Investors and the Fed: Why is the First Wall Street Comeback so Strong? The Case of the S&P 500 and the Consumer Price Index
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Markets plunged on Thursday morning after red-hot inflation data raised fears on Wall Street that the Federal Reserve would continue hiking interest rates aggressively. Then, something strange happened.
Stocks staged a massive comeback. The S&P 500 had its widest trading range since March 2020, as the indices surged from a peak to a trough.
The economy is showing signs of resilience, mainly due to consumer spending, according to Khater. Housing costs are increasing and this is impacting inflation.
The Fed’s tightening could push the economy into a recession in 2023 if it continues, he said. The majority of economic indicators show signs of resilience. Additionally, this week’s Consumer Price Index data showed continued moderation in the price growth trajectory.”
Why is the divergence between markets and inflation data so great? Investors could be betting that the stronger-than-expected inflation report means price increases are near their peak. The market is showing how investors have been searching for clues about what the Fed will do.
The Big Picture: Household Wealth in the Next Three Years: Allianz reveals a Stagnant Growth of Financial Assets and Mortgage Rates
The big picture: Household wealth is on track for its first significant reduction since the financial crisis in 2008, according to a new report by financial services company Allianz.
Global assets are set to decline by more than 2% in 2022, Allianz reports. That means households, on average, will lose about a tenth of their wealth this year.
The report paints a bleak picture. The 2008 financial crisis was marked by a relatively quick turn around, but the outlook shows stagnant growth in the future. The average growth of financial assets is expected to be around 4.6% until 2025, compared with 10.4% over the last three years.
Russia’s war on Ukraine has obstructed the potential for a post-pandemic economic recovery, and increased food and energy scarcity. The world’s central banks are increasing borrowing costs due to high inflation. The last year of the old “new normal” may be the one where the stock markets end in the red.
Household debt, meanwhile, has been on the rise globally. The impact of rising interest rates and the cost of living on household balance sheets could be a concern according to researchers.
The results of the change are atonic shift in global wealth that will take years to recover from. Earnings reports from some of the country’s largest banks such as Citigroup, Morgan Stanley, and Wells Fargo are likely to give more insight into the state of the consumer, as the release of retail sales for September will shed more light on that.
Mortgage rates have ticked down recently, but are still up dramatically from a year ago thanks to the surge in long-term bond yields as the Federal Reserve hiked interest rates.
“Mortgage rates are really critical to the path of the housing market in the year ahead,” said Jeff Tucker, senior economist at Zillow. We are watching to see how affordability improves. That should breathe some life back into the market.”
Freddie Mac’s chief economist said they see a tale of two economies in the data. “Strong job and wage growth are keeping consumers’ balance sheets positive, while lingering inflation, recession fears and housing affordability are driving housing demand down precipitously.”
The Price of Homebuying in the 2020 to 2022 Recession: The Impact of Netflix and Wall Street Negatives on the Streaming Market
A homeowner with an average rate of 6.92 would pay $2,059 a month in principal and interest on their house. The monthly increase is $735 per month.
So what will be the state of the housing market this year? Home prices rose nearly 40% from the spring of 2020 to the spring of 2022, representing roughly a decade of price gains in just a couple of years. Will what went up come down as well?
The new option will feature much of what’s available with Netflix’s current $9.99 a month Basic plan, but will include an average of four to five minutes of commercials per hour. Those ads will be 15 or 30 seconds in length and will play before and during TV series and movies.
The company lost billions in its market cap after that news. Hundreds of employees were laid off, and doubts ran rampant about the platform’s future, raising questions about the viability of the entire streaming marketplace.
In the third quarter, Bank of America and Goldman Sachs had earnings, as did Johnson & Johnson and United Airlines.
Mortgage Rate Forecasts for the Next Few Years: The Effects of Inflationary Pressures and a Toll on Borrowers
The forecasters have predicted a wide range of where rates will be in the near future. While Realtor.com anticipates rates for the 30-year, fixed-rate loan will be above 7% in 2023, Zillow projects rates closer to 6% this year, ending the year at between 5.5% and 6%.
The economy will likely enter a recession as a result of the Fed’s rate hikes, even as data points to continued resilience, he said.
Over the next few years, Kan said first-time homebuyers will account for a large portion of demand. But since more homeowners are staying put, unwilling to give up their ultra low mortgage rates, it means fewer starter homes are available. And the combination of low inventory of homes for sale and slowing new construction activity means that housing supply is likely to remain constrained.
