It was another extremely volatile week for global financial markets, largely due to offsetting events in the UK, but the net result for US mortgage markets was small. According to the most recent Freddie Mac weekly survey, average mortgage rates have risen a shocking 3.70% from one year ago and are now at the highest levels since 2007.
To help people struggling with the enormous increase in energy costs resulting from the conflict in Ukraine, as well as rapidly rising prices for most other items, the UK government passed new tax cuts and spending measures. Investors reacted to the inflationary implications of this increased deficit spending by pushing bond yields in the UK and around the world higher. On Wednesday, the Bank of England stepped in by announcing that it will temporarily purchase bonds to help stabilize financial markets. This unexpected increase in demand for bonds caused yields to fall back to roughly the levels seen prior to the fiscal policy change.
The PCE price index is the inflation indicator favored by the Fed because it adjusts for changes in consumer preferences over time. In August, core PCE was up 4.9% from a year ago, a little more than expected, but down from a peak of 5.4% in February. For comparison, the annual rate of increase was below the Fed’s target level of 2.0% during the first three months of 2021. One of the key questions for investors is how quickly the Fed’s aggressive monetary policy tightening will bring down inflation.
Not surprisingly, home buyers have been very sensitive to mortgage rates lately, and a brief dip in rates in August caused an unexpected surge in sales activity. After peaking in January 2021 at an annualized rate of 993,000, sales of new homes in July were just 511,000, the lowest level since January 2016. In August, however, new home sales jumped 29% from July to 685,000, far above the consensus forecast for a slight decline. The median price of a new home was 8% higher than a year ago at $436,800, the smallest annual rate of increase since November 2020. Unfortunately, mortgage rates were significantly higher in September, and this likely will be reflected in the results seen in the next report.
Going forward, investors are hoping for more specific guidance from the Fed on the pace of future rate hikes and bond portfolio reduction. The ISM national manufacturing sector index will come out on Monday and the ISM national services sector index on Wednesday. The key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.
All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline) and may not be reproduced without permission.