Better-Than-Expected Inflation Readings Fail to Lower Rates
Although the market welcomed a better-than-expected core PCE report (the Fed’s favored inflation gauge), it had a less-than-desired impact on bond yields. Several factors may have contributed to this subdued response from the bond market. The looming government shutdown, with a staggering $33 trillion in debt, has cast a shadow on any other momentum. In addition, a significant strike by the United Auto Workers is likely to encourage other large unions to demand higher wages. Matters become further complicated by the tight oil supply causing oil prices to push back toward $100 per barrel.
Speaking of oil, it is worth noting that the PCE metric excludes the more volatile components of inflation, namely food and energy. With energy prices surging in recent months and the cost of living growing larger, this report offers little relief to most Americans.
Homebuyers Barred from Market Due to Mortgage Rates
Higher mortgage rates are now dampening demand, making the market inaccessible to many potential homebuyers. Homebuilders try to clear inventory by reducing prices and offering substantial incentives, such as 2-1 buydowns on mortgage applicants. While the tight supply in the resale housing market prevents prices from dropping significantly, an economic downturn could leave people struggling to afford mortgage payments as other costs rise. In California, the soaring costs of health and homeowner’s insurance are becoming increasingly burdensome for small businesses and homeowners. Credit card costs have also shot up, comfortably exceeding 20%.
Lower-rated credit card borrowers are beginning to make delinquent payments, signaling that the Fed’s substantial rate hikes are starting to take a toll. However, despite some receding, inflation is not rapidly decreasing. Americans are grappling with both higher capital costs and increased expenses. While the economy continues to show resilience, many are beginning to feel the severity of a slowing economy and a higher inflationary environment.
Prominent figures like Jamie Dimon and Bill Ackman, both Wall Street legends, would not be surprised by higher rates. They foresee rates settling above 5.00% at the long end of the curve. We share this view and are closely monitoring how the markets adapt to a world of elevated interest rates.
Circling back to mortgages, this market remains difficult and fragmented. The days of speaking to one or two banks on a deal are gone. Insignia Mortgage provides value by surveying many different lenders on each deal and locating incredibly competitive terms for prospective borrowers, especially those borrowers with more complex or nuanced financial profiles.