Monday Market Update – 01/30/2023

Mortgage Rates Trend Down – Pending Home Sales Up!

Pending Home Sales rose 2.5% from November to December, ending sixth straight months of declines but sales are still 33.8% lower than they were just a year ago. Inflation continues to improve and that’s good news for interest rates because it is the arch enemy of bonds and that’s primarily where we derive mortgage rates–those have been on the decline, with the 30 year mortgage down nearly 1% since early November. We have the Fed meeting and announcing their monetary policy on Wednesday and the jobs report on Friday. Could be a huge week for mortgage rates!

Freddie Mac Primary Mortgage Market Survey® as of January 26, 2023

Mortgage rates continue to tick down and, as a result, home purchase demand is thawing from the months-long freeze that gripped the housing market. Potential homebuyers remain sensitive to changes in mortgage rates, but ample demand remains, fueled by first-time homebuyers.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s economists and other researchers, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the authors attempt to provide reliable, useful information, they do not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. ©2023 by Freddie Mac.

Week of January 23, 2023 in Review

Housing activity moved higher in December, inflation continues to cool, and more recession signals are flashing:

  • Inflation Turning the Corner
  • Pending Home Sales Rise for First Time in Six Months
  • New Home Sales Ticked Higher in December
  • Caveats to Positive Fourth Quarter GDP
  • Initial Jobless Claims Decline for Second Consecutive Week
  • Economic Slowdown and Recession Signs Continue

Inflation Turning the Corner

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.1% in December, while the year-over-year reading declined from 5.5% to 5%. Core PCE, which strips out volatile food and energy prices, rose by 0.3% with the year-over-year change falling from 4.7% to 4.4%.

What’s the bottom line? Headline PCE has declined nearly 2% after peaking last June, while Core PCE is down 1% after reaching 5.4% last February. This is a meaningful improvement in inflation, and the decline is expected to continue. Inflation is calculated on a rolling 12-month basis, so the total of the past 12 monthly inflation readings gives us the year-over-year rate of inflation. Readings from the start of last year are higher comparisons, so if we continue to see lower monthly inflation readings, the annual rate of inflation will continue to move lower.

Pending Home Sales Rise for First Time in Six Months

 pending home sales (9)

Pending Home Sales rose 2.5% from November to December, ending sixth straight months of declines. However, sales were 33.8% lower than they were a year earlier. This is a critical report for taking the pulse of the housing market, as it measures signed contracts on existing homes, which represent around 90% of the market.

What’s the bottom line? Lawrence Yun, chief economist for the National Association of Realtors, noted, “This recent low point in home sales activity is likely over. Mortgage rates are the dominant factor driving home sales, and recent declines in rates are clearly helping to stabilize the market.”

New Home Sales Ticked Higher in December

 New Homes Sales v2

New Home Sales, which measure signed contracts on new homes, rose 2.3% in December to a 616,000-unit annualized pace, which was in line with estimates. Note that there was a negative revision to November’s sales that made December’s gain appear a bit bigger.

What’s the bottom line? December saw a slight decline in mortgage rates, so it makes sense that buyer activity moved higher. And while the median price for new homes fell from $459,000 in November to $442,100 in December, this is not the same as a decline in home prices. The median price simply means half the homes sold were above that price and half were below it, and this figure can be skewed by the mix of sales among lower-priced and higher-priced homes.

Looking closely at inventory, there were 461,000 new homes for sale at the end of December, which equates to a 9 months’ supply. However, only 71,000 were completed, with the rest either not started or under construction. The number of completed homes equates to a 1.4 months’ supply, well below a balanced market and showing inventory remains tight.

Caveats to Positive Fourth Quarter GDP

The first reading of Gross Domestic Product (GDP) for the fourth quarter of last year showed that the U.S. economy grew by 2.9% annualized, which was higher than estimates. Note that this is the first of three readings and there can be significant revisions when the second and final readings are released on February 23 and March 30, respectively.

What’s the bottom line? GDP functions as a scorecard for the country’s economic health. Last year, GDP was negative for both the first and second quarters before turning positive in the third. While the positive initial reading for the fourth quarter sounds like good news, there is more to the data than this headline number.

Looking at the internals, inventory build played a big role in the overall figure. Recent data showed that Personal Spending declined in November and December while Retail Sales were weak during the holiday shopping season, leaving companies with excess inventory. As a result, companies may start to slash prices, which could become a drag on the economy and impact GDP in the first and second quarters of this year.

Initial Jobless Claims Decline for Second Consecutive Week

 jobless claims (40)

The number of people filing for unemployment benefits for the first time fell by 6,000 in the latest week, as 186,000 Initial Jobless Claims were reported. This marked the second week in a row that Initial Jobless Claims declined, keeping them below 200,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 20,000 to 1.675 million.

What’s the bottom line? Data from the latest Bureau of Labor Statistics Jobs Report showed that companies are reducing workers’ hours as opposed to outright letting them go, which may be contributing to the decline in initial unemployment claims. However, Continuing Claims have risen by more than 300,000 over the last four months, which suggests it’s becoming harder for many to find a job if they are let go. 

Economic Slowdown and Recession Signs Continue

Several reports released last week continue to show that the economy is slowing. The National Association for Business Economics released their January 2023 Business Conditions Survey of 60 of its members firms. The responses showed that profit margins remain under pressure and hiring plans turned negative for the first time since the pandemic. Just over half of respondents felt there was a 50% or higher chance of a recession over the next year. 

The Conference Board also released their Leading Economic Index (LEI) for December showing that it fell 1%, following a 1.1% decline in November. This report is a composite of economic indexes and can signal peaks and troughs in the business cycle. Of note, the LEI was down 4.2% from June through December of last year, and it has also been in contraction for 10 months in a row. The Conference Board explained how the rollover in indicators and trajectory over the last six months is a recession signal that has been highly accurate historically. 

We are also continuing to see inversions on the yield curve, with 1-month, 3-month, 1-year and 2-year yields all moving higher than 10-year yields. This is unusual as typically you would expect to receive a higher rate of return if you put your money away for 10 years when compared to lesser timeframes. An upside-down yield curve has been a historically accurate recession indicator, as it is a symptom that the economy is slowing.

What’s the bottom line? The economy has been slowing in large part because of aggressive action taken by the Fed last year to try to tame runaway inflation, including seven hikes to its benchmark Fed Funds Rate. This is the overnight borrowing rate for banks, and it is not the same as mortgage rates. Raising the cost of borrowing on certain items slows the economy down and incentivizes savings rates, driving down demand and thus curbing inflation, which has begun to cool per recent reports.

Investors will be closely watching what actions the Fed takes to fight inflation at their meeting which begins Tuesday, with the Monetary Policy Statement and press conference coming on Wednesday.

What to Look for This Week

Updates on housing, jobs and the Fed meeting highlight a busy week ahead. On Tuesday, look for home price appreciation data for November from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index.

From the labor sector, ADP’s Employment Report will give us an update on private payrolls for January when it is released on Wednesday. The latest Jobless Claims data will be reported on Thursday while Friday brings the Bureau of Labor Statistics Jobs Report for January, which includes Non-farm Payrolls and the Unemployment Rate.

