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As anticipated, Chairman Powell maintained a rather hawkish tone Friday afternoon, citing unexpected economic strength in the third quarter as reason to stay vigilant on inflation. “We are attentive to signs that the economy may not be cooling as expected.” Powell said. The Fed, Powell said, is “prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
JPMorgan Asset Management’s chief global strategist David Kelly said Powell wants to keep expectations open as they approach the September meeting. Kelly, however, says from his point of view the bigger risk for the Fed at this point is hiking again, as we don’t yet know the full, lagged effects of the Fed’s aggressive rate rises yet, and there is every reason to believe, Kelly argues, inflation is on its way down, citing recent global PMI numbers, new car prices falling this year, and rents stabilizing. JPMorgan expects we will be in the low 3s by the end of this year and 2% by end of next year. Kelly also said he believes it is nearly impossible to go into recession with 9.5 million job openings, a lingering effect of the pandemic that is helping to keep inflation lower.
Morgan Stanley’s Global Head of Corporate Credit Research Andrew Sheets said much the same on inflation: “Two key measures of underlying inflation, core PCE and core CPI, slowed sharply in the most recent reading.” Sheets said. He says car prices and rent—big drivers of high inflation last year—are now pointing in the opposite direction. Sheets also sights tightening bank credit and a moderation in job growth as a sign rates are restrictive enough for Morgan Stanley economists to believe the Fed is done this year.
On the bond market, Sheets also noted: “Since 1984, there have been five times where the Fed has ended interest rate hiking cycles after multiple increases. Each time the yield on the U.S. aggregate bond index peaked within a month of this last hike. In short, the Fed being done has been good for the U.S. Agg Bond Index.”
Perhaps in line, 30 year mortgage rates ticked further upward over the 7% level on tight housing supply, as Mortgage Bankers Association (MBA) data indicated mortgage application activity drifted further downward to levels not seen in nearly three decades. Lawrence Yun, chief economist at the National Association of Realtors, said the future path of rates depends on 10-year Treasury yields and on what the Fed does at its Sept. 20 meeting. “We are at this critical juncture,” Yun said. “[Mortgage rates] can either break higher, up to 8 percent, or lower, to 6.5 percent.”
Meanwhile, Auction.com reported more than nine in 10 default servicing industry leaders expect completed foreclosure auction volume to increase this year compared to 2022, with 85 percent of those surveyed expecting home prices to decline in 2023 compared to 2022.
As anticipated, Chairman Powell maintained a rather hawkish tone Friday afternoon, citing unexpected economic strength in the third quarter as reason to stay vigilant on inflation. “We are attentive to signs that the economy may not be cooling as expected.” Powell said. The Fed, Powell said, is “prepared to raise rates further if appropriate and intend to hold policy at a restrictive level until we are confident that inflation is moving sustainably down toward our objective.”
JPMorgan Asset Management’s chief global strategist David Kelly said Powell wants to keep expectations open as they approach the September meeting. Kelly, however, says from his point of view the bigger risk for the Fed at this point is hiking again, as we don’t yet know the full, lagged effects of the Fed’s aggressive rate rises yet, and there is every reason to believe, Kelly argues, inflation is on its way down, citing recent global PMI numbers, new car prices falling this year, and rents stabilizing. JPMorgan expects we will be in the low 3s by the end of this year and 2% by end of next year. Kelly also said he believes it is nearly impossible to go into recession with 9.5 million job openings, a lingering effect of the pandemic that is helping to keep inflation lower.
Morgan Stanley’s Global Head of Corporate Credit Research Andrew Sheets said much the same on inflation: “Two key measures of underlying inflation, core PCE and core CPI, slowed sharply in the most recent reading.” Sheets said. He says car prices and rent—big drivers of high inflation last year—are now pointing in the opposite direction. Sheets also sights tightening bank credit and a moderation in job growth as a sign rates are restrictive enough for Morgan Stanley economists to believe the Fed is done this year.
