February 2022 Mortgage Rates Face Massive New Inflation-Induced Volatility

Rising inflation levels continued to induce massive daily market volatility for February 2022 mortgage rates. As a recap, the Federal Reserve initiated a bond purchase program. They did this to combat the adverse effects of the coronavirus pandemic. In doing so, the Federal Reserve successfully facilitated economic growth.

Now, that the coronavirus cases plummeted, the economy quickly returned to form. However, inflation still faces a monumental rise. Conclusively, inflation rates played a major role on last month’s mortgage-backed securities.

Consumer Price Index Spurs Volatility for February 2022 Mortgage Rates

Because inflation held heavy influence over February 2022 mortgage markets, investors remained on the edge of their seats when it came time to the Consumer Price Index report (CPI). During the second week of February, inflation unexpectedly surged.

First, the CPI inflation report reflected stronger than anticipated inflation data. Later in the week, an official from the Federal Reserve proposed a very rapid pace of rate hikes to bring down inflation. This news spurred mortgage rates to climb to their highest levels in over two years. For comparison, mortgage rates rose 100 basis points higher than a year ago at that time.

Understanding the Consumer Price Index

Investors closely watch the monthly Consumer Price Index report (CPI). For reference CPI examines price changes for a broad range of goods and services. Also, Core CPI excludes the volatile food and energy components. Due to this, Core CPI provides a clearer picture of the longer-term trend.

In January, Core CPI rose 6.0% higher than a year ago. Not only did this climb above the consensus forecast, it grew from an annual rate of increase of 5.5% in December 2021. Also, Core CPI achieved its highest level since 1982.

Factors Leading to Jump in Consumer Price Index

In 2021, the core inflation remained below 2.0%. When assessing the cause for the significant jump in the core inflation rate, analysts point to multiple relevant factors. First, the United States faces a tight labor market. With the onset of the coronavirus pandemic, remote work became a widely accessible option. This allowed workers to obtain greater job availability.

Secondly, energy prices rose. Once again, the COVID-19 pandemic left its mark here. Because of the labor and parts shortage, energy became harder to produce cheaply. Finally, the world battles an ongoing supply chain crisis. Shortages for many items led to enormous cost increases. For example, the price of used cars soared 41% higher compared to one year ago.

To date, Federal Reserve officials and economists remain divided on the recent inflation spike. Whereas some feel that the COVID-19 pandemic temporarily led to the spike, others firmly believe that long-term, structural changes are to blame.

Personal Consumption Expenditures Demonstrates Rising Inflation

While investors closely watch the Consumer Price Index report (CPI) for inflation updates, the Federal Reserve favors the Personal Consumption Expenditures report. Generally, the Personal Consumption Expenditures report (PCE) also reflects inflation levels.

In January 2021, Core PCE increased 5.2% higher than a year ago. in addition, Core PCE also jumped 4.9% last month. Finally, Core PCE reached its highest annual rate since 1983.

For comparison, readings fell below 2.0% during the first three months of 2021. Similar to the CPI report, investors question whether how quickly inflation will moderate as pandemic-related disruptions are clear up.

Employment Report Exceeds Expectations in Nearly Every Area

In February 2022, the labor market demonstrated a much stronger than expected Employment report. Because of this, mortgage-backed securities saw a negative impact. As a result, mortgage rates climbed to their highest levels since early 2020.

Employment Report Highlights Massive Job Gains

During the first week of February 2022, the Employment report exceeded exceeded expectations in nearly every area. Against a consensus forecast of 150,000, the economy gained 467,000 jobs in January 2022. Subsequently, revisions added a massive 709,000 jobs to the figures for prior months.

Despite the surge in COVID-19 cases, the leisure and hospitality sectors showed particular strength. They gained 151,000 jobs in total. This is especially interesting because both sectors faced numerous labor and economic setbacks throughout the coronavirus pandemic.

Average Hourly Earnings Reflect Unfavorably for February 2022 Mortgage Rates

Aside from the job gains, the unemployment rate unexpectedly increased from 3.9% to 4.0%. analysts primarily attribute the unemployment rate increase to a huge number of people returning to the labor force in January 2022, a sign of strength.