As noted above, the Fed’s two-day meeting begins Tuesday, with the Monetary Policy Statement and press conference coming on Wednesday.

Technical Picture

Mortgage Bonds have been trading somewhat sideways since the beginning of the year, trapped between a dual floor of support formed by the 25-day and 50-day Moving Averages and overhead resistance at the formidable 101.671 Fibonacci level. This is a wide range, so we can see some big price fluctuations while Bonds remain in it. The 10-Year is trading right in the middle of a range comprised of a ceiling at the 25-day and 50-day Moving Averages and a floor at the 3.431% Fibonacci Level.   

Monday Market Update – 01/23/2023

Mortgage Rates Continue to Decrease

Freddie Mac Primary Mortgage Market Survey® as of January 19, 2023

As inflation continues to moderate, mortgage rates declined again this week. Rates are at their lowest level since September of last year, boosting both homebuyer demand and homebuilder sentiment. Declining rates are providing a much-needed boost to the housing market, but the supply of homes remains a persistent concern.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s economists and other researchers, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the authors attempt to provide reliable, useful information, they do not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. ©2023 by Freddie Mac.

Week of January 16, 2023 in Review

Recent housing data brought some better than expected news, while wholesale inflation cooled in December. The contraction in manufacturing continued this month. Here are the details:

  • Sales of Existing Homes Higher Than Expectations
  • Two Sides to Housing Starts Data
  • Is the Uptick in Builder Confidence a Turning Point for Housing?
  • Wholesale Inflation Much Cooler Than Estimates
  • Jobless Claims Continue to Reflect Slower Pace of Hiring
  • Manufacturing and Retail Sales Data Point to Economic Slowdown

Sales of Existing Homes Higher Than Expectations 

 existing home sales (8)

Existing Home Sales fell 1.5% from November to December to a 4.02 million unit annualized pace, per the National Association of Realtors (NAR). However, this was a smaller decline than economists had forecasted. Sales were also 34% lower when compared to December of last year. This is a critical report for taking the pulse of the housing market, as it measures closings on existing homes, which represent around 90% of the market.

What’s the bottom line? Inventory continued to move lower after peaking over the summer as part of the normal seasonal build, falling for the fifth straight month to 970,000. This is a 13.4% decline from November and the equivalent of a 2.9 months’ supply.

But inventory is even tighter than that figure implies, as there were only 690,000 “active listings” in December, meaning that 29% of the “inventory” in the Existing Home Sales report is under contract and not truly available. This data speaks to ongoing demand for homes, even with the decline in sales, as a normal market has 25% of inventory under contract. 

Demand can also be seen in the pace of sales, as homes are still selling quickly when priced correctly. Average days on the market increased slightly from 24 days in November to 26 days in December, while 57% of homes sold last month were on the market for less than a month.

Looking at the data as a whole, low inventory and ongoing housing demand will continue to limit the downside in home prices.

Two Sides to Housing Starts Data

 housing starts (8)

Housing Starts, which measure the start of construction on homes, fell 1.4% from November to December. Starts for single-family homes, which are the most important because they are in such high demand among buyers, were up 11.3% monthly but they are still 25% lower when compared to December 2021. Building Permits for single-family homes, which are indicative of future supply, also fell 6.5% for the month and 34.7% year over year.

What’s the bottom line? While construction has slowed, December’s data was better than expected. In addition, the low supply environment in new homes (and in existing homes as noted above) will continue to be supportive of prices. This is very different from the housing bubble, where demand was waning but the supply of new homes was significantly increasing.

Is the Uptick in Builder Confidence a Turning Point for Housing?

 HMI (11)

The National Association of Home Builders (NAHB) Housing Market Index, which is a near real-time read on builder confidence, rose four points to 35 in January. Among the components of the index, current sales conditions rose four points to 40, buyer traffic increased three points to 23, and sales expectations for the next six months moved two points higher to 37. Any reading above 50 on this index, which runs from 0 to 100, signals expansion while readings below 50 signal contraction.

What’s the bottom line? The rise in confidence among home builders this month follows declines seen every month last year. NAHB Chairman Jerry Konter noted, “It appears the low point for builder sentiment in this cycle was registered in December, even as many builders continue to use a variety of incentives, including price reductions, to bolster sales.” He added, “The rise in builder sentiment also means that cycle lows for permits and starts are likely near, and a rebound for home building could be underway later in 2023.”

Wholesale Inflation Much Cooler Than Estimates

The Producer Price Index (PPI), which measures inflation on the wholesale level, fell by a greater than expected 0.5% in December. On a year-over-year basis, PPI decreased from a downwardly revised 7.3% to 6.2%. Core PPI, which strips out volatile food and energy prices, was in line with estimates with a 0.1% increase, though the previous report was revised lower. On an annual basis, Core PPI declined from 6.2% to 5.5%.

What’s the bottom line? Overall, inflation continues to subside and the annual readings are moving lower in the right direction. In fact, the progress made on the producer side of inflation is notable. At its peak last March, PPI was at 11.7% year over year and is now almost half that amount at 6.2%.

Cooling inflation is a welcome sign for several reasons. Besides causing higher prices, 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 as we saw through much of last year.

Jobless Claims Continue to Reflect Slower Pace of Hiring

 jobless claims (39)

Initial Jobless Claims declined by 15,000 in the latest week, as the number of people filing for unemployment benefits for the first time fell to 190,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 17,000 to 1.647 million.

What’s the bottom line? Continuing Claims have been trending higher since mid-September when they were at 1.346 million. This reflects a potential slowdown in the pace of hiring, suggesting it’s becoming harder for many to find a job once they’re let go. 

Manufacturing and Retail Sales Data Point to Economic Slowdown

Recent reports offer more signals that the economy is slowing. In the manufacturing sector, there were negative readings (which signal contraction) reported for the New York and Philadelphia regions this month. The Empire State Index contracted sharply to -32.9, which was much worse than estimates, while the Philadelphia Fed Index remained in contraction territory for the fifth straight month. 

Meanwhile, Retail Sales were also down 1.1% in December, which was a bigger decline than economists had forecasted, showing a disappointing end to the holiday shopping season. 

What to Look for This Week

Thursday brings a full slate of economic news, including December’s New Home Sales and Durable Goods, the first reading on fourth quarter 2022 GDP, and the latest Jobless Claims.

On Friday, look for December’s Pending Home Sales along with the Fed’s favored inflation measure, Personal Consumption Expenditures.

Technical Picture

Mortgage Bonds ended last week trading in the middle of a range comprised of the 101.671 Fibonacci ceiling and a floor at the 25-day Moving Average. The 10-year broke above the ceiling at the 3.431% Fibonacci level. There is a lot of room for yields to worsen before reaching the next ceiling at the 25-day Moving Average.   

First Time Buyers Catch An Interest Rate Break!

You may have heard that first time home buyers are getting a break on interest rates! It’s true! To understand how and why, we’ll need to go a little deeper on the topic.

The Federal Housing Finance Agency (FHFA) is the regulator of Fannie Mae and Freddie Mac, which are government-sponsored enterprises (GSEs) that purchase mortgages from lenders. The FHFA sets the loan level pricing adjustments (LLPAs) for loans that are sold to Fannie Mae and Freddie Mac.

