July 26, 2023 – Rate Commentary

• July 26, 2023
• realestatelife
• Business & Markets, Fed, Interest Rates, Politics & Economy, Rates, Real Estate, Real Estate Finance, Recession, World News, Your Real Estate Life

Our benchmark FNMA MBS 6.00 August Coupon is currently up +28 BPS.

Taking it to the House: Weekly Mortgage Applications were down by -1.8%. Purchases led the way lower with -2.5%. Refinances were basically flat at -0.4%. June New Home Sales were vs. est. of 727K.

The Talking Fed: We got the Fed’s latest Interest Rate Decision and Policy Statement at 2:00. You can read their official policy statement here. Here are some key takeaways from this afternoon:

• The FOMC increased their main interest rate by 25BPS to 5.50%
• They will continue their balance sheet runoff known as QT

Powell said the following during his live Presser:

• FOMC is STRONGLY committed to getting inflation down to 2%
• Process of getting to 2% has a long way to go
• Full effects of tightening is yet to be felt but will take cumulative lags in prior tightening into account.
• FOMC to take data dependent approach on future hikes
• Current policy is not restrictive enough, for long enough
• They would consider stop raising rates before inflation is at 2%
• Fed will NOT be cutting rates this year.

On Deck for Tomorrow: ECB Interest Rate Decision and Policy Statement. Initial Weekly Jobless Claims, preliminary 2nd QTR GDP, Durable Goods Orders, Pending Home Sales, 7 year Treasury Note Auction.

As expected, the Fed increased rates by 25 bps to 5.25%/5.50%, the highest rates in 22 years. Also as expected the FOMC let it hang out there more increases still not off the table. “Recent indicators suggest that economic activity has been expanding at a moderate pace. Job gains have been robust in recent months, and the unemployment rate has remained low, inflation remains elevated.” The Committee will continue to assess additional information and its implications for monetary policy. In determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”… “The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments”… “The U.S. banking system is sound and resilient.”… “Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.” No surprise, the vote was unanimous.

Powell said there is no thought what the FOMC will do at the Sept 20th FOMC meeting, it is about incoming data (have you heard that before?) It has been over a year now that the Fed has increased rates, seems like a lifetime that all we do is focus on the Fed. Powell worries about inflation risks to the economy and its target of 2.0%. It is highly unlikely inflation will drop to 2.0% unless the economy rolls over soon, and that does not seem likely given most economists’ outlook and what investors are doing these days. He pointed to the core reads on CPI, PPI as key elements in the decision.

PacWest bank and Banc of California are merging, another rescue deal. JPMorgan Chase will buy $1.8B of residential mortgages to help the deal, the purchase at a discount. JPMorgan Chase hasn’t indicated whether it will hold the loans or sell them in the market.

Now that the FOMC is behind, the next two days have fresh meat to grill. Tomorrow weekly jobless claims expected at 335K from 22K; June durable goods orders expected +0.5% from +1.7% in May, ex transportation -0.1% from +0.7%, core capital goods -0.1% from +0.7% in May; June pending home sales +0.3% from -2.7% in April; Treasury will auction $35b of 7 year notes. On Friday, the next inflation reading, June PCE m/m expected +0.2% from +0.1%, year/year +3.0% from 3.8% in May, the core PCE +0.2% from +0.3%, year/year +4.2% from 4.6% (Powell stressed he focuses on the core read). Then we get the employment cost index for Q2, expected +1.1% from +1.2% in Q1. Inflation based on those reports is declining. Finally on Friday the final U. of Michigan consumer sentiment index expected at 72.6 unchanged from mid-month. Last Tuesday the consumer confidence index for July increase to 117.0 on forecasts of 111.8 and up from 109.7 in June.

It took an hour after the FOMC policy statement for any movement in rate markets. The 10 did get better starting about 3 pm to end the day -4 bps and MBS prices increased 10 bp from 9:30 am pricing.