“Mortgage application activity sunk to a quarter-century low this week as high mortgage rates continue to weaken the housing market,” said Sam Khater, Freddie Mac’s chief economist. “While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023.”
“Origination volumes have declined, revenues have dropped, and expenses continue to rise,” said Walsh. Reducing staffing levels, exiting less profitable channels and even exiting the business entirely are some of the ways in which bankers have begun to shrink excess capacity.
NAR anticipates the economy will continue to add jobs throughout this year and next, with the 30-year fixed mortgage rate steadily dropping to an average of 6.1% in 2023 and 5.4% in 2024.
A toll on borrowers. The Federal Reserve has been raising the federal funds rate, its key interest rate, as it tries to rein in inflation. The Fed raises the rate that banks charge each other, which sets off a domino effect. A number of borrowing costs for consumers go up.
“The Federal Reserve controls short-term rates, but long-term rates, including 30-year mortgage rates, are a function of market expectations for the path of the economy,” said Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association. According to investors, the slowing of the economic growth will result in lower rates over time.
The base rate is typically tied to the yield on a 10-year Treasury note, so if you move to another home after 10 years of getting a mortgage, you’ll have to pay more than the current base rate. The difference between the yield on those notes and mortgage-backed securities is a factor that can lead to a second rate. In Wall Street parlance, this difference is known as the “spread.”
Finally, there is an additional amount of interest charged that reflects the profits that lenders, servicers and other players make in the mortgage chain.
Since M.B.S investors expect interest rates to keep going up, they make people stay in their homes longer which makes them slower to prepayments or refinance their mortgage. That changes investors’ calculations of the returns they expect on their holdings over a certain time frame. Rather than stick around, some investors sell the bonds in search of higher returns elsewhere. Others would prefer higher interest rates to compensate for the risk of holding mortgage bonds.
The Spread between Treasuries and Mortgage-backed securities remains consistent in normal times. When interest rates rise, that changes.
The spread is widening because bond investors now expect more than a Treasury note. This year the spread has doubled to 1.7 percent from 0.7 percent. The wider the spread, the more consumers pay because lenders pass on to them the cost of those increased rates.
Inflation and Mortgage Application Fluctuations in the US: What Have Investors been Telling Us About Mortgage Rates and Homebuying?
Inflation, as measured by the Consumer Price Index, cooled considerably in November and was at its lowest level in nearly a year, according to the Bureau of Labor Statistics’ closely watched index, released on Tuesday.
Freddie Mac gets tens of thousands of mortgage applications from banks across the country. The survey includes only borrowers who put 20% down and have excellent credit. Many buyers pay more than the average rate due to the fact that they put down less money upfront.
Fed Chair Jerome Powell mentioned in his remarks that with prices still rising at a high rate, more rate increases are needed and the central bank remains committed to rate hikes until the pace of inflation notches a noticeable slowdown, Ratiu said.
Ratiu said the continued cooling in inflation measures should make it less likely that mortgage rates will go up.
She claimed the data did not take into account the full impact of rising mortgage rates that led to a significant decrease in buyer activity. “In many local markets across the country, home prices have fallen precipitously from their summer peaks as buyers were forced out of the market due to affordability challenges.”
Already, rates have been climbing in recent weeks, leading to a drop in mortgage applications. Last week, applications fell 7.7% from one week earlier, according to the Mortgage Bankers Association.
“Purchase activity that was put on hold last year due to the quick runup in rates is gradually coming back as rates ease and housing demand remains strong, driven by supportive demographics and the ongoing strength in the job market,” said Joel Kan, MBA’s vice president and deputy chief economist.
There is a lot of housing data on the table. On Tuesday the US Census Bureau will report housing starts and building permits figures for November, followed by Friday’s release of new home sales data for the same month. The existing home sales data from the National Association of Realtors will be out on Wednesday, followed by weekly data on mortgage rates and applications on Thursday.
Still, there are some promising signs that the worst could soon be over. Shares of Lennar
(LEN), one of the largest homebuilders in the US, rallied after reporting earnings last week. The company expects to deliver more homes next year than analysts think, but revenue was higher than expected.
Kenneth Leon thinks that investors may be looking ahead to the next few years, perhaps crossing the valley from recession to potential recovery.
Home prices are 40% higher than they were before the Pandemic. Even a further 15% drop would bring them to mid-2021 levels. This is not like the mid-2000s real estate bubble bursting.