The LLPAs are used by Fannie Mae and Freddie Mac to manage the risk of the loans they purchase from lenders and to ensure that they are able to meet their financial obligations. These LLPAs are used by the GSEs to adjust the prices they pay to lenders for mortgages, based on the risk characteristics of the loans.

As you might expect, these LLPAs are typically, in turn, imposed by mortgage lenders. These additional charges are applied to the interest rate of a loan to compensate the lender for the added risk associated with certain loan features, such as a high loan-to-value ratio or a low credit score. This is why we, as mortgage originators, have such hard time answering the question, “What’s your rate?”

Things like a low credit score or a high loan-to-value ratio or the amount of money you want to borrower or whether you are refinancing or purchasing or whether you are buying a condo or a multi-unit property all impact the interest via these LLPAs. These various loan characteristics,  in simple terms, are how the banks determine your overall risk profile and that allows them to then quote you an interest rate.

For example, a borrower with a low credit score may be more likely to default on a loan than a borrower with a high credit score. Similarly, a loan with a high loan-to-value ratio (meaning the borrower has a small down payment) may be considered riskier than a loan with a low loan-to-value ratio. Condos are riskier than a single family residence and second homes are riskier than a primary occupancy home. There are other adjusters too!

Having explained all of that, the good news is that the FHFA is removing some of these risk-based price adjustments for first-time home buyers and that means lower interest rates for these very important buyers! There are some rules though and they mostly revolve around income and whether or not you are considered a first-time buyer (spoiler: even if you have purchased a home before, you could still be considered a “first-time buyer”. You just can’t have had a financed property in the last three years).

If you’d like to know more about how these changes impact you or your clients please contact me!

“Monday” Morning Update – 01/17/2023

Mortgage Rates Decline

Freddie Mac Primary Mortgage Market Survey as of January 12, 2023

While mortgage rates have resumed their decline, the market remains hypersensitive to rate movements, with purchase demand experiencing large swings relative to small changes in rates. Over the last few weeks latent demand has been on display with buyers jumping in and out of the market as rates move.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s economists and other researchers, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the authors attempt to provide reliable, useful information, they do not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. ©2023 by Freddie Mac.

Week of January 9, 2023 in Review

Consumer inflation continued to cool in December, but there were also more signs of an economic slowdown. Here are last week’s key headlines:

  • Consumer Inflation Continues to Ease
  • Inflation Remains Top Problem for Many Small Businesses
  • Seasonal Factors Likely Impacted Latest Jobless Claims
  • Services Sector Shows Signs of Slowdown
  • Watching an Important Recession Indicator

Consumer Inflation Continues to Ease

The Consumer Price Index (CPI), which measures inflation on the consumer level, showed that inflation decreased by 0.1% in December. On an annual basis, inflation declined from 7.1% to 6.5%. Core CPI, which strips out volatile food and energy prices, rose 0.3%. As a result, year-over-year Core CPI decreased from 6% to 5.7%. All of these figures were in line with estimates.

Of particular note, shelter costs make up 39% of Core CPI and they rose 0.8% in December, meaning they played a big role in the 0.3% monthly gain in Core CPI. However, shelter costs have been lagging in the CPI report, as they have been coming down in more real-time data. Once these moderating shelter costs are reflected in the CPI data, they should add additional downside pressure to inflation. 

What’s the bottom line? 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 as they did throughout much of last year.

Since lower inflation typically helps both Mortgage Bonds and mortgage rates improve, these signs of easing inflation are welcome. In fact, if you took the last three monthly CPI readings and averaged them over the next 12 months, the run rate would be 1.6%. Doing the same for Core CPI would give us a run rate of 3.2%. If the lower monthly readings we’ve seen recently continue, they will help us make substantial progress towards the Fed’s 2% inflation target. 

Inflation Remains Top Problem for Many Small Businesses

The National Federation of Independent Business (NFIB) Small Business Optimism Index was reported at 89.8 for December. This was the lowest reading since last June and a hair above the weakest since 2013. Among the key takeaways, 32% of small business owners reported that inflation remained their biggest problem, so evidence of cooling inflation is certainly a welcome sign.

What’s the bottom line? Overall, small business owners are not feeling optimistic about the year ahead, per NFIB’s chief economist Bill Dunkelberg. He explained, “Owners are managing several economic uncertainties and persistent inflation and they continue to make business and operational changes to compensate.”

Seasonal Factors Likely Impacted Latest Jobless Claims

 jobless claims (38)

Initial Jobless Claims remained relatively flat in the latest week, as the number of people filing for unemployment benefits for the first time fell by 1,000 to 205,000. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, declined 63,000 to 1.634 million.

What’s the bottom line? Even though Continuing Claims fell in the latest week, they have now risen by 270,000 since the beginning of October. Plus, this Continuing Claims data was for the week ending December 31, so it’s possible that the number of claims filed may have been higher if it wasn’t for the holidays. In addition, the Jobs Report for December showed that there was a big spike in both part-time and second jobs, which also could have impacted the number of jobless claims that were filed. 

Services Sector Shows Signs of Slowdown

The ISM Services Index, which measures economic activity in the services sector, has now joined its manufacturing brethren in moving below 50 into contraction territory. The index fell to 49.6% in December from 56.5% in November, marking the first reading below 50 since December 2009 (other than the start of the pandemic in the spring of 2020). Among the components of the index, new orders dropped sharply to 45.2%, employment fell into contraction at 49.8% and supplier deliveries eased again to 48.5%.

What’s the bottom line? Survey respondents (which include purchasing and supply executives from non-manufacturing firms) spoke to the challenges they’re facing, with one noting that, “Orders from customers are softening, and some orders are being canceled.” Another explained, “Our company has tightened hiring of new employees month over month, due to uncertainty around the strength of the economy going into 2023.” All in all, the U.S. economy continues to weaken, and this is now spreading into the services sector.

Watching an Important Recession Indicator

The yield spread between the 10-year Treasury and 3-month Treasury has inverted almost 120 basis points. Normally, you would expect to receive a higher rate of return for putting your money away for 10 years versus 3 months. But when there is an economic slowdown and fear in the markets, the yield curve can go inverted – meaning that 3-month yields are higher than 10-year yields, which is backwards or upside down.

What’s the bottom line? Looking back at the history of recessions, we always see an inversion occur ahead of a recession, although the actual recession may not follow immediately. While a recession is not a great thing for the economy, one positive aspect is that periods of recession are always coupled with lower interest rates.

What to Look for This Week

After the market closures Monday in honor of Martin Luther King Jr. Day, this week’s economic calendar includes crucial housing, manufacturing and inflation reports.

On Wednesday, look for the National Association of Home Builders Housing Market Index, which will give us a near real-time read on builder confidence for this month. Housing Starts and Building Permits for December will be reported on Thursday, while December’s Existing Home Sales follows on Friday.

January’s manufacturing data for the New York and Philadelphia regions will provide an important update on that sector when those reports are released on Tuesday and Thursday, respectively.

Also of note, the Producer Price Index for December will give us the latest news on wholesale inflation when it is reported on Wednesday, while Retail Sales data for December will also be released. Plus, the latest Jobless Claims remain important to monitor when that data is released as usual on Thursday.

