets and have helped keep home loan rates low.

However, after last week’s meeting, the Fed announced that they would be doubling the size of their taper of Mortgage Bonds from $15 billion a month to $30 billion a month.

Why did they do this?

The Fed has made it clear that they don’t want to make any hikes to their benchmark Fed Funds Rate and taper at the same time. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates.

So, the sooner that the Fed can be done with tapering their outright purchases (i.e. bring them down to zero), that’s when they can begin to think about hiking their Fed Fuds Rate, which is the real tool the Fed has to help curb rising inflation.

Speaking of inflation, the Fed sharply raised their inflation forecasts for 2021 and 2022. They expect their favored measure, Personal Consumption Expenditures, to show inflation rising 5.3% this year, up from their previous forecast of 4.4%. Their forecast for 2022 has also grown from 2.3% to 2.6%.

Builder Confidence Rises for Fourth Consecutive Month

The National Association of Home Builders Housing Market Index, which is a real-time read on builder confidence, rose 1 point to 84 in December, tying the highest reading of the year that was previously recorded in February.

Looking at the components of the index, current sales conditions rose 1 point to 90, sales expectations for the next six months were unchanged at 84, and buyer traffic rose 1 point to 70

Any reading over 50 on this index, which runs from 0 to 100, signals expansion. Despite inflation concerns and ongoing production bottlenecks that builders are facing, confidence has risen in recent months due to the continued high demand for homes around the country.

In fact, Lennar, one of the nation’s largest homebuilders, noted in a recent press release that, “Our record fourth quarter results reflect both continued strength in the housing market across the country, and continued housing supply shortage driven by limited entitled land, labor and supply chain constraints, and 10 years of production shortfall.”

This ongoing dynamic of high demand and tight supply is supportive of home prices.

November Housing Starts Rise But Backlog Remains

Housing Starts, which measure the start of construction on homes, rose by almost 12% in November to an annualized pace of 1.679 million homes. This is 8.3% higher than November of last year.

Starts for single-family homes, which are in such high demand among buyers, were also up 11.3% from October to November. Yet, they are still nearly 1% lower than they were in November of last year.

Building Permits, which are a good forward-looking indicator for Housing Starts, rose by 3.6% and they were also up almost 1% year over year. Single-family permits also ticked higher by 2.7%, but they are still down 4.5% annually.

One of the biggest takeaways is that the backlog of homes continues to grow and speaks to the difficulty builders have experienced in completing homes. Homes authorized but not yet started increased by 1.5% in November and they were up 46% year over year.

Jobless Claims Returning to Pre-Pandemic Levels

The number of people filing for unemployment benefits for the first time increased by 18,000 in the latest week, with Initial Jobless Claims reported at 206,000. However, this figure is coming off the lowest reading in 52 years, so the bounce higher is understandable.

Continuing Claims, which measures individuals who continue to receive benefits, decreased by 154,000 to 1.85 million, once again reaching a pandemic-era low.

There are now just under 2.5 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year. It also reflects that employers are having a hard time finding new workers and are reducing their pace of firings.

What to Look for This Week

There will be plenty of news for investors to feast on ahead of the market closures on Friday in celebration of the Christmas holiday. On Wednesday, we’ll get the final reading on third quarter GDP, along with November’s Existing Home Sales and Consumer Confidence for this month.

On Thursday look for November’s readings on New Home Sales, Durable Goods Orders, Personal Income, Personal Spending and the Fed’s favored inflation measure, Personal Consumption Expenditures. The latest Jobless Claims figures will also be reported, along with the Consumer Sentiment Index for December.

Investors will also be closely watching Tuesday’s 20-year Bond auction to see the level of demand.

Technical Picture

Mortgage Bonds tested the ceiling at their 50-day Moving Average last Friday but were rejected, which led to a sharp move lower beneath their 25-day Moving Average. The 10-year has broken beneath its 100-day Moving Average and ended last week trading between it and the next floor at 1.37%.

Week of December 6, 2021 in Review

Inflation, home prices and rents are all on the rise, while Initial Jobless Claims hit their lowest level since 1969.

The Consumer Price Index (CPI) showed that consumer inflation rose by 0.8% in November while the year over year reading shot up from 6.2% to 6.8%! Core CPI, which strips out volatile food and energy prices, also rose on a monthly and annual basis. Rising inflation is always critical to monitor because it can have a big impact on Mortgage Bonds and home loan rates, which are tied to them. Read more about this below.