Ratiu said that investors have been expecting the economy to fall into a recession following the Fed rate hikes, assuming that higher borrowing costs will make it ever more challenging for consumers to continue spending on credit. “On the other hand, the combination of a strong job market and pandemic savings mean that Americans have maintained a steady consumption pace even as they switched their focus from goods to services.”
Others point out that even though housing sales may remain weak due to high home prices and still elevated mortgage rates, the good news is that most existing homeowners are still paying their monthly mortgage on time.
Many people with poor credit histories had trouble keeping up with their mortgage payments in 2008 but that has changed now.
The economy isn’t being brought down by housing. The market for housing has been affected. Gene Goldman said that mortgage delinquencies are still low.
Not a lot of companies report their latest earnings this week. But the few that are could give more clues about the financial health of consumers and the state of corporate spending.
Cereal giant General Mills
(GIS) will release earnings on Tuesday. Analysts are expecting the sales and profit to go up. Consumers may be growing increasingly wary about inflation and the broader economy, but they’re still eating their Wheaties. The shares of General Mills have increased in value this year.
Analysts are less optimistic about the outlooks for sneaker king and Dow component Nike
(NKE), used car retailer CarMax
(KMX) and memory chip maker Micron
(MU), whose semiconductors are used in devices ranging from cell phones and computers to cars.
FactSet estimates fourth-quarter earnings for the S&P 500 will decline by 2%) from a year ago. Analysts have been cutting their forecasts. John Butters, senior earnings analyst at FactSet, noted in a report that fourth-quarter profits were expected to rise 3.7% as recently as September 30.
The odds of a recession are high according to the chief economist and macro strategist of Dreyfus & Mellon,Vincent Reinhart. “That will have a knock-on effect for corporate earnings. Higher rates and weaker earnings suggest more pain for stocks.”
Personal income and spending, US PCE inflation, US new home sales, and US Durable goods orders are all on Friday.
It’s hard to say what action by the Federal Reserve will mean for people who were just getting their heads around rate at a lower level that may bounce higher.
Economists’ predictions range from prices rising by around 5% this year, according to Realtor.com, to as much as a 22% decline from the peak in 2022 to the trough, according to John Burns Real Estate Consulting.
He said that more inventory would become available, because locked-in homeowners will now have more opportunities to sell.
Real Estate Prices in the Rise and Fall of the Real Estate Markets: Implications for Real Estate Buyers and Developers, Wall Street Walls and Labor Market Dynamics
San Francisco prices plunged in November and then worsened in December, falling 4.2% year-over-year. The price in Seattle was down from last year.
Some places such as Manchester, New Hampshire, Columbus, Ohio, Fort Wayne, Indiana and Hartford, Connecticut, are still seeing homes being sold as buyers from more expensive locations are drawn by the solid local economies and median prices.
The median mortgage payment in November was $1,977, a 5.6% decline from $2,012 in October.
The negative psychological shock of the rate jump in the fall is starting to wear off for buyers, and this leads to a favorable adjustment in expectations.
In 2023, the first half of the year might not have gone well but the second half may be strong for buyers, Leonard Steinberg said in a conference call.
“The would-be buyers that stepped back from the market in late 2022 can’t and won’t stay away forever, especially given the competing demands from first-time buyers looking to get into the market and retirees looking to move or downsize,” Steinberg said.
He added that chronic under-building of new homes is likely to remain a challenge in all market segments as builders grapple with the challenge of balancing a short-term decline in demand with long-term need for more new housing.
The mood in the market is much more optimistic than a month ago, as many agents and brokers are expecting a robust spring housing market.
“New listings were at the lowest level in the last six years in January as sellers stayed on the sidelines, waiting to see buyers return, before placing their homes for sale,” said Jones. In the first month of the year, the decline in new home sales slowed, and buyer sentiment improved, as well as the existing home sales decline.
“With a Federal Reserve committed to bringing inflation down, investors expect business investments and consumer spending to pull back,” said Ratiu. With most Americans still employed and seeing modest pay gains, the retreat in spending has yet to come to fruition.
“With more than 10 million open jobs and still not enough applicants to fill them, the labor market would have to experience a sharp and significant drop to move the needle on spending,” he said. If corporate executives cut payrolls before a recession, it would create a self-fulfilling downward spiral.
The Rise and Fall of Real House Prices in Top 150 Metropolitan Areas in November, according to the S&P Case-Shiller US National Home Price Index
Even though home values dropped by 10% nationwide in November, they were up by double digits in dozens of the top 150 metropolitan areas.