Technical Picture

Mortgage Bonds tested the very difficult ceiling of resistance at 101.671 but were rejected on Friday. The 10-year tested support at 3.43% but was also rejected and moved higher as a result. 

Monday Market Update – 01/09/2023

Mortgage Rates Inch Up

January 5, 2023

Mortgage application activity sunk to a quarter century low this week as high mortgage rates continue to weaken the housing market. While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023. Homebuyers are waiting for rates to decrease more significantly, and when they do, a strong job market and a large demographic tailwind of Millennial renters will provide support to the purchase market. Moreover, if rates continue to decline, borrowers who purchased in the last year will have opportunities to refinance into lower rates.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s economists and other researchers, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the authors attempt to provide reliable, useful information, they do not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. ©2023 by Freddie Mac.

Week of January 2, 2023 in Review

The new year kicked off with crucial labor market data, an update on home prices and a warning from the International Monetary Fund:

  • Slower Wage Growth Data Boosts Bonds
  • Stronger Than Expected Private Sector Job Growth in December
  • Jobless Claims Decline But Holidays Likely Skewed Data
  • Home Prices Still Expected to Appreciate This Year
  • IMF Issues Recession Warning

Slower Wage Growth Data Boosts Bonds

 bls jobs report (11)

The Bureau of Labor Statistics (BLS) reported that there were 223,000 jobs created in December, which was stronger than expectations of 200,000 job gains. Revisions to the data from October and November cut 28,000 jobs in those months combined. The unemployment rate declined from 3.6% to 3.5%.

What’s the bottom line? There are two reports 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 717,000 job creations, which is a pretty big disparity from the headline number of 223,000 job gains.When we look deeper at the numbers, of the 717,000 job creations in the household survey, 679,000 were from part-time workers and 380,000 represent multiple job holders. This means the job creations that were reported could reflect a lot of holiday hires or people getting part-time seasonal work, making the report weaker than the headlines suggest.

In addition, average hourly earnings were up 0.3% in December and 4.6% year over year, which is down from the previous report. Average weekly earnings only rose by 0.2% last month and 3.1% year over year. Average weekly earnings measure actual take-home pay because the data factors in hours worked, which reached the lowest level since 2020. This cut in hours would actually equate to a significant number of jobs lost.

The Stock and Bond markets both reacted positively on Friday to the data on wage growth, as it reflects less wage-pressured inflation, which is what the Fed is looking for. 

And the Fed was certainly watching last week’s labor market data closely, as the minutes from their December meeting showed that officials are committed to maintaining a restrictive policy stance until the incoming data provides confidence that inflation is on a sustained path to 2%. Members believe that this is likely to take some time and cautioned, based upon historical experience, against prematurely loosening monetary policy.

Stronger Than Expected Private Sector Job Growth in December

 adp employment (10)

The ADP Employment Report, which measures private sector payrolls, showed that there were 235,000 jobs created in December. This was much stronger than the 150,000 job gains that were expected. While small and medium-sized businesses each added almost 200,000 jobs respectively, large companies with 500 or more employees shed 151,000 jobs. 

ADP also reported that annual pay for job stayers increased 7.3% year over year, which is a decline from 7.6% in the previous report. Job changers saw an average increase of 15.2%.

What’s the bottom line? Nela Richardson, chief economist for ADP, said, “The labor market is strong but fragmented, with hiring varying sharply by industry and establishment size. Business segments that hired aggressively in the first half of 2022 have slowed hiring and in some cases cut jobs in the last month of the year.”

Jobless Claims Decline But Holidays Likely Skewed Data

 jobless claims (37)

The number of people filing for unemployment benefits for the first time fell by 19,000 in the latest week, as 204,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, declined 24,000 to 1.694 million.

What’s the bottom line? The latest Initial Jobless Claims data was for the week of Christmas, so it’s possible that the number of claims filed may have been higher if it wasn’t for the holidays. Continuing Claims measured the week before Christmas and while they declined in the latest week, they have now risen by 330,000 since the beginning of October. This is another sign of a potential slowdown in the pace of hiring, suggesting it’s becoming harder for many to find a job once they’re let go. 

Home Prices Still Expected to Appreciate This Year

CoreLogic released their Home Price Index report for November, showing that home prices fell by 0.2% from October but they were 8.6% higher when compared to November of last year. This annual reading declined from 10.1% in October but is still solid. More importantly, CoreLogic forecasts that home prices will drop 0.1% in December but rise 2.8% in the year going forward. 

What’s the bottom line? While CoreLogic has reported slightly negative readings month to month, they still forecast nearly 3% appreciation nationwide over the next year, which can be meaningful for wealth creation. For example, if someone bought a $400,000 home and put 10% down, they would gain $12,000 in appreciation over the next year and earn a 30% return on their investment due to leverage.

IMF Issues Recession Warning

The International Monetary Fund (IMF) issued a recession warning for this year, with Managing Director Kirstalina Georgieva, saying, “We expect one third of the world economy to be in recession.” While the IMF did not include the U.S. in recession, she said that 2023 will be a “tougher” year than 2022 because “the three big economies, US, EU, China, are all slowing down simultaneously.”

If the U.S. does end up in a recession, we will likely have much more than a third of the globe in a recession, as the U.S. makes up a huge part of global GDP. 

What to Look for This Week

The National Federation of Independent Business Small Business Optimism Index will show us how small business owners were feeling last month when it is released on Tuesday.

Thursday brings a crucial update on inflation when December’s Consumer Price Index is reported, along with the latest Jobless Claims data.

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 broke above four resistance levels on Friday and ended last week trading in a range between support at the 25-day Moving Average and resistance at the 101.671 Fibonacci level. The 10-year broke beneath a triple floor of support and ended the week trading around 3.56%.

“Monday” Market Update – 1/3/2023

The 30-Year Fixed-Rate Moves Higher

December 29, 2022

The housing market remains in the doldrums with declining sales, inventory and prices. The declines in sales and deceleration in home prices began swiftly earlier in 2022 but have moderated more recently. While the intensity of weakness is moderating, the market continues to decline and forward leading indicators suggest housing will remain weak throughout the winter.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s economists and other researchers, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the authors attempt to provide reliable, useful information, they do not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. ©2023 by Freddie Mac.

Week of December 26, 2022 in Review

After the market closures Monday for the Christmas holiday, housing news highlighted last week’s calendar:

  • Are Signed Contracts on Existing Homes Set to Rebound This Year?
  • Home Prices Have Softened But Annual Appreciation Is Still Strong
  • Challenges Remain for Job Seekers, Data Shows

Are Signed Contracts on Existing Homes Set to Rebound This Year?

Pending Home Sales fell 4% from October to November, marking the sixth straight monthly decline. Sales were also 37.8% lower than they were in November of last year. This is a critical report for taking the pulse of the housing market, as it measures signed contracts on existing homes, which represent around 90% of the market.

