May 10, 2023 Interest Rate News
Wednesday May, 2023 12:59 PM Filed in:
Interest RatesIn this market update, we explore recent developments. Mortgage rates have held steady thanks to a welcome drop in inflation. The Consumer Price Index for April revealed a lower-than-expected 4.9% year-over-year increase, the lowest since April 2021. Lower housing costs are playing a role in reducing inflation, a trend expected to continue through 2024. The prospect of the Federal Reserve pausing on rate hikes is growing, with financial markets showing just a 1.5% probability of a hike in June. However, the looming debt ceiling debate and the "sell in May" adage add uncertainty. A chart analysis suggests a potential rate improvement on the horizon.
Exploring the Market Trends
Hello, and welcome to our market update for the week. We've got some exciting developments to share, so let's dive right in!
A Breath of Fresh Air for Mortgage Rates
Mortgage rates have been holding steady this past week, near the best levels we've seen in months. What's driving this? Well, it's all thanks to the latest inflation data, which revealed the lowest numbers we've seen in two years. Let's take a closer look at what's been happening and what's on the horizon.
Remember what The Eagles once sang, "Lighten up while you still can. Don't even try to understand."
Inflation Takes a Dip
In April, the Consumer Price Index (CPI), a key measure of consumer inflation, showed a year-over-year increase of 4.9%. This came as a pleasant surprise and marked the lowest reading since April 2021.
Just last year, the CPI was hovering above 9%, so this drop below 5% is certainly a positive sign.
Here's some good news: a significant part of the CPI is made up of housing costs, including rent. These costs have been gradually decreasing, although they take some time to reflect in the CPI report. We can expect housing expenses to continue playing a role in lowering inflation throughout the rest of this year and into 2024. This should help keep long-term rates, like mortgage rates, below their current levels.
A 1.5% Chance?
With inflation showing signs of cooling off, there's growing sentiment that the Federal Reserve might hit the pause button on rate hikes in June. Currently, the financial markets are only giving it a 1.5% probability of a rate hike at the next meeting.
Considering we've experienced the fastest rate hike cycle in 40 years, this news would be very much welcomed. Despite what Fed officials are saying, the financial markets are also indicating a good chance of multiple rate cuts in the latter half of this year if inflation keeps cooling off and unemployment starts to rise.
Dealing with the Debt Ceiling
Adding a dash of uncertainty to our economic landscape is the ongoing debate about the debt ceiling in Congress. Essentially, we're approaching the limit on government spending, which could happen as early as next month. To avoid a potential debt default and credit downgrade like we saw in 2011, Congress must agree to raise the spending limit.
Most experts believe that, despite the political drama, a deal will be reached to prevent a U.S. debt default. However, in the short term, this could lead to increased market volatility and potentially higher rates, including mortgage rates, as the threat of a downgrade looms.
"Sell in May" Wisdom
As we transition into the summer months, the age-old adage "sell in May and go away" is gaining popularity. This suggests selling stocks in May and re-entering the market later in the year. Why is this important? If stocks dip due to uncertainty, bonds and interest rates could be the beneficiaries.
In Conclusion
We're at a crucial juncture for rates. As you can see in the chart below, there's a pending breakout that could lead to a rapid improvement in rates. Stay tuned and be ready to seize any opportunities that arise!
Looking Ahead
We're keeping a close eye on the debt ceiling debate and the banking sector's uncertainty. In the coming weeks, the economic calendar will provide insights into Retail Sales, Housing, and regional manufacturing data.
Chart Analysis
Mortgage-backed security (MBS) prices are the driving force behind home loan rates. Take a look at the one-year view of the Fannie Mae 30-year 5.5% coupon in the chart below, representing the loans that are currently being packaged. As prices rise, rates fall, and vice versa.
Keep an eye on the purple line, which represents the 200-day Moving Average (MA), as we mentioned earlier. Once MBS surpass this threshold, we could see bonds take off and rates quickly move to new lows.
CHRIS PAHL
Real Estate Attorney
945 E Paces Ferry Rd
Suite 2250
Atlanta, GA 30326
Tel. +1 (678) 448-4148
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