In housing news, CoreLogic’s Home Price Index report for October showed that home prices rose 1.3% from September and 18% year over year. This annual gain is unchanged from the previous report.

Rental prices were also on the rise, with Apartment List’s National Rent Report showing a 0.1% increase in November. While this is the lowest month-over-month growth rate of the year, rents have increased almost 18% year to date. To put this in perspective, rent growth from January to November averaged just 2.6% in the pre-pandemic years from 2017-2019.

The number of people filing for unemployment benefits for the first time fell by 43,000 in the latest week, as Initial Jobless Claims were reported at 184,000. This is the lowest reading in 52 years! Continuing Claims, which measures individuals who continue to receive benefits, increased by 38,000 to 1.992 million, coming off a pandemic-era low. There are now 1.95 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.

Meanwhile, job openings remain high as the October JOLTS (Job Openings and Labor Turnover) report showed that there were 11 million job openings in October. This is up from the 10.6 million reported in September and is just slightly below the record high of almost 11.1 million seen in July. The number of people quitting their job was reported at 4.16 million, off the September level of 4.36 million and a rate of 2.8%. The data is not surprising, as many companies have expressed a need for more workers.

Lastly, investors were closely watching Wednesday’s 10-year Treasury Note auction and Thursday’s 30-year Bond auction to see the level of demand. High demand, which is reflected in the purchasing of Bonds and Treasuries, can push prices higher and yields or rates lower. Weak demand, on the other hand, can signal that investors think yields will continue to move higher, which can have a negative effect on rates.

Wednesday’s 10-year Treasury Note auction was met with about average demand and there was not much market reaction. Thursday’s 30-year Bond auction was met with weak demand. After an initial move lower, Bonds shook off the news. Neither auction had much of an impact on trading last week.

Consumer Inflation Hotter Than Expected

The Consumer Price Index (CPI), which measures inflation on the consumer level, rose by 0.8% in November. This was hotter than expectations and pushed the year over year reading significantly higher from 6.2% to 6.8%!

Core CPI, which strips out volatile food and energy prices, rose by 0.5%. While this was in line with expectations, the reading did cause year over year Core CPI to jump from 4.6% to 4.9%.

Within the report, rents rose 0.5% in November and increased from 2.7% to 3% on a year over year basis. However, the CPI report is still not capturing the increases we are seeing in many other rent reports that are showing double digit increases year over year, such as the latest Apartment List report detailed below. We may see some catch up in this CPI data in future months but for now the reporting continues to be dragged down by their methodology.

Also of note, owners’ equivalent rent also increased 0.5% in November and the year over year figure rose from 3.1% to 3.5%.

Remember, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise. Though many factors influence the markets, keeping an eye on inflation remains critical.

The Latest on Home and Rental Prices

CoreLogic released their Home Price Index report for October, showing that home prices rose by 1.3% from September and 18% year over year. This annual gain is unchanged from the previous report. Detached homes appreciated at an even higher pace of 19.5% year over year.

The unchanged 18% annual figure for October follows suit with recent appreciation data released by both Case-Shiller and the Federal Housing Finance Agency, which seem to reflect that we’ve reached the maximum year over year gains. Note this does not mean that home prices are going to decline. It simply means we may see slower month over month gains and that home prices may rise at a more modest pace.

Within the report, the hottest markets were Phoenix (+31%), Las Vegas (+24%), and

San Diego (+22%).

CoreLogic forecasts that home prices will appreciate 0.2% in November and 2.5% in the year going forward. Yet, they remain conservative in their forecasting and continue to miss on the low side. For example, CoreLogic had forecasted prices for October would rise by 0.1% from September and they actually increased by 1.3%.

Even though CoreLogic only forecasts a 2.5% gain in home prices over the next year, they are certainly the outlier compared to other forecasts. Goldman Sachs expects 16% gains, Zillow anticipates 14%, and Fannie Mae sees prices rising by roughly 7.5%. Mid to high single digit appreciation is definitely attainable and is still very meaningful for wealth creation. For example, a $400,000 home that appreciated by 8% would result in $32,000 in appreciation gain in just one year.

CoreLogic also conducted a consumer survey, which showed that over half of respondents across every age cohort said that owning a home has always been a goal of theirs. This further supports the outlook that consumer desire for homeownership remains.