What’s the bottom line? Lawrence Yun, chief economist for the National Association of Realtors, noted, “Pending home sales recorded the second-lowest monthly reading in 20 years as interest rates, which climbed at one of the fastest paces on record this year, drastically cut into the number of contract signings to buy a home.” However, he explained that there is typically a two months’ lag time between mortgage rates and home sales and “with mortgage rates falling throughout December, home-buying activity should inevitably rebound in the coming months and help economic growth.”

Home Prices Have Softened But Annual Appreciation Is Still Strong

 case shiller hpi (13)

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices fell 0.5% in October but they were 9.2% higher when compared to October of last year. This annual reading is a decline from the 10.7% gain reported in September.

The Federal Housing Finance Agency (FHFA) also released their House Price Index, which showed that home prices were flat from September to October but they were 9.8% higher than they were in October of last year. This is a decline from the 11% annual increase reported in September. FHFA’s report measures home price appreciation on single-family homes with conforming loan amounts, which means it most likely represents lower-priced homes. It also differs from Case-Shiller’s data, in that it does not include cash buyers or jumbo loans. 

What’s the bottom line? Home prices have been softening, but Case-Siller’s 9.2% annual gain “is in the top quintile of historical performance levels,” per Craig J. Lazzara, Managing Director at S&P DJI. And while home prices are now down 3% from their peak, this is a far cry from a housing crash of 20% that some in the media are predicting.

In addition, Case-Shiller’s 10-city and 20-city Indexes are down 4.6% from their peak, showing that home prices in the major cities are declining a bit more than they are across the nation overall. Note that several of these cities were somewhat overheated and are now giving back a little more price-wise. However, most of the major cities saw less of a price decline in October than they did in September, which could be a sign that markets are slowly improving.

Challenges Remain for Job Seekers, Data Shows

 jobless claims (35)

The number of people filing for unemployment benefits for the first time rose by 9,000 in the latest week, as 225,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, saw another large increase of 41,000 to 1.71 million.

What’s the bottom line? Continuing Claims have now risen by 346,000 since the beginning of October, reaching their highest level since early February. This is another sign of a potential slowdown in the pace of hiring, suggesting it’s becoming harder for many to find a job once they’re let go. 

What to Look for This Week

After the market closures Monday for the New Year holiday, labor market data will dominate this week’s calendar.

ADP’s new Employment Report will give us an update on private payrolls for December when it is released on Thursday. The latest Jobless Claims data will also be reported on Thursday while Friday brings the Bureau of Labor Statistics Jobs Report for December, which includes Non-farm Payrolls and the Unemployment Rate.

Also of note on Wednesday, December’s ISM Index will provide an important update on the manufacturing sector. Plus, the minutes from the Fed’s latest meeting will be released and these always have the potential to move the markets.

Technical Picture

Mortgage Bonds ended last week battling support at the 50-day Moving Average. If this level is broken, the next floor is at the 99.845 Fibonacci level. The 10-year tested the 3.908% Fibonacci level but was rejected. This Friday’s BLS Jobs Report could be the catalyst to spark a rally in Bonds. 

“Monday” Market Update – 12/27/2022

The 30-Year Fixed-Rate Mortgage Continues to Trend Down

December 22, 2022

Heading into the holidays, mortgage rates continued to move down. Rates have declined significantly over the past six weeks, which is helpful for potential homebuyers, but new data indicates homeowners are hesitant to list their homes. Many of those homeowners are carefully weighing their options as more than two-thirds of current homeowners have a fixed mortgage rate of below four percent.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s economists and other researchers, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the authors attempt to provide reliable, useful information, they do not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. ©2022 by Freddie Mac.

Week of December 19, 2022 in Review

The markets had plenty of news to feast on last week, including the latest data on consumer inflation, home sales and home construction. Here are the highlights:

-Consumer Inflation Headed in Right Direction

-Inventory of Existing Homes Declined for Fourth Consecutive Month

-New Home Sales Beat Expectations in November

-What the Home Construction Slowdown Means for Home Prices

-Home Builder Confidence Declined Every Month This Year

-Unemployment Claims Data Illustrates Difficulties for Job Seekers

-Third Quarter GDP Remains Positive

Consumer Inflation Headed in Right Direction

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.1% in November. The year-over-year reading for November declined from 6.1% to 5.5% and while this is a nice decline, it does factor in an upside revision to October’s data. Core PCE, which strips out volatile food and energy prices, rose by 0.2% with the year-over-year change falling from 5% to 4.7%.

What’s the bottom line? Inflation is heading in the right direction and there is hope that inflationary pressures will continue to ease. This is because inflation is calculated on a rolling 12-month basis, which means that the total of the past 12 monthly inflation readings will give us the year-over-year rate of inflation. Inflation readings after November of last year are higher comparisons, so if we continue to see lower monthly readings, the annual rate of inflation will continue to move lower.

Inventory of Existing Homes Declined for Fourth Consecutive Month

 existing home sales 12 21 2022

Existing Home Sales fell 7.7% from October to November to a 4.09 million unit annualized pace, per the National Association of Realtors (NAR). This was weaker than expectations looking for a 6% decline. Sales were also 35.4% lower when compared to November of last year. This is a critical report for taking the pulse of the housing market, as it measures closings on existing homes, which represent around 90% of the market.

What’s the bottom line? The rise in inventory that occurs every summer from parents listing their homes so their kids are settled for the new school year has clearly crested. Inventory has declined steadily over the last four months, from 1.31 million homes available for sale at the end of July to 1.14 million homes at the end of November. This equates to a tight 3.3 months’ supply of homes.

But inventory is even tighter than that figure implies, as there were only 752,000 “active listings” in November, meaning that 34% of the “inventory” in the Existing Home Sales report is under contract and not truly available. Even though sales have declined, this data also speaks to ongoing demand for homes, as a normal market has 25% of inventory under contract. 

And while there are reports that homes are sitting longer on the market, they are still selling quickly when priced correctly, which is also reflective of demand. Average days on the market increased slightly from 21 days in October to 24 days in November, while 61% of homes sold last month were on the market for less than a month.

To summarize, low inventory and ongoing housing demand will continue to limit the downside in home prices.

New Homes Sales Beat Expectations in November

 New Homes Sales v2

New Home Sales, which measure signed contracts on new homes, rose 5.8% in November to a 640,000-unit annualized pace, coming in much stronger than the 4.7% decline that was expected. There was a negative revision to October’s sales that made November’s gain appear a bit bigger, but even when factoring this in sales were up 1.3%.

The median home price for new homes was $471,200 but remember this is not the same as appreciation. It simply means half the homes sold were above that price and half were below it, and this figure can be skewed by the mix of sales.

What’s the bottom line? These sales figures were from November when rates were higher, so contract signings may continue to pick up. And while sales are now down 15.3% from November of last year, this year’s figure is not so bad considering higher rates, inflation and tight inventory.

Speaking of inventory, there were 461,000 new homes for sale at the end of November, which equates to an 8.6 months’ supply. However, only 64,000 were actually completed, with the rest either not started or under construction. The number of completed homes equates to a 1.7 months’ supply, well below a balanced market.

What the Home Construction Slowdown Means for Home Prices

 housing starts (7)

Housing Starts, which measure the start of construction on homes, fell 0.5% from October to November. Starts for single-family homes, which are the most important because they are in such high demand among buyers, declined 4.1% from October and 32.1% from November of last year. Building Permits for single-family homes, which are indicative of future supply, also fell 7.1% for the month and 29.7% year over year.