The upcoming March is expected to be the start of seasonal norms, as more inventory becomes available and more buyers look at what is out there, as long as buyers are willing to give up low rates that they enjoyed in the past.
“We may have to wait until the start of the spring shopping season for more clarity on the direction of housing markets this year, especially as both buyers and sellers are pulling back from the marketplace,” he said.
US home prices dropped for the fifth month in a row in November, as rising mortgage rates pushed prospective buyers out of the housing market late last year and prices continued to cool, according to the latest S&P CoreLogic Case-Shiller US National Home Price Index, released Tuesday.
The national index decreased in July, for the first month-over-month decrease since February 2012 and continued through the end of the year.
Before seasonal adjustments, all cities in the 20-city index reported declines. After seasonal adjustments, 19 cities still reported declines, with only Detroit increasing 0.1%.
The S&P Core Logic Case-Shiller US National Home Price index rose 7.7% in November from the year before, but that’s slower than the jump of 9.2% in October.
Miami, which saw the strongest prices for the fifth-straight month, was the city with the strongest price appreciation. It was followed by Tampa, Florida, up 13.9%; Atlanta, up 10.4%, and Charlotte, North Carolina, up 9.9%. The Southeast and South were the strongest regions while the West was the weakest.
The First Three Months of Housing Market Growth: Implications of Inflation, Mortgage Rates, and Mortgage Rate Increases for the US Economy
According to Lisa Sturtevant, Bright MLS chief economist, the report provides evidence of the slowing housing market during the fall, but it doesn’t show the worst yet of the housing market.
Mortgage rates fell throughout January, prompting more buyers to view properties and make offers. Inflation has begun to ease, boosting consumer confidence. Home sales in December and January improved.
Freddie Mac’s chief economist says that a one percentage point reduction in rates can allow three million more consumers to qualify and afford a $400,000 loan.
A quarter-point increase in the federal funds rate on Wednesday was the smallest since March. The central bank is seeing some progress in its battle with inflation, thanks to the move to slow the pace of increases.
He said that he expects mortgage rates to stay around 6% for the next few weeks because of the Fed’s actions.
The Bureau of Labor Statistics said last week the US economy added more than half a million jobs in January. Analysts were expecting something closer to 185,000 jobs. The Fed has made a lot of effort to cool the labor market and bring down inflation, but it is complicated now because of the surprising number.
Housing economists and those in the mortgage market are looking to the next report on inflation, set to be released February 14, to see if the pace of price hikes continues to slow.
Ratiu said that the down payment amount is lower for a median-priced home today than it was last summer. It’s good news butAffordability remains a challenge for first-time buyers.
The Federal Reserve is Hiking: Predictions from the First Quarter of the Year 2003-2004 Mortgage Rate Rise and Demand in the Real Estate Market
The Federal Reserve raised its lending rate this week as a stronger-than- expected jobs report suggested it would continue hiking in its battle against inflation.
The Federal Reserve Chairman, Jerome Powell, said the central bank may have done more and raised rates more than was priced in, speaking at the Economic Club of Washington.
The tension between expectations and economic data will continue to seep through financial markets for several more months, said George Ratiu, Realtor.com’s manager of economic research.
Mortgage applications have fallen by a factor of five since November, and rates are nearly double from a year ago, according to the Mortgage Bankers Association.
“Affordability — especially at the lower end of the market — continues to be a challenge, but MBA expects purchase demand to continue to recover heading into the spring,” said Bob Broeksmit, MBA president and CEO.
The pending sales index, based on signed contracts to buy a home rather than the final sales that are accounted for in existing home sales, rose by 8.1% from December to January, beating economists’ predictions for a rise of 1%. In December, a downwardly revised 1.1% rise was recorded.
It appears that activity is starting to bottom out in the first quarter of this year, after being in a high state of activity for a very long time.
The South gained ground because of stronger job growth, while the West saw an extra boost due to lower home prices.
“But as rates are right back up in February, it’s likely that any momentum in this market will be short lived and affordability challenges will remain key to the direction and speed the market moves in the coming months,” she said.
The recent economic data shows that the Federal Reserve is not done with its fight to cool the economy, and likely will keep hiking its lending rate.
According to Kan, data on inflation, employment, and economic activity have signaled that inflation may not be cooling as quickly as expected, which is putting upward pressure on rates.