On the bond market, Sheets also noted: “Since 1984, there have been five times where the Fed has ended interest rate hiking cycles after multiple increases. Each time the yield on the U.S. aggregate bond index peaked within a month of this last hike. In short, the Fed being done has been good for the U.S. Agg Bond Index.”
Perhaps in line, 30 year mortgage rates ticked further upward over the 7% level on tight housing supply, as Mortgage Bankers Association (MBA) data indicated mortgage application activity drifted further downward to levels not seen in nearly three decades. Lawrence Yun, chief economist at the National Association of Realtors, said the future path of rates depends on 10-year Treasury yields and on what the Fed does at its Sept. 20 meeting. “We are at this critical juncture,” Yun said. “[Mortgage rates] can either break higher, up to 8 percent, or lower, to 6.5 percent.”
Meanwhile, Auction.com reported more than nine in 10 default servicing industry leaders expect completed foreclosure auction volume to increase this year compared to 2022, with 85 percent of those surveyed expecting home prices to decline in 2023 compared to 2022.
As the market was expecting, the Fed raised interest rates another quarter point Wednesday afternoon, bringing the federal-funds rate to a range between 5.25% and 5.5%, a 22 year high. There will be eight weeks until the next Fed meeting.
Chairman Jay Powell said there is “uncertainty in the next meeting let alone next year.” Powell also said he believed they “have a shot” at a soft landing in the economy — the ability to achieve inflation reduction without high levels of job loss as has occurred in many past instances of tightening. We’ve been hearing this from some (not all) Wall Street economists more recently, but during the press conference Powell also revealed the independent staff at the Fed is now no longer forecasting a recession, given recent strength in the economy.
Asked directly about the housing market and the prospect of getting supply and demand back into balance, Powell said, citing the constraint of existing homes, “I think we have a ways to go to get back to balance” given that existing homeowners with low rate mortgages see “too much value in their mortgage,” keeping supply tight and continuing to pressure prices. On the other hand, Powell said, even in this rate environment there are a significant number of new buyers. “Hopefully,” Powell said, “more supply comes online” and “we are still living with through aftermath of the pandemic.”
The Mortgage Bankers Association (MBA) said high mortgage rates and low existing inventory led to another annual increase in new home purchases in June. Mortgage applications for new home purchases jumped 26.1% in June from the same period last year, according to the MBA’s builder application survey. Compared with the prior month, applications dropped by 5%, MBA said.
Housing Wire reported that construction of single-family homes specifically designed as rentals is booming. However, there are several states bucking that trend due to regulatory constraints that make investment less attractive.
The shift in commercial real estate since the pandemic — decreased office occupancy and retail activity coupled with higher interest rates — has put the CRE sector under continued strain. That stress has caused banks and other lenders to tighten their standards for new loans and scrutinize existing ones. Reuters reports that big banks are increasing loan loss reserves for commercial real estate although their exposure is relatively low. “While regional banks carry the greatest exposure to the (CRE sector,” Reuter said, “second quarter earnings show that a number of big banks have prepared for potential defaults, primarily on office loans.”
Mortgage and housing trade groups meanwhile this week objected to the Financial Stability Oversight Council (FSOC) proposal to designate nonbank servicers and others as systemically-important financial institutions. MBA said in a letter response that FSOC’s proposed interpretive guidance and a revised analytical framework “signal a renewed effort by the Biden Administration and federal financial services regulators to target non-bank financial companies – including non-bank mortgage servicers – for SIFI designation and subject them to Federal Reserve prudential oversight.”
MBA also reported that Federal Reserve, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) may vote Thursday on the interagency proposed changes to capital requirements for banks with assets of $100 billion or more, which may include an increase in residential mortgage capital requirements for large depository banks. “This is disconcerting,” MBA said, “as large increases in capital standards will likely lead to a shift in where mid-sized and regional banks will focus their core businesses and reduce credit availability for all types of lending, including for single-family, multifamily, and commercial real estate.”