Monday Mortgage Minute – The FED MUST GET THIS RIGHT! #rates #thefed #inflation #economy

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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