Apartment List also released their National Rent Report which showed that rents increased 0.1% in November. While this is the lowest month-over-month growth rate of the year, rents have increased almost 18% year to date. To put this in perspective, rent growth from January to November averaged just 2.6% in the pre-pandemic years from 2017-2019. Although low inventory around the country has made buying a home challenging for many people, renting is not a better option.

Initial Jobless Claims Hit Their Lowest Level Since 1969

Initial Jobless Claims fell by 43,000 in the latest week, as the number of people filing for unemployment benefits for the first time was reported at 184,000. This is the lowest reading in 52 years!

Continuing Claims, which measures individuals who continue to receive benefits, increased by 38,000 to 1.992 million, coming off a pandemic-era low.

There are now 1.95 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.

The October JOLTS (Job Openings and Labor Turnover) report was also released, showing that there were 11 million job openings in October. This is up from the 10.6 million reported in September and is just slightly below the record high of almost 11.1 million seen in July. Some of the areas with the highest job openings, which you would expect to see, include leisure and hospitality (1.78 million), manufacturing (1 million), construction (410,000) and transportation (611,000).

The number of people quitting their job was reported at 4.16 million, off the September level of 4.36 million and a rate of 2.8%. This is still elevated but lower than the record high of 3%. The data is not surprising, as many companies have expressed a need for more workers.

In addition, the low participation rate that we are experiencing in the labor force has led to the increase in wages that we have seen. This trend looks to continue and should add to inflation from wage pressures.

What to Look for This Week

More inflation news follows this week on Tuesday when the Producer Price Index for November will give us a read on wholesale inflation. Also on Tuesday, we’ll see how small business owners were feeling last month when the National Federation of Independent Business Small Business Optimism Index is reported.

Wednesday brings a range of reports, including November’s Retail Sales, December’s Empire State Index (which gives us manufacturing news for the New York region) and December’s National Association of Home Builders Housing Market Index (which is a near real-time read on builder confidence).

The Fed’s two-day meeting will also conclude on Wednesday with the release of their Monetary Policy Statement, which always has the potential to move the markets.

On Thursday, the latest Jobless Claims data will be released as usual, along with an update on Housing Starts and Building Permits for November and regional manufacturing news via the Philadelphia Fed Index for December.

Technical Picture

After falling 30bp Friday morning, Mortgage Bonds rebounded and ended last week above the 101.79 support level. If Bonds can remain above this floor, there is room to the upside until reaching the ceiling at 102.117. The 10-year is still testing its 200-day Moving Average, which is a pivotal level. Whichever way it breaks will likely dictate the direction in the coming week.

Week of November 29, 2021 in Review

There were some mixed messages regarding November job creations while home prices continued to rise in October. Plus, the new Omicron COVID variant and Fed chatter regarding inflation led to volatility in the markets.

Economists were anticipating 550,000 job creations in November, but job growth came in far short of these expectations per the Bureau of Labor Statistics (BLS), which reported 210,000 new jobs. However, there were positive revisions to the figures for September and October adding 82,000 new jobs in those months combined, which made up for some of the miss. In addition, there are important caveats to understand about this data, as explained below.

On the flip side, private sector payrolls came in strong in November, with the ADP Employment Report showing that there were 534,000 jobs created. Both goods-producing and service-providing sector companies showed gains, with services contributing the majority share at 424,000 jobs. Job gains were also reported across all sizes of businesses.

Jobless Claims continue to trend in the right direction, coming in at levels seen prior to the pandemic. Though the number of first-time filers moved higher by 28,000 in the latest week to 222,000, this figure is coming off the lowest reading for Initial Jobless Claims in 50 years, so the bounce higher was expected. Continuing Claims decreased by 107,000 to 1.956 million, hitting a new pandemic-era low. There are now 2.3 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.

In housing news, Pending Home Sales, which measures signed contracts on existing homes, rose 7.5% in October, coming in above expectations. The National Association of Realtors chief economist, Lawrence Yun, stated, “This solid buying is a testament to demand still being relatively high, as it is occurring during a time when inventory is still markedly low.”

This dynamic of strong demand and low inventory around the country continues to help home prices appreciate. The Case-Shiller Home Price Index showed that home prices rose 1% in September and 19.5% year over year. The Federal Housing Finance Agency (FHFA), which measures home price appreciation on single-family homes with conforming loan amounts, reported that home prices rose 0.9% in September and they were also up 17.7% year over year. While these are certainly still strong levels of appreciation, there are signs that the pace of appreciation may be moderating, as noted below.