What’s the bottom line? There is a big difference between housing the economic driver and housing the investment. Clearly activity has slowed but the low supply environment in new homes (and in existing homes as noted above) will continue to be supportive of prices. This is a stark contrast to the housing crash where demand was lower, but builders were putting up a record number of homes.

Home Builder Confidence Declined Every Month This Year

 HMI (10)

The National Association of Home Builders (NAHB) Housing Market Index, which is a near real-time read on builder confidence, fell 2 points to 31 in December. Among the components of the index, current sales conditions fell 3 points to 36, buyer traffic remained at a very low 20 and sales expectations for the next six months rose four points to 35.

What’s the bottom line? Any reading above 50 on this index, which runs from 0 to 100, signals expansion while readings below 50 signal contraction. This month’s confidence reading is the lowest since mid-2012 (except for the onset of the pandemic in the spring of 2020), which is unsurprising given that construction costs remain elevated while higher interest rates have caused many homebuyers to pause their search. 

However, NAHB chief economist Robert Dietz, noted that December marked the first time since April that “builders registered an increase in future sales expectations.” He added, “The silver lining in this HMI report is that it is the smallest drop in the index in the past six months, indicating that we are possibly nearing the bottom of the cycle for builder sentiment.”

Unemployment Claims Data Illustrates Difficulties for Job Seekers

 jobless claims (34)

Initial Jobless Claims rose by 2,000 in the latest week, as 216,000 people filed for unemployment benefits for the first time. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, fell 6,000 to 1.672 million, though the prior week’s report was revised higher by 7,000.

What’s the bottom line? Continuing Claims have now risen by 308,000 since the beginning of October. This is another sign of a potential slowdown in the pace of hiring, suggesting it’s becoming harder for many to find a job once they’re let go. 

Third Quarter GDP Remains Positive

The final reading of third quarter Gross Domestic Product (GDP) showed that the U.S. economy grew by 3.2%. This is an upward revision from the first and second readings and also better than the 2.9% expected. GDP functions as a scorecard for the country’s economic health, so the positive reading in the third quarter is a welcome sign after two consecutive negative GDP readings in the first and second quarters of this year.

What to Look for This Week

After the market closures Monday for the Christmas holiday, housing news will highlight this week’s calendar. On Tuesday, look for home price appreciation data for October from the Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) House Price Index. November’s Pending Home Sales will be delivered on Wednesday.

Also of note, the latest Jobless Claims remain important to monitor when they are released as usual on Thursday.

Technical Picture

Mortgage Bonds ended last week continuing to battle the dual floor of support at the 100-day Moving Average and 100.758 Fibonacci level. The 10-year moved higher on Friday, ending the week trading in a range between support at 3.65% (which is a Fibonacci level) and overhead resistance at the 50-day Moving Average.

Monday Market Update – 12/19/2022

Mortgage Rates Continue their Downward Trajectory

Primary Mortgage Market Survey® for December 15, 2022

Mortgage rates continued their downward trajectory this week, as softer inflation data and a modest shift in the Federal Reserve’s monetary policy reverberated through the economy. The good news for the housing market is that recent declines in rates have led to a stabilization in purchase demand. The bad news is that demand remains very weak in the face of affordability hurdles that are still quite high.

Week of December 12, 2022 in Review

Consumer inflation continues to cool, while there were some important takeaways from the Fed’s latest rate hike decision. Read on for these crucial details:

What the Fed’s Latest Rate Hike Really Signals

As expected, the Fed hiked its benchmark Fed Funds Rate by 50 basis points at its meeting last Wednesday. This was the Fed’s seventh rate hike of the year though it was a slower pace after four consecutive 75 basis point hikes at their meetings in June, July, September and November. The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation.

What’s the bottom line? In their statement after the meeting, the Fed said that ongoing increases to the Fed Funds Rate would be appropriate and that they would continue their balance sheet reduction. The surprise was in the Fed Funds Rate outlook, where 17 of 19 members forecasted a Fed Funds Rate of over 5%. The projected terminal rate, or the highest the Fed Funds Rate will go in the cycle, increased by 50 basis points to 5.1% from 4.6%. 

While the markets initially reacted negatively to this news because it signaled that the Fed intended to keep rates higher for longer than anticipated, sentiment shifted during Fed Chair Jerome Powell’s press conference. He acknowledged that, “The inflation data received so far for October and November show a welcome reduction in the monthly pace of price increases.” 

Powell went on to telegraph a 25 basis point hike at the Fed’s next meeting on February 1. This continual slowing in the pace of hikes was considered a positive sign, as it signaled to the markets that inflation is getting under control.

Consumer Inflation Cooler Than Expected Last Month

The Consumer Price Index (CPI), which measures inflation on the consumer level, showed that inflation increased by 0.1% in November, coming in lower than estimates. On an annual basis, inflation declined from 7.7% to 7.1%, which was much cooler than the 7.3% expected. Core CPI, which strips out volatile food and energy prices, also came in softer than forecasted with a 0.2% rise. As a result, year-over-year Core CPI decreased from 6.3% to 6%, which again was lower than estimates.

Of particular note, shelter costs make up 39% of Core CPI and they rose 0.6% in November, meaning they played a big role in the 0.2% monthly gain in Core CPI. However, shelter costs have been lagging in the CPI report.

In more real-time data, we are seeing a moderation in rental prices. For example, Apartment List’s National Rent Report showed that rents were up 4.7% from January through November of this year, well below the 18% rise reported this time last year. These moderating shelter costs should be reflected in the CPI data hopefully by January, which should add additional downside pressure to inflation. 

What’s the bottom line? 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 as we’ve seen this year.

When we look at how inflation is calculated, there is hope that it will continue to move lower next year. CPI is a rolling twelve-month report. If we add the previous 12 monthly readings and account for rounding and compounding, we come up with the year-over-year figure. For example, when the data for November 2022 was released last week (0.2% for Core CPI), it replaced the data for November 2021 (0.5%) in the calculation of annual inflation.

Going forward, the inflation readings that will be replaced are high, so if we see lower monthly readings like we did in November’s report, the annual rate of inflation will continue to move lower. Again, lower inflation typically helps both Mortgage Bonds and mortgage rates improve.

Small Business Owners Say Inflation Remains Top Problem

The National Federation of Independent Business (NFIB) Small Business Optimism Index was reported at 91.9 for November. While this was a slight improvement from October, this is the eleventh straight month the index has come in well below the 49-year average of 98. Among the key takeaways, 32% of small business owners reported that inflation remained their biggest problem, so evidence of cooling inflation is certainly a welcome sign.

What’s the bottom line? Bill Dunkelberg, NFIB’s chief economist, noted that, “Going into the holiday season, small business owners are seeing a slight ease in inflation pressures, but prices remain high.” He added, “The small business economy is recovering as owners manage an ongoing labor shortage, supply chain disruptions, and historic inflation.”

Shipping Data Brings Positive Sign for Inflation Picture

The expenditures component of the Cass Freight Index, which measures the total amount spent on freight across the country, rose 1.8% in November. However, on a year-over-year basis the expenditures component decelerated from +21% in September to +11.1% in October to now +4.7% in November. 