Average hourly earnings, an indicator of wage growth, increased an impressive 5.7% higher than a year ago. Concurrently, average hourly earnings improved 5.0% from December 2021. In short, the labor market remains extremely tight. Fortunately, analysts forecast that the Omicron variant effects will be very short-lived. Since stronger economic growth raises the outlook for future inflation, this report reflected unfavorably for February 2022 mortgage rates.

Manufacturing Sector Faces Continual Supply Chain Disruptions

While the Employment report displayed favorable statistics, supply chain disruptions continue to plague the manufacturing sector. During February 2022, the the Institute of Supply Management (ISM) posted expected declines. Having said that, the ISM reporting remained at very high levels by historical standards.

The National Service Sector Index came in at 59.9. meanwhile, the National Manufacturing Index at 57.6. Levels above 50 indicate that the sectors are expanding. In addition, readings above 60 are rare. However, the ISM reporting displayed regular readings above 60 over the past few months. Supply chain disruptions due to the pandemic have had a greater impact on manufacturing companies than on service providers.

Housing Sector Kicks off 2022 on the Right Foot

2021 represented a banner year for the housing market. Median home prices soared year-over-year. additionally, existing and new home sales both saw incredible years. In fact, new home sales achieved their best on record since 2006.

However, the housing market still contends with the age-old issue of limited inventory. More so, new construction faces progressive stalls due to labor and materials shortages. Finally, the housing market grew increasingly unfavorable to first-time home buyers, who now have to compete against high-powered real estate developers for single-family homes.

Sales of Existing Homes Beat the Consensus Despite February 2022 Mortgage Rates

After unexpectedly dropping in December 2021, sales of existing homes jumped 7% in January. Thus, sales of existing homes far exceeded their consensus forecast for just a slight increase. The median existing-home price increased 15% higher than last year at this time to $350,300.

On the other hand, inventory levels in January dropped down 17% from a year ago. Currently, inventory levels sit at just a 1.6-month supply nationally, a record-low level. Analysts consider a 6-month supply to represent a healthy balance between home buyers and home sellers.

Investors Dismayed by Housing Starts Data

With the shortage of available homes in many areas, investors closely watching the monthly reports on housing starts. Overall, the most recent data contained mixed results. In January 2022, housing starts unexpectedly decreased 4% from December. Worth noting, higher prices and shortages for land, materials, and skilled labor created obstacles for a faster pace of construction.

However, building permits unexpectedly beat the consensus forecast. Building permits indicate future activity. With the publication of the February 2022 report, building permits rose to the highest level since 2006.

New Home Sales Fell as Prices Rose to Record-Levels

Sales of new homes fell 5% in January to an annualized rate of 806,000. However, new home sales neared their consensus forecast. In January 2021, new home sales peaked at a rate of 993,000 units, the highest level since 2006.

The median new home price increased 13% higher than last year at this time at $423,300. Similar to existing home sales, housing inventory prevented better sales figures. As a matter of fact, the backlog of new homes approved for construction but not yet started rose to a record high of 26%. Higher prices and shortages for key inputs such as lumber and appliances also restrained the pace of building.

Retail Sales Gains Distribute Broadly

Consumer spending accounts for over two-thirds of the United States’ economic activity. Therefore, consumer spending indicates economic health.

In January 2022, retail sales jumped 3.8% from December 2021, far above the consensus forecast for an increase of 2.0%. The gains distributed broadly across industries. Notably, vehicles, furniture, and building materials saw strong numbers.

Central Bank Meetings Discuss Approaches to Inflation

As the world proceeds in its battle against rising inflation, the European Central Bank and Federal Reserve took their latest steps in the process.

European Central Bank Causes February 2022 Mortgage Rates to Move Higher

The latest European Central Bank (ECB) and Bank of England (BOE) meetings took place in February 2022. While their actions were different, both leaned more strongly in favor of tighter monetary policy than expected. Following its first 25-basis point rate hike in December 2021, the BOE raised rates by 25 basis points again this week. By contrast, the ECB held rates steady, despite record high inflation in January 2022.

However, comments made during the press conference caused investors to anticipate a rate hike as soon as the next meeting in March. Conclusively, a March rate hike occurs much earlier than the prior meeting’s outlook. Global bond yields, including United States mortgage