The news of the new Omicron COVID variant, with the first cases confirmed in the US, led to ongoing volatility in the markets last week due to the unknowns regarding the number of mutations and risk of reinfection. The Fed also made headlines, as Fed Chair Jerome Powell retired the word “transitory” in regard to inflation, testifying before Congress that the risks of inflation have now increased. He also said that inflation pressures will linger well into next year.

Remember, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise. Though many factors influence the markets, it’s always important to keep an eye on inflation.

Mixed Messages From November Jobs Report

The Bureau of Labor Statistics (BLS) reported that there were 210,000 jobs created in November, which was much weaker than the 550,000 new jobs that were expected. However, there were positive revisions to the figures for September and October adding 82,000 new jobs in those months combined, which makes up for some of the miss.

Yet this was a tale of two reports, as there are two surveys within the Jobs Report and there is a fundamental difference between them. First, the Business Survey is where the headline job number comes from and it’s based predominately on modeling. Part of this modeling is the birth-death ratio that factors in the birth of new businesses and the death of businesses, adding or removing the typical number of jobs in those types of businesses when performing the calculations. However, this methodology may be a bit more flawed in today’s market because people are returning to positions that were vacated during the pandemic, so it’s less about new businesses being created and more about new jobs being created.

The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. The Household Survey also has a job loss or creation component, and it showed there were 1.14 million job creations, while the labor force increased by almost 600,000. The number of unemployed people decreased by 542,000, causing the Unemployment Rate to fall from 4.6% to 4.2%.

The labor force participation rate did move a little higher from 61.6% to 61.8%, but it remains near a 50-year low.

In addition, it’s important to note that there has been a lingering misclassification error where people were classified absent from work for other reasons and not marked as unemployed on temporary layoff when they should have been. When we factor this into the calculations, the Unemployment Rate should have been around 0.1% higher at around 4.3%.

The U-6 all-in unemployment rate improved from 8.3% to 7.8% and is more indicative of the true unemployment rate.

Average hourly earnings and average weekly earnings were both up roughly 5% year over year. Wage growth is running even hotter if you annualized the pace over the last 6 months.

November Private Payrolls Meet Expectations

The ADP Employment Report, which measures private sector payrolls, showed that there were 534,000 jobs created in November, which was in line with expectations. October’s figures were revised slightly lower by 1,000 to 570,000 new jobs in that month.

Both goods-producing and service-providing sector companies showed gains, with services contributing the majority share at 424,000 jobs. Leisure and hospitality saw the most job gains with 136,000, followed by professional and business at 110,000, and trade, transportation, and utilities at 78,000. On the goods-producing side, construction also showed strong gains at 52,000.

Job gains were reported across all sizes of businesses, with the majority of those reported at large businesses. Small businesses (1-49 employees) gained 115,000 jobs, mid-sized businesses (50-499 employees) gained 142,000 jobs, and large businesses (500 or more employees) gained 277,000 jobs.

The bottom line is that of the 19.6 million private sector jobs lost in March and April 2020, we’ve since recovered about 15 million of them.

Jobless Claims Reflect Pre-Pandemic Levels

The number of people filing for unemployment benefits for the first time increased by 28,000 in the latest week, with Initial Jobless Claims reported at 222,000. However, this figure is coming off the lowest reading in 50 years, so the bounce higher was expected.

Continuing Claims, which measures individuals who continue to receive benefits, decreased by 107,000 to 1.956 million, once again reaching a pandemic-era low.

There are now 2.3 million people in total receiving benefits, which is a healthy number and in stark contrast to the 20 million plus seen last year.

Pending Home Sales Beat Expectations

Pending Home Sales, which measures signed contracts on existing homes, came in much stronger than expectations, rising 7.5% in October. Sales are now down 1.4% year over year, which is quite impressive considering the lack of inventory, tough comparisons to last year’s market due to the pandemic, and the fact that rates have risen.

The National Association of Realtors chief economist, Lawrence Yun, stated, “Motivated by fast-rising rents and the anticipated increase in mortgage rates, consumers that are on strong financial footing are signing contracts to purchase a home sooner rather than later.” He added, “This solid buying is a testament to demand still being relatively high, as it is occurring during a time when inventory is still markedly low.”

