Called it! I called it. Last week I said that the Fed was in between a rock and hard place and that the way they approach their press conference would be VERY telling about how they view the markets, bank stress, and whether they’re winning the fight against inflation. Remember last week? You remember right? 

 [From last Week’s episode] “What I’m looking for next week is to see how much of their time in front of camera is spent addressing their longstanding goals versus what they feel they need to address to restore confidence to the American population that their money will be safe in the institutions that have come under duress over the last two weeks. This will be a very critical meeting for the Fed to do 100% accurately otherwise this will signal they are actually way more worried about the system than they are leading on, and therefore abandoning the other issues that they have been telling us are their primary concerns for nearly a year. They HAVE TO GET THIS RIGHT.” 

 So what happened? Jerome Powell had to get up there and do a dog and pony show, do a little bit of a dance and try to very creatively answer reporters’ questions while also not throwing the markets into a complete freefall – all while trying to avoid issuing contrary statements and he was struggling. I kind of feel bad for him, kind of.  At one point he mentioned the recent bank collapses would be under independent investigation when days prior it was revealed that SVB had already been in oversight, so how did they get caught off guard? It just doesn’t make sense! And then he had to deliver difficult news about unemployment but before we get to that remember this from a few weeks ago? 

[From 3 Week’s Ago!] “Thursday March 2nd unemployment was pretty much the same as the previous week, pretty low, and a non-issue EXCEPT FOR THE FACT THAT THE FED NEEDS TO SEE MORE UNEMPLOYMENT AND IT’S NOT HAPPENING!!! They’re totally going to raise rates again, especially because the labor market isn’t softening like they need it to.” 

See? Even though we had bank failures since that was aired, the fed had no choice but to stick with a rate hike because they aren’t seeing the inflation return to 2% like they want…so they just have to keep going. They also had to keep going to communicate that the recent bank failures are not paramount to their primary objectives of returning inflation to 2%, softening in the labor market (code for increasing unemployment), and restoring price stability to the markets. Pausing would have been interpreted that they’re abandoning their main goals they’ve been telling us about for nearly a year! And that bank failures aren’t over, and are a bigger problem than we know about. 

Look, I hate to be the one to communicate this but Jerome Powell clearly stated they need unemployment to be at 4.5%. The most recent unemployment reading was 3.6% which means they need unemployment to go up almost a WHOLE PERCENT in order to create the demand destruction The Fed needs to see –  in order to slow down spending which will reduce prices, thus decreasing inflation and restoring to price stability. Less money to spend brings prices down because dollars chase products when there’s too much money in the system, and products chase dollars when the dollars become more scarce…the only way to separate people from their cash, is to reduce prices….thus eventually bringing inflation down to 2%…which then also achieves restoring price stability. But let that sink in a second, if we have approximately 160 Million people employed according to the Bureau of labor and statistics, 1% more unemployment is roughly 1.6 million more people hitting the unemployment lines to bring down inflation….that’s a lot. Like a Lot a lot!!! 

And this leads me to the another doozy from the press conference. When asked about whether or not he was worried about unemployment causing a snowball effect he said that reducing inflation is not linear, but as you can see from this explanation the snowball is exactly what will help cause inflation come down and so to try to avoid one would run counter to the logic that the snowball is actually what causes the outcome they need to see. It really sucks to say this, but they’re telling us that they need more pain in order to achieve their goals, and I hate to put it that way. However, they said it and even showed their charts projecting future rate expectations and inflation figures. 

Yes it’s a problem from last week’s press conference though, Jerome Powell put up a dot plot chart that showed their expectation of being back to 2% inflation in 2025…that’s 2 years from now. Which means they cannot deliver the “soft landing” it was not “transitory” it has become “sticky” and currently “entrenched” until “more pain” makes it’s way through the economy. 

So what’s this all mean for mortgage rates Andy? 

Mortgage rates were all over the place like I said they would be and this will remain the case moving forward because of the Statements Jerome gave and the interpretation of the press conference answers. Some of this was really telling! 

This week we’re not even reviewing economic reports because it all really pales in comparison to all the items Jerome Powell covered last week. Yes the data will matter looking forward, but what everyone’s focused on right now is banking stability, and digesting what the Fed said in order to brace up for the remainder of 2023, 2024, and into 2025…I can’t believe I’m saying that. 

And before you think I’m being negative I’m simply giving you front row feedback from what the Fed actually said, the reasoning and rationale they gave for their decision, and my previous experience in this industry through 2008 and 2009. We already had a front row seat to difficult economic times once during our business lifetime, and everything happening right now indicates that they are doing their best job, however the results they seek are still not on the horizon in the near future. 