What’s the bottom line? The Cass Freight Index is a monthly measure of the North American freight market and it provides valuable insight into supply chain indicators and the overall economy. The latest data shows that the supply and demand imbalance in trucking markets has loosened significantly this year. As a result, freight rates are leveling off and set to soften further in the months to come. Shippers are starting to see real savings and considerable cost relief is now likely for 2023, which is positive news for the inflation picture.

Continuing Jobless Claims at Highest Level Since February

The number of people filing for unemployment benefits for the first time fell by 20,000 in the latest week, as 211,000 Initial Jobless Claims were reported. This is the lowest level of first-time filers since September. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, rose 1,000 to 1.671 million.

What’s the bottom line? Continuing Claims have now risen by 307,000 since the beginning of October to their highest level since February. This points to a potential slowdown in the pace of hiring, suggesting it’s becoming harder for many to find a job once they’re let go. 

What to Look for This Week

The markets have plenty of news to feast on this week, beginning Monday with the National Association of Home Builders Housing Market Index, which will give us a near real-time read on builder confidence for this month. Housing Starts and Building Permits for November will be reported on Tuesday, while November’s Existing Home Sales and New Home Sales follow on Wednesday and Friday, respectively.

On Thursday, the latest Jobless Claims remain important to monitor, as does the final reading for third quarter GDP.

Ending the week, crucial inflation numbers for November will be reported Friday via the Fed’s favored measure, Personal Consumption Expenditures.

Technical Picture

Mortgage Bonds ended last week still trading in the middle of a wide range with a triple floor of support formed by the 25-day Moving Average, 100-day Moving Average and 100.758 Fibonacci level. The 10-year is battling with an important ceiling at the 100-day Moving Average and falling trendline that has been intact since late October. If this level is broken, there is a lot of room to the upside before reaching the next ceiling at 3.644%.   

Monday Market Update – 12/12/2022

Mortgage Rates Continue to Drop

Primary Mortgage Market Survey for December 8, 2022

Mortgage rates decreased for the fourth consecutive week, due to increasing concerns over lackluster economic growth. Over the last four weeks, mortgage rates have declined three quarters of a point, the largest decline since 2008. While the decline in rates has been large, homebuyer sentiment remains low with no major positive reaction in purchase demand to these lower rates.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s economists and other researchers, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the authors attempt to provide reliable, useful information, they do not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. ©2022 by Freddie Mac.

Week of December 5, 2022 in Review

Reports on home prices, inflation and unemployment highlighted a relatively quiet economic calendar, while recession signals continue flashing. Read on for these crucial stories:

Wholesale Inflation Hotter Than Anticipated

The Producer Price Index (PPI), which measures inflation on the wholesale level, rose by a higher than expected 0.3% in November. On a year-over-year basis, PPI decreased from an upwardly revised 8.1% to 7.4%. While this was also a little higher than expected, 0.7% still represents a meaningful decline. Core PPI, which strips out volatile food and energy prices, was also hotter than expected but the annual figure decreased from 6.7 to 6.2%.

What’s the bottom line? Even though wholesale inflation was hotter than expected last month, the annual readings are still moving lower in the right direction. In addition, year-over-year consumer inflation is also expected to show a decline when November’s Consumer Price Index is reported this week, which would be good news.

Besides causing higher prices, 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 as we’ve seen this year.

Are Home Prices Still Forecasted to Appreciate?

CoreLogic released their Home Price Index report for October, showing that home prices declined by 0.1% from September but they were 10.1% higher when compared to October of last year. This annual reading declined from 11.4% in September but is still solid. More importantly, CoreLogic forecasts that home prices will remain flat in November and rise 4.1% in the year going forward, which is an increase from 3.9% in the previous report. 

What’s the bottom line? CoreLogic’s latest annual forecast is important to note because 4% appreciation can still be meaningful for wealth creation. For example, if someone bought a $400,000 home and put 10% down, that means they would gain $16,000 in appreciation over the next year and earn a 40% return on their investment due to leverage.

Continuing Jobless Claims Reach a 10-Month High

The number of people filing for unemployment benefits for the first time rose by 4,000 in the latest week, as 230,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, saw another large increase of 62,000 to 1.671 million.

What’s the bottom line? Initial Jobless Claims represent a new crop of people filing for unemployment benefits and the data suggests it’s becoming harder for many to find a job once they’re let go. This is evidenced by Continuing Claims, which have now risen by 307,000 since the beginning of October to their highest level since February.

More Recession Signals Flashing

We are seeing more inversions on the yield curve, including 2-year yields moving higher than 10-year yields last week to reach the deepest inversion since 1981. We have also seen 3-month and 1-year yields move higher than 10-year yields. This is unusual as typically you would expect to receive a higher rate of return if you put your money away for 10 years when compared to lesser timeframes. An upside-down yield curve has been a historically accurate recession indicator, as it is a symptom that the economy is slowing.

Meanwhile, recession signals are flashing in other areas of the economy, including in the manufacturing sector. The Chicago PMI, which measures activity in that region, plummeted to 37.2 in November, below estimates and well into contraction territory which is seen when readings fall below 50.   

Another sign that things are slowing has come via Business Roundtable’s fourth quarter CEO Economic Outlook Survey, which showed that hiring plans fell 17 points to 61.

Business Roundtable noted that the “results reflect a softening economy that has tempered CEO plans and expectations for the next six months. The results signal CEOs remain cautious amid persistent domestic and global economic headwinds, including high inflation and the Fed measures required to tame it.”

Lastly, the Philadelphia Federal Reserve does a quarterly survey asking “professional forecasters” the probability of a recession in the next four quarters. It is now almost twice what it was prior to the Great Recession. Professional forecasters tilt to the bullish side of the optimism street. When 43% of them think a recession is likely within the next year, we should pay attention.

What to Look for This Week

The Fed’s two-day meeting begins Tuesday, with the Monetary Policy Statement and press conference coming on Wednesday. The Fed is expected to again hike its benchmark Fed Funds Rate to help cool inflation and the Fed will see the latest data on consumer inflation when the Consumer Price Index for November is released ahead of its meeting on Tuesday. Investors will be closely watching their actions and commentary.

Also on Tuesday, the National Federation of Independent Business Small Business Optimism Index will show us how small business owners were feeling last month.

Thursday brings November’s Retail Sales data and the latest Jobless Claims. Plus, December’s manufacturing data for the New York and Philadelphia regions will provide an important update on that sector.

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

Technical Picture

Mortgage Bonds broke beneath their 100-day Moving Average on Friday, which is a negative. However, there is support not too far beneath present levels at the 100.53 Fibonacci level and some potentially Bond-friendly news is ahead this week.

Monday Market Update 12/5/2022

Mortgage Rates Tick Down

November 23, 2022

Mortgage rates continued to tick down heading into the Thanksgiving holiday. In recent weeks, rates have hit above seven percent only to drop by almost half a percentage point. This volatility is making it difficult for potential homebuyers to know when to get into the market, and that is reflected in the latest data which shows existing home sales slowing across all price points.