Home Price Appreciation Slows But Remains Strong

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices rose 1% in September and 19.5% year over year. This annual reading was slightly lower than the 20% rise reported for August.

While home price appreciation is expected to continue, this slowing in the annual reading could suggest that the pace of appreciation is beginning to slow. Note that this does not mean that home prices will drop. It simply means that they may rise at a more modest pace.

The 20-city index also rose 0.8% in September and 19.1% year over year. Phoenix (+33.1%), Tampa (+27.7%) and Miami (+25.2%) reported the highest annual gains.

The Federal Housing Finance Agency (FHFA) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. While you can have a million-dollar home with a conforming loan amount, the report most likely represents lower-priced homes, where supply has been tight and demand strong.

Home prices rose 0.9% in September and they were also up 17.7% year over year, which is down from the 18.5% annual gain reported for August. Again, we are still seeing home prices rise, but at a slightly slower pace.

What to Look for This Week

The economic calendar is quiet this week, with the biggest news coming Friday when November’s Consumer Price Index report will give us an update on inflation. Also of note, the JOLTS (Job Openings and Labor Turnover Survey) for October will be released on Wednesday while the latest Jobless Claims data will be reported on Thursday.

Investors will also be closely watching Wednesday’s 10-year Note and Thursday’s 30-year Bond auctions for the level of demand.

Technical Picture

Mortgage Bonds ended last week near their 25-day Moving Average. If they are able to convincingly break above it, the next point of resistance is a dual ceiling formed by the 38.2% Fibonacci level at 102.68 and the 50-day Moving Average.

The 10-year has fallen sharply, breaking through support at the 100-day Moving Average and 38.2% Fibonacci level. There may be some modest support in the 1.25% to 1.3% range, with the next concrete floor of support being the 50% Fibonacci level at 1.188%.

Week of November 22, 2021 in Review

A full serving of news on inflation, housing and the economy was reported ahead of Thanksgiving, with plenty of headlines for the markets to feast on.

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that consumer inflation rose 0.6% in October. Year over year, the index increased from 4.4% to 5%, which is the hottest reading in over 30 years! Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.4% in October while the year over year reading increased from 3.7% to 4.1%.

Rising inflation is always critical to monitor because it can have a big impact on Mortgage Bonds and home loan rates, which are tied to them. Don’t miss our analysis below about what may be ahead for inflation.

On a related note, with oil prices at seven-year highs, President Biden announced that the Department of Energy will release 50 million barrels of oil from the Strategic Petroleum Reserve in an attempt to push oil prices lower. This was a coordinated effort with other countries, and we should see the impact on oil prices over the coming months.

In housing news, sales of existing homes ticked up nearly 1% from September to October to an annual pace of 6.34 million units. This follows a large jump in sales in September. However, on an annual basis, sales are nearly 6% lower than they were in October of last year. The lack of homes for sale continues to remain a challenge around the country, as inventory declined almost 1% to 1.25 million homes for sale at the end of October.

New Home Sales, which measure signed contracts on new homes, were also up 0.4% in October at a 745,000 annualized pace. However, this headline number does not tell the whole story, as explained below.

Initial Jobless Claims also made headlines, with the number of people filing for unemployment benefits for the first time falling by 71,000 to 199,000 in the latest week. Not only is this a pandemic-era low, it’s also the lowest level in 50 years! There are now 2.4 million people in total receiving benefits, which is down 752,000 from the previous week.

Also of note, the second reading of Gross Domestic Product (GDP) for the third quarter showed a slight revision higher from 2% to 2.1%, though this is still pretty anemic considering all of the stimulus.

Lastly, President Biden has confirmed that Jerome Powell will be re-nominated as Chair of the Federal Reserve for another term.

Annual Inflation Hits a 30-Year High

The Fed’s favorite measure of inflation, Personal Consumption Expenditures, showed that headline inflation rose 0.6% in October. Year over year, the index increased from 4.4% to 5%, which is the hottest reading in over 30 years.

Core PCE, which strips out volatile food and energy prices and is the Fed’s real focus, was up 0.4% in October. The year over year reading increased from 3.7% to 4.1%.

Remember that the year over year figures are on a 12-month rolling basis. This means that in last week’s report, the October 2020 reading of 0% for Core PCE was replaced with the 0.4% that was just reported for October 2021. This is why the year over year figure jumped significantly.

