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Provided to you Exclusively
by
Lillian Wong
  
For the week of Sep 26, 2022 | Vol. 20, Issue 38
Lillian Wong
Lillian Wong
Sr. Loan Officer
NMLS ID 630337
Lillian Wong & Associates
NEXA Mortgage
Office: 480-650-5412
E-Mail: lwong@nexamortgage.com
Website: www.lillianwong.net
Lillian Wong & Associates<br>NEXA Mortgage

A Look Into the Markets





















This past week, the Federal Reserve raised the Fed Funds Rate by .75% and issued its quarterly economic projections. In response, home loan rates ticked up to a new 2022 high. Let's discuss three things we learned from the Fed Meeting and what to watch in the weeks ahead.

"You gotta believe in someone, asking me who is right, asking me who to follow...Don't ask me, I don't know". I Don't Know by Ozzy Ozbourne

"In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3 to 3.25 percent and anticipates that ongoing increases in the target range will be appropriate."  Fed Statement Sept 21, 2022.

1. The Federal Reserve Is Not Very Good At Forecasting

The .75% rate hike lifts the Fed Funds Rate to a range of 3 to 3.25%, the highest since Jan 2008. This increase will affect short-term loans like credit cards, autos, and home equity lines of credit.

Along with the rate hike, the Fed released its quarterly economic projections. This means every three months they update their projections on economic growth, inflation, and the path for interest rates.

If you follow what they have forecasted for the past couple of years, it's clear the Fed has underestimated inflation, overestimated economic growth, and underestimated how high they want to raise rates.

Back in June, the Fed forecasted economic growth to be 1.7% for 2022. Three months later, they now see the US growing at a slim 0.2% level. Also back in June, the Fed had forecasted Core inflation to be 4.3% for 2022. Now they expect inflation to be higher at 4 to 5%.

Lastly, on the Fed Funds Rate, the Fed expected the rate to increase to 3.4% back in June. Now, the Fed sees the Fed Funds Rate at 4.4%.

The market's reaction – lower stocks and higher rates mimic the uncertainty and volatility we hear from the Fed and economic readings.

2. The Federal Reserve Can't Say Recession

Despite downgrading economic growth at each of the last few quarterly projections and the Atlanta Fed forecasting 3rd quarter GDP to be just 0.3% on the heels of a contraction in the first half of 2022, The Fed has never used the word recession to describe where the economy is or where we are headed. The Fed reiterated that we will all feel economic pain because of their inflation-fighting efforts. He also said the chances for a soft landing are slim. All of this means, the US economy may already be in a recession and headed towards something potentially worse as the Fed also wants to create some unemployment.

Seeing the 2-yr yield rise to 4.11% and well above the 10-yr Note means the bond market is telling us the economy is headed towards a recession, despite our central bankers' inability to utter the word.

3. Higher For Longer

Fed Chair Powell reiterated several times during his press conference that the Fed will raise rates higher and hold them elevated until inflation comes back down to the Fed's target of 2.00%.

The markets are currently pricing in yet another .75% hike in November and a .50% hike in December. This could change if we see a softer inflation reading or surprisingly soft labor market or growth readings.

A reminder - the Fed only controls a short-term overnight rate and long-term rates like the 10-yr Note, which will signal how high and long rates will stay elevated. Seeing a wide yield curve inversion between the 2 and 10-yr Notes suggests the economy will have a difficult time absorbing the hikes without a recession.

Bottom line: The 10-yr Note yield closing above 3.50%, means we should not expect much or any improvement in rates in the near term. We now have to follow the incoming data carefully, which should tell the bond market and The Fed whether economic conditions warrant higher rates.

Looking Ahead

Next week brings the important Core Personal Consumption Expenditure (PCE) Index. How this report goes could impact the pace of rate hikes in the future. There is also some housing data expected to be released.


Mortgage Market Guide Candlestick Chart

Mortgage-backed security (MBS) prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 5% coupon, where currently closed loans are being packaged.  As prices go higher, rates move lower, and vice versa.

Prices are right at 2022 lows, which means home loan rates are at 2022 highs. With the 10-yr moving above 3.50%, we are likely to see home loan rates remain elevated in the near to intermediate term.

Chart: Fannie Mae 5.0% Mortgage Bond (Friday Sep 23, 2022)
Japanese Candlestick Chart

Economic Calendar for the Week of September 26 - September 30

Date
ET
Economic Report
For
Estimate
Actual
Prior
Impact
Tue. September 27
08:30
Durable Goods Orders
Aug
-0.4%
-0.2%
-0.1%
Moderate
Tue. September 27
09:00
S&P/Case-Shiller Home Price Index
Jul
17%
16.1%
18.7%
Moderate
Tue. September 27
10:00
Consumer Confidence
Sep
104.5
108.0
103.6
Moderate
Tue. September 27
10:00
New Home Sales
Aug
500K
685K
532K
Moderate
Wed. September 28
10:00
Pending Home Sales
Aug
-4.0%
 
-1.0%
Moderate
Thu. September 29
08:30
Jobless Claims (Initial)
9/23
223K
 
213K
Moderate
Thu. September 29
08:30
Gross Domestic Product (GDP)
Q2
-0.6%
 
-0.6%
HIGH
Thu. September 29
08:30
GDP Chain Deflator
Q2
8.9%
 
9.0%
HIGH
Fri. September 30
08:30
Personal Income
Aug
0.3%
 
0.2%
Moderate
Fri. September 30
08:30
Personal Spending
Aug
0.2%
 
0.1%
Moderate
Fri. September 30
08:30
Personal Consumption Expenditures and Core PCE
Aug
0.3%
 
0.1%
HIGH
Fri. September 30
08:30
Personal Consumption Expenditures and Core PCE
YOY
4.7%
 
4.6%
HIGH

The material contained in this newsletter is provided by a third party to real estate, financial services and other professionals only for their use and the use of their clients. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, we do not make any representations as to its accuracy or completeness and as a result, there is no guarantee it is without errors.

As your mortgage professional, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you.

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Lillian Wong
Lillian Wong & Associates
NEXA Mortgage
3100 W Ray Rd Ste 201
Chandler AZ 85226

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