Opinions, estimates, forecasts, and other views contained in this document are those of Freddie Mac’s economists and other researchers, do not necessarily represent the views of Freddie Mac or its management, and should not be construed as indicating Freddie Mac’s business prospects or expected results. Although the authors attempt to provide reliable, useful information, they do not guarantee that the information or other content in this document is accurate, current or suitable for any particular purpose. All content is subject to change without notice. All content is provided on an “as is” basis, with no warranties of any kind whatsoever. Information from this document may be used with proper attribution. Alteration of this document or its content is strictly prohibited. ©2022 by Freddie Mac.

Week of November 28, 2022 in Review

With reports on housing, jobs, inflation and Fed chatter, the markets had plenty to digest last week. Here are the highlights:

Big Jobs Number or Grand Illusion

The Bureau of Labor Statistics (BLS) reported that there were 263,000 jobs created in November, which was stronger than expectations of 200,000 job gains. Revisions to the data from September and October cut 23,000 jobs in those months combined. The unemployment rate held steady at 3.7%.

What’s the bottom line? While the headline job growth number appears strong, this figure is not what it seems.

There are two reports 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 138,000 job losses, which is a pretty big disparity from the headline number of 263,000 job gains. The Household Survey also showed that the labor force decreased by 186,000. As a result, the unemployment rate remained the same – but for the wrong reasons. It was not due to strong job growth, but rather more people leaving the labor force than job losses.

Private Sector Job Growth at Slowest Pace Since January 2021

The ADP Employment Report, which measures private sector payrolls, showed that there were 127,000 jobs created in November. This was weaker than the 200,000 job gains that were expected and almost half the amount reported in October. Declines were seen in some of the more interest rate-sensitive sectors like construction and manufacturing, while leisure and hospitality and healthcare were bright spots.

ADP also reported that pay growth “remained elevated even as it continued a modest but broad-based deceleration.” Annual pay for job stayers increased 7.6% year over year, while job changers saw an average increase of 15.1%, which is down for the fifth consecutive month.

What’s the bottom line? Nela Richardson, chief economist for ADP, said, “Turning points can be hard to capture in the labor market, but our data suggest that Federal Reserve tightening is having an impact on job creation and pay gains. In addition, companies are no longer in hyper-replacement mode. Fewer people are quitting and the post-pandemic recovery is stabilizing.”

Continuing Jobless Claims at Highest Level Since February

The number of people filing for unemployment benefits for the first time fell by 16,000 in the latest week, as 225,000 Initial Jobless Claims were reported. Continuing Claims, which measure people who continue to receive benefits after their initial claim is filed, saw a substantial jump of 57,000 to 1.608 million.

What’s the bottom line? The latest Initial Jobless Claims data was for the week of Thanksgiving, so it’s likely the number of claims filed may have been higher if it wasn’t for the holiday. Continuing Claims data measured the week before Thanksgiving, so they were unaffected by the holiday. Continuing Claims have now risen by more than 244,000 since the beginning of October and have reached their highest level since February, suggesting that it’s becoming harder for people to find a job once they’re let go. 

Bonds Boosted by Fed Chair Powell and Cooler Inflation

The Fed’s favorite measure of inflation, Personal Consumption Expenditures (PCE), showed that headline inflation rose 0.3% in October, which was in line with estimates. The year over year reading declined from 6.3% to 6% and is down from the peak of 7% seen in June. Core PCE, which strips out volatile food and energy prices, rose by 0.2% with the year-over-year change falling from 5.2% to 5%, down from the peak of 5.4% in February.

What’s the bottom line? Inflation is heading in the right direction and there is hope that inflationary pressures will continue to ease. This is because inflation is calculated on a rolling 12-month basis, which means that the total of the past 12 monthly inflation readings will give us the year-over-year rate of inflation. Inflation readings after October of last year are higher comparisons, so if we continue to see lower monthly readings, the annual rate of inflation will continue to move lower.

On a related note, Fed Chair Jerome Powell’s remarks last week sparked a rally in the markets, as he said that smaller hikes to the Fed’s benchmark Fed Funds Rate could start as soon as their December 13-14 meeting. The Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. When the Fed hikes the Fed Funds Rate, they are trying to slow the economy and curb inflation.

Powell’s less hawkish tone sets up a potential 50 basis point hike at next week’s meeting, which would mark their seventh rate hike of the year, including four consecutive aggressive 75 basis point hikes at their meetings in June, July, September and November.

Why Signed Contracts on Existing Homes Are Set to Rebound

Pending Home Sales fell 4.6% from September to October, marking the fifth straight monthly decline. Sales were also 37% lower than they were in October of last year. This is a critical report for taking the pulse of the housing market, as it measures signed contracts on existing homes, which represent around 90% of the market.

What’s the bottom line? Lawrence Yun, chief economist for the National Association of Realtors, noted, “October was a difficult month for home buyers as they faced 20-year-high mortgage rates.” Yet, he added that “upcoming months should see a return of buyers, as mortgage rates appear to have already peaked and have been coming down since mid-November.”

What the Latest Home Price Appreciation Data Really Means

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, showed home prices fell 1% in September but they were 10.6% higher when compared to September of last year. This annual reading is a decline from the 12.9% gain reported in August but still strong.

The Federal Housing Finance Agency (FHFA) also released their House Price Index. This report measures home price appreciation on single-family homes with conforming loan amounts, which means it most likely represents lower-priced homes. Home prices rose 0.1% from August to September and they were up 11% from September of last year. This is a decline from the 11.9% annual increase reported in August, but again still solid on an annual basis.

What’s the bottom line? Case-Shiller’s 10-city and 20-city Indexes were down 1.4% and 1.5% respectively, meaning that a lot of the losses were concentrated in the bigger cities that were somewhat overheated, including Seattle (-2.9%), San Francisco (-2.9), San Diego (-2.1%), Denver (-2.0%) and Los Angeles (-1.8%). Note that the decreases were milder than the previous report.

Further softness in home prices is possible in the next several Case-Shiller reports as the full impact of peak rates was not realized in September. And while home prices are now down 2.5% from their peak, this is a far cry from a housing crash of 20% that some in the media are predicting.

Third Quarter GDP Remains Positive

The second reading of third quarter Gross Domestic Product (GDP) showed that the U.S. economy grew by 2.9%. This is an upward revision from the first reading of 2.6% and also better than the 2.7% expected. Note that significant revisions are still possible when the final reading for the third quarter is released on December 22.

What’s the bottom line? GDP functions as a scorecard for the country’s economic health, so the positive reading in the third quarter is a welcome sign after two consecutive negative GDP readings in the first and second quarters of this year.

What to Look for This Week

This week’s economic calendar is relatively quiet but highlighted by the latest Jobless Claims data on Thursday and the Producer Price Index on Friday, which will give us an update on wholesale inflation for last month.

Technical Picture

After the stronger than expected Jobs Report was released Friday morning, Mortgage Bonds initially gave back some of the gains they had made earlier in the week. Yet they were able to recover their losses later on Friday after testing their 100-day Moving Average. The next celling is all the way up at 102.788. The 10-year tested overhead resistance at 3.57% and was rejected. The next floor is at their 100-day Moving Average.