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.
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.
Mortgage rates – as of Nov. 16, 2022
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.
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%.
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.
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.
Home prices fell in Austin-Round Rock and increased in Dallas-Fortworth
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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