When we look ahead to the next report, which will be released on December 23 with data for November, we will be replacing another reading of 0% for Core PCE from November 2020. This means we may continue to see the PCE climb sharply.

Why is this important?

Remember, inflation is the arch enemy of fixed investments like Mortgage Bonds because it erodes the buying power of a Bond’s fixed rate of return. If inflation is rising, investors demand a rate of return to combat the faster pace of erosion due to inflation, causing interest rates to rise. This is why keeping an eye on inflation remains critical.

It’s also worth noting that the PCE is a poor measure of inflation because it has a low weighting towards housing and out of pocket medical expenses, both of which are very important to consumers. Real inflation is likely higher than what is reflected in this latest report.

Also of note, private sector wages are up 11% year over year, which speaks to the wage pressured inflation we are seeing from companies that are having to pay more to retain and hire workers.

Existing Home Sales Rise for Second Consecutive Month

Existing Home Sales, which measure closings on existing homes, inched up nearly 1% from September to October to an annual pace of 6.34 million units. This follows a large jump in sales in September. However, on an annual basis, sales are nearly 6% lower than they were in October of last year.

The lack of homes for sale continues to remain a challenge around the country, as inventory declined almost 1% to 1.25 million homes for sale at the end of October. This represents just a 2.4 months’ supply of homes at the current sales pace. Inventory is also 12% lower when compared to October of last year.

The median home price was reported at $353,900, which is up 13.1% year over year. Remember that the median home price is not the same as appreciation. It simply means half the homes sold were above that price and half were below it. Home sales under $250,000 fell 24% year over year, while sales of homes above $750,000 rose about 30%, which caused the median home price to rise.

First-time home buyers have accounted for 29% of sales, which is up from 28% in September. Cash buyers increased to 24% from 23%, while investors purchased 17% of homes, which was up sharply from 13% in September.

Digging Into New Home Sales Data

New Home Sales, which measure signed contracts on new homes, were up 0.4% in October at a 745,000 annualized pace. However, this headline number does not tell the whole story.

Sales in September were revised lower from 800,000 to 742,000. When factoring in this revision, New Home Sales are really down 6.8% from the originally reported number in September. But there was a big surge in sales in September from August (where there were 693,000 homes sold at an annualized pace). So, even though sales in October were just modestly higher than they were in September, they were up 7.5% from August.

Year over year, sales were down 23.1% but from 2019 they are up 6%. The year over year comparisons to 2020 are tough because of the abnormalities in the market during the pandemic last year.

The median home price came in at $407,700. Again, this is not the same as appreciation. It simply means half the homes sold were above that price and half were below it.

Initial Jobless Claims Reach Lowest Level in 50 Years!

The number of people filing for unemployment benefits for the first time fell by 71,000 to 199,000 in the latest week. Not only is this a pandemic-era low, it’s also the lowest level since November 1969.

California (+53K), Virginia (+18K) and Texas (+15K) reported the largest number of claims.

Continuing Claims, which measure individuals who continue to receive benefits, also hit a pandemic-era low, falling 60,000 to 2.049 million.

There are now 2.4 million people in total receiving benefits, which is down 752,000 from the previous week and more reflective of numbers prior to the pandemic.

What to Look for This Week

This week kicks off with important housing news via October’s Pending Home Sales on Monday while Tuesday brings an update on home price appreciation for September when Case-Shiller’s Home Price Index and the Federal Housing Finance Agency’s House Price Index are reported.

Important manufacturing updates for November will also be reported, first on Tuesday with the Chicago PMI and then on Wednesday with the ISM Index.

Then the rest of the week will be centered on important labor sector news, beginning Wednesday when the ADP Employment Report will give us an update on private payrolls for November. Thursday brings the latest Initial Jobless Claims data. Then ending the week on Friday, the highly anticipated Bureau of Labor Statistics Jobs Report for November will be released, which includes Non-farm Payrolls and the Unemployment Rate.

Technical Picture

Mortgage Bonds rebounded sharply last Friday, breaking above the ceiling of resistance at 101.79 and moving higher to end the week just above their next ceiling at the 25-day Moving Average. The 10-year fell below floors of support at its 25-day and 50-day Moving Averages, ending the week testing the next floor at its 200-day Moving Average.