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Sandstone Financial
 
Provided to you Exclusively by Allycyn Bennett
By
Allycyn Bennett
 
Allycyn Bennett
Loan Officer
NMLS #230116
DRE #01000269
Sandstone Financial
Office: 949-717-7290
Fax: 949-717-7490
E-Mail: abennett@sandstonefin.com
 
Allycyn Bennett
 
For the week of May 17, 2021 --- Vol. 19, Issue 20

A Look Into the Markets
 





















"The way that buck has shrunk / It's a lowdown dirty shame / That's why I got the blues / Got those inflation blues" - "Inflation Blues" by B.B. King

"It takes all of my money / Just to eat and pay my rent"

This past week, the yield on the 10-year note increased to its highest level in one month in response to a very hot consumer inflation reading. Let us break down what happened and get into what to look for in the week ahead.

On Wednesday, the financial markets were prepared for a high Consumer Price Index (CPI) inflation reading. Well, the report showed headline consumer prices climbed 4.2% year-over-year, far above the 3.6% expected and the Core CPI (which strips out food and energy) rose by 3.0% year-over-year, the largest 12-month increase in 26 years.

The market reaction was a swift decline in both stock and bond prices with yields moving higher. If inflation rises, rates/yields must rise to compensate the investor for the effects of inflation.

Some bad history was made with this spike in inflation. For the first time in nearly 50 years, CPI has exceeded mortgage rates on a year-over-year basis. This screams opportunity for those looking to refinance or purchase a home, because at some point either inflation must come back down, rates must go up, or some combination of both.

Will Price Increases Be "Transitory?"

That is the biggest question for the economy and financial markets. The Federal Reserve fully believes that the spike in prices will be temporary, and we should see a moderation in prices come fall. So we will have to wait to see if the Fed is correct. What we can expect over the summer months is more volatility in stocks, bonds, and rates, as future inflation readings will be closely watched for sustained and substantial price increases.

"Don't Fight the Fed"

We should all remember that saying. The Fed continues to hold the Fed Funds Rate near zero and purchase bonds to keep long-term rates low. The muted outlook for inflation supports their stance.

If the Fed is right and inflation does moderate in the fall, we will not see any major increase in rates. If the Fed is wrong and we see sustained higher inflation, the Fed will likely adopt other tools to help keep long-term rates low. Again, likely no major increase in rates.

If that sounds a bit like a win-win from a rate perspective, yes, it is. We should expect rates to remain relatively low for a longer timeframe.

Bottom line: This is no time to get complacent, and while interest rates may not move too high in the near-future, they may also not improve much from here, as evidenced by what happened this week. Take advantage of what is available today thanks to the Fed bond purchasing program.

Looking Ahead

The economic calendar is a bit lean next week, but we will get a look at housing starts and permits. The recent surge in lumber and material costs has created an unsustainable situation for new home builders. At some point, the inflation in materials must moderate, or builders will be forced to slow down construction. The other big story we must follow now is the heightened inflation concerns and see if it is indeed transitory.


Mortgage Market Guide Candlestick Chart
 

Mortgage-backed security (MBS) prices are what determine home loan rates. The chart below is the Fannie Mae 30-year 2% coupon, where current closed loans are being packaged. As prices go higher, rates go lower and vice versa.

Note the large red candles on the right side of the chart showing the price decline and rate increase. Fortunately, MBS prices were able to recover some losses on Thursday heading into the weekend.

Chart: Fannie Mae 2.0% Mortgage Bond (Friday May 14, 2021)
Japanese Candlestick Chart
 

Economic Calendar for the Week of May 17 - May 21

Date
ET
Economic Report
For
Estimate
Actual
Prior
Impact
Mon. May 17
08:30
Empire State Index
May
24
 
26.3
Moderate
Mon. May 17
10:00
Housing Market Index
Apr
83.0
 
83.0
Moderate
Tue. May 18
08:30
Housing Starts
Apr
1.710M
 
1.739M
Moderate
Tue. May 18
08:30
Building Permits
Apr
1.774M
 
1.766M
Moderate
Wed. May 19
02:00
FOMC Minutes
April
NA
 
NA
HIGH
Thu. May 20
08:30
Jobless Claims (Initial)
5/15
453K
 
473K
Moderate
Thu. May 20
08:30
Philadelphia Fed Index
May
44.0
 
50.2
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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Allycyn Bennett
Sandstone Financial
1400 Newport Center Drive
Suite 100
Newport Beach, CA 92660

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