As I said last week you really just need to be prepared for mortgage rates to be extremely volatile. It might sound like I’m overreacting to say that banks are on pins and needles watching every single move, every single word being said, every single thing not being said, and every piece of data that could influence the market one way or another, but right now uncertainty rules in all aspects of the financial markets. Depositor banks are very quickly reassessing their risk and exposure, mortgage lenders are readjusting pricing, the equity markets are trying to find their footing, and all the while residential homeowners are currently hunkered down with their fixed low rates they got in the last two years waiting it out to see what happens next. 

if you are currently in escrow and looking to lock your loan this week, be sure you are getting rate alert from your loan officer that notifies you and them every time mortgage rates increase or decrease during the open trading sessions Monday through Friday. On days where there may be uncertainty in other parts of the market, money can find its way into mortgage-backed securities and when there is more supply there is decrease in rates. Also Please remember that banks are in the business of making money, and they make that money by lending out funds to people like you and me. So there will be a point at which the rate environment must become more appetizing in order for them to begin lending out money more regularly in order to increase loan revenue, because in the end that’s what banks do and that’s how they make their money. 

If you have questions and you wish to talk with one of us here on the team please send us a direct message, email, call or text so that we can help you make the best choice considering all the circumstances facing you and your family. Again, we’ve been at this for 18 years and we have our finger on the pulse of what’s happening in the markets. Wherever we can help you win in mortgage and real estate we want to help you win. We want you to feel secure and confident about your financial future when it comes to your mortgage options and your real estate holdings. 

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Before we jump into all of the economic expectations for the coming week we have to address all of the recent bank failures and the list of banks that are under financial stress and duress due to the most recent bank runs. At this point you have probably seen numerous news pieces about this as well as online videos and articles highlighting the potential risks that the United states banking system is under because of a variety of reasons. Not all of these threats to the system are equal because not each bank has the same type of risk at the same rate of risk.

The primary take away that I want everyone who watches this show to have is that the mortgage industry is connected to the banking industry, the Fed, the treasury, in a very specific regard as it relates to lending to residential real estate, and is more of a sidecar to the main show rather than the culprit. This is a stark contrast to 2008 and 9 back when mortgage and real estate were the primary catalysts with too easy lending standards, wild financial products, improper investment ratings of products and institutions, just to name a few of the issues. And more than anything else what I want you to know is that the current state of affairs when it comes to banking in the United states has very little to do with risk associated to residential real estate and mortgages at this time.

You should also know that we are out of the woods yet because every day we wake up to new news and information that was unknown the prior day. As more and more information unfolds it alters and changes the context for which we assess the forward-looking risk the banking system, which then impacts the type of backstops or bailouts the government and the Fed need to come up with in order to prevent all out collapses.

I have to admit, the solutions for the SVB bank run were astonishingly quick and did have a very familiar sense to it because it was handled over a weekend much like some of the other bank takeovers were back in the Great Recession of 2008 and 9. Again although there are much different reasons for why this happened, but the swiftness for which they backstopped this failure felt very familiar. My hope moving forward would be that other banks looking on would not continue to run high risks in the hope that they will also receive some sort of backstop if it goes too far and works against them, however this move to backstop SVB bank as quickly as they did signals that it is OK for these banks to overleverage, under regulate themselves, and do that all without consequence to their business.

Let’s quickly recap what went down in the data last week and talk about what’s coming next.

All the CPI news from Tuesday last week spells bad news for the fed because they were all pretty much what we expected…remember we need these to be going DOWN, not hitting their mark. Hitting the mark means that there is more time we have to wait before prices retreat and actually begin to decline.

All the PPI data last week spelled goods news because they ALL MISSED TO THE DOWNSIDE meaning that they were softer than expected…this is good news because easing on the producer side of things signals that we can eventually expect easing on the consumer side, but only more time will tell when that will be.

And once again the Empire State manufacturing index came in super weak WAY WORSE than expected and will remain a trouble spot for our economy for the months moving forward because of the variables that impact this reading becoming worse thus undermining this data each month. If we continue to see weakness in manufacturing, that sends ripple effects throughout dozens of industries connected to getting products made, out the door, delivered to their destinations, and purchased by businesses and consumers. It’s like the first domino in a string of 12 dominoes…when the first one tips eventually all the others do too!

Both Building permits and housing starts came in way better than expected which is a bright spot for housing in particular because we need both permits and housing starts to move in the same direction and provide more inventory for an extremely tight housing market. Above all other news last week this one is definitely going to carry us through 2023 into a more positive 2024 as it relates to real estate and mortgage specifically.

