Have interest rates peaked?

As of this writing, Fed Daly poured cold water and sees that the rate may go up another 1%. St Louis Fed James Bullard seems to believe that the lower limit is 5% and the upper limit could be as high as 7%. The stock market seems to be in Euphoria S&P inched higher and Nasdaq jumped 1.5%. On other news the mortgage rates plunged to 6.61 from 7.08%, the largest drop since 1981

If the rates are bound to go up how come risk on is back fashion. We will try to answer this question and some others in this blog post.

  • The market is a future looking mechanism. Although the market has priced in all the rate hikes, but the inflation story is still not yet over.
  • The October consumer price index was lower than expected. The CPI came at 7.7% an increase of 0.4% over the last year. The expectation was 7.9%.
  • Core CPI that strips the volatile food and energy components came at 6.3% a 0.3% increase YOY. Expectation was at 6.5%.

How did the markets react to October CPI number

  • Nasdaq jumped 7.5% biggest gain since March 2020.
  • The bond yield started to fall.
  • S&P 500 was up 5.5%

This was all driven off a one low CPI Print. The question is are we out of the woods? Let’s try to answer this in the next paragraph.

The Fed will not tolerate an over headed economy and will not pivot until they have seen multiple data points that confirm a slow-down inflation. The Fed’s 2 main mandates are asset price stability and full employment.

Fed Chair, Jay Powell has reiterated numerous times “ it’s premature to talk about pausing rate hikes”. The FOMC committee seems to indicate “Recent indicators point to modest growth in spending and production. Job gains have been robust in recent months, and the unemployment rate has remained low. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures.”

This brings us to the point why the sudden jubilation in the market and risk assets. There are many theories one of them happens to be that markets were oversold and there was lot of cash on the sideline that was looking for a place. The other theories are most of the trades were algorithmic and the rally was driven by short covering. Bear Market rallies are strong, and these rallies are known to push indexes upwards of 20%.

The more the financial conditions ease the Fed will have all the ammunition to keep accelerating the rate hikes.

Where are the Mortgage rates and Bond Market

Mortgage rates – as of Nov. 16, 2022

  • The 30-year rates stood at 7.08 %
  • 15 year stood at 6.38%
  • 5/1-Yr ARM stood at 6.06 %
  • 2 year US treasury stood at 4.37 up 0.009 basis points
  • The long-term treasury yield went down across the board starting from
    • 5 years stood at 3.855% down -0.066 basis points
    • 10 years stood at 3.699 down -0.1 basis points
  • The bond markets seem to indicate that the rates are going to go down. However, the Fed Speak tends to be hawkish.

A recent snippet from CNBC, during her interview with CNBC Fed Daly seems to indicate that the hike will continue, and the rate would go up at least another percentage “Pausing is off the table right now. It’s not even part of the discussion,” Daly said.

The markets seem to be overly jubilant with just one inflation read. Will the inflation go down from here only time will tell. I’m not a future teller to make a judgment on way or other, but the fed will not stop if the financial conditions ease. Markets are yet not pricing in a recession. There is a high likelihood of recession next year and the Fed is prepared to overdo rate hikes than undercut inflation.

What rates is the market pricing in

As of now, the market seems to be pricing in a probability of 85% for a fed fund rate of 425-450 basis points. Fed Daly sees the rate at 4.75% to 5.25%.

What does this all mean for the Housing Market

According to Fortune magazine, There are at least 219 markets that are down from their 2022 peak. 181 markets remain at their peak. The increase in the Fed fund rate has led to a reset in asset prices and overall asset validation be it stocks, bonds, homes or any other risk assets like bitcoin or ETH.

There are some markets where the prices will correct a lot and some where the prices may not correct at all. The key point to note here is that we have underbuilt homes in the past decade. The demand for homes far out ways the supply.

Supply and Demand of homes in Texas

According to the Texas Real Estate Research center.

“Mortgage rates have elevated significantly as a result of the Federal Reserve’s rate increases,” said Dr. Harold Hunt, research economist for the Texas Real Estate Research Center. “The result has been a real hit to affordability across the housing sector. Although interest rates are typically higher for manufactured homes compared with site-built products, the much lower purchase price still gives manufactured housing a strong advantage in the affordable-housing niche.”

Total home sales improved 10.9 percent since July’s steep decline, reaching a seasonally adjusted rate of 31,000 closed listings.

In the higher-end home (> 750K) market sales went down by 20% QOQ. due to the rising Mortgage rates.

  • Homes are sitting on the market longer because of slowing sales.
  • Texas’ average days on market (DOM) inched up to 42 days, continuously climbing from 29 days in March.
  • DOM was shortest in Dallas at 35 days and longest in San Antonio at 47 days

Home prices fell in Austin-Round Rock and increased in Dallas-Fortworth

Some Keys Stats on Supply

Texas’ single-family construction permits dropped to a two-year low, although Texas remained the state with the most issuance with 10,934 permits.
The lumber producer price index (PPI) fell three times in the past four months, and the year-over-year price elevation decelerated from 74.3 percent in January to 17.6 percent in September.

New single-family construction saw an 18.2 percent QOQ cutback in September, and single-family private construction values balanced at a two-year low. All major metros reported double-digit negative year-to-date (YTD) growths.

Contributor : Financial & Market Section – Ishan Pandey | Real Estate & Market Section : Balgovind Pandey

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