Preliminary consumer sentiment, and preliminary inflation expectations both came in well below expectations. This is bad when it comes to consumer sentiment but it is good when it comes to inflation expectations. We would like to see the consumer feeling confident about the market but the fact that they have a lower reading than was expected indicates that the reality of prices becoming more and more entrenched is souring to the consumers feeling about the economy. This is also is reflected in the inflation expectations being lower than expected in the sense that people see some prices flattening which also signals that there is potentially a top being met.

Despite all this information that came out last week, really everyone’s attention was on bank failures and other bank potential failures. In a week prior to fed meeting, this information would have been considered much more heavily than it was because it got caught in the deep long shadow of the systemic weaknesses of the banking system coming under heavy heavy scrutiny.

And now this week all eyes are on the Fed again, but not for all the reasons we thought just a few weeks ago. Instead of Jerome taking the podium to announce a rate hike as well as make a statement then take questions strictly from the economic data and monetary policy discussions they have over their two day meeting, they have to very carefully and narrowly weigh how much of their time spent in front of cameras will be dedicated to addressing bank confidence and how capable they feel our system still is.

Do not get this mixed up, this is a really big distraction for them. For months they have been talking about inflation needing to come down to 2%, they have been talking about needing the labor market to “soften” which means more unemployment, they’ve been talking about restoring price stability to the markets, and now the big albatross around the neck of the Fed has everything to do with bank stability and Americans confidence in the banking system. They absolutely did not need this distraction.

What I’m looking for next week is to see how much of their time in front of camera is spent addressing their longstanding goals versus what they feel they need to address to restore confidence to the American population that their money will be safe in the institutions that have come under duress over the last two weeks. This will be a very critical meeting for the Fed to do 100% accurately otherwise this will signal they are actually way more worried about the system than they are leading on, and therefore abandoning the other issues that they have been telling us are there primary concerns for nearly a year. They HAVE TO GET THIS RIGHT.

So what does all this mean for mortgage rates Andy? You know after being in this industry for close to 18 years now I have to say that we will probably experience the most wild, most volatile moves in mortgage pricing this week than we have seen since the initial COVID lockdowns that happened and the Fed dropped rates all the way to 0% overnight, and of course the actual Great Recession financial collapse of 2008 and 2009.

There is just no other way to look at everything happening right now in this exact snapshot moment in time and say that we will have smooth sailing ahead, everything will be easy-peasy, and that we should not expect volatility this week. This will likely be one of the most Volatile weeks we will see this entire year barring any other unexpected surprises of course which right now I can’t even confidently say we’ll avoid given all the things being uncovered.

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Remember last week when Andy said that there were two big, REALLY BIG things happening?….Jerome Powell AND Jobs!

First off, Jerome Powell testified in front of the Senate Banking committee Tuesday March 7^th and Wednesday March 8^th . He pretty much sounded like he was reading off the same set of notes from the last Fed Press Conference. He said things like – We will have to hold rates higher than initially expected, for longer than expected and sustain them until we see inflation returning to the 2% target…I mean how many months in a row is this going to continue?!?! I get it, they’re not making traction in the ways they need to, and he’s not gonna reveal any new secrets prior to the meeting coming up next week, but man, the repeated canned commentary is just not helping inspire confidence that we’re heading in the right direction.

Second was Labor and Jobs

• JOLTS continues to be bipolar month after month. North of 11 million one month, then below 11 million the next…then north of 11 million again, and back below 11 million…In my opinion, It’s way too unpredictable to continue as a major variable in Fed policy moving forward. {shrug} But what do I know?….maybe they have a job opening coming up 😉
• ADP Non-Farm Payroll came in super-hot, well above the forecast and even the previous moniths number. So even though we want there to be more job growth like this is indicating, the Fed wants more UNEMPLOYMENT in order to squash demand so that people will stop spending money at these elevated levels. It’s the ONLY WAY inflation has a chance at returning to their target.
• Unemployment wes higher/lower than expected. Again, this reading has the Fed’s attention as it relates to the future because of the aforementioned “demand destruction” strategy.
• average hourly earnings were better/worse than expected but what’s most important is the long term readings COMPARED to inflation. If hourly pay can keep up with the elevated costs, then the problems for the Fed persist as wage earners are able to cope with sustained high prices.

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This week, the most important things happening are all coming at us like a firehose. THIS IS the week before the next Big Fed meeting and rate announcement, so this data will all be considered vital leading up to the March 22^nd Fed Rate announcement.

Tuesday starts us off with: Month over month CPI, year over year CPI and the Fed favorite – Core CPI

Wednesday we get month over month PPI, month over month CORE PPI,  month over month CORE retail sales, and month over month retail sales…But wait! how could there be more?  The Empire state manufacturing index ALSO comes out, which we thought wasn’t a big deal last month but turned out to be a really bad sign for the markets. Wednesday is a big one.

Thursday we’re watching Building permits and housing starts closely hoping for positive readings in BOTH of those. Unemployment also comes out and has been pretty erratic lately and in contrast to what the Fed wants to see happening.

Finally, Friday we have preliminary consumer sentiment, and preliminary inflation expectations readings. It sure would be nice for both of these to reflect some sort of positivity coming into the week before the fed rate announcement. The markets and the economy at large could use some good news right about now.

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So what does all this mean for mortgage rates Brian? You can expect mortgage rates to be flying around all over the place this week. With SO MUCH data coming out AND it being the week before the big fed announcement, you should not expect this week to be smooth sailing.

Weeks like this are where your preparation, communication, and execution all work in your favor. If you have a lock a loan this week, you should stick REAL close to your loan officer and be ready to strike IF and WHEN rates take a midday nosedive.

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As I mentioned, last week was going to be a bit light, yet there are still a few things we need to keep aware of:

Monday February 27^th Pending Home Sales had a pretty low forecast of 0.9%, but came in REALLY hot at 8.1%. This is a great print on the surface, and we’re going to want to see more of this month after month in order to generate confidence that there is a trajectory change in this report through the rest of the year. And remember, this is just 1 great reading…we’ll need to string these together for a while to really make our confidence concrete.

Tuesday February 28^th consumer confidence came out well below what was expected. It was 102.9, and anything over 100 is considered good. In this case the expectation was 108.5, so a 102 print isn’t that great, but not all hope is lost…quite yet.

Wednesday March 1^st the ISM Manufacturing PMI came in just about as expected and made very little difference in the markets this week only because it was already struggling to begin with, and the continued struggle isn’t BREAKING NEWS. I would expect that this will gain more weight overall once this figure heads north of 50 once again, which is a sign of expansion and anything below 50 is a signal of contraction.

Thursday March 2^nd unemployment was pretty much the same as the previous week, pretty low, and a non-issue EXCEPT FOR THE FACT THAT THE FED NEEDS TO SEE MORE UNEMPLOYMENT AND IT’S NOT HAPPENING!!! They’re totally going to raise rates again, especially because the labor market isn’t softening like they need it to.

Friday March 3^rd the ISM Services PMI came out pretty quietly and it’s not SO VOLATILE that people are talking about it. Among all the other major headliners when it comes to the economy right now, this one is a lightweight until it becomes a REAL PROBLEM. That day could still come, but for now it may have found some footing.

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This week is a BIG DEAL for a few key reasons.

#1 Jerome Powell will be testifying before the senate banking committee Tuesday March 7^th and Wednesday March 8^th. EVERYONE CONNECTED TO THE MARKETS AND FINANCE WILL BE LISTENING TO WHAT HE SAYS AS WE NEAR THE NEXT FED MEETING THIS MONTH. The markets will be volatile and most likely experience wild swings as tuned in ears are jockey-ing for position on what it could all mean moving forward.

If you’re listening to anything that could be a cue for what the next fed meeting will be like, listen for Jerome to say things about prices becoming “entrenched” and that their upwards trajectory for rates to sustain until they are confident their work is done. If you hear those 2 things or anything that remotely sounds like those 2 things…that confirms they’re worried inflation is here to stay.

#2 Labor and Jobs are in the spotlight Big Time! We have JOLTS, ADP Non-Farm Payroll, unemployment, and average hourly earnings all on deck to give us a very well-rounded look at how the labor markets are performing, where there are more pain points lifting up their heads, and possibly what the next shoe to drop will be.

This week is going to be a really good week for gauging the economic horizon.

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So what does all this mean for mortgage rates?

Well everything I just mentioned coming up this week is going to impact mortgage rates as money moves INTO or OUT OF the mortgage backed security market. As we’ve been teaching you the more money that comes in, the lower the rates will go and the more money that leaves the market creates scarcity which causes rates to increase.

With the next fed meeting only a few weeks away, this is the week that could have the most volatile reaction between now and the next fed rate announcement. Expect rates to go up or down by as much as 0.25% or 0.3875% of a percent on any given day. Anything LESS volatile than that on a week like this will be very welcomed.

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Thanks again for tuning in to Monday Mortgage Minute.

Remember to like, subscribe and turn on notifications so you see this show right when it posts each week.

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We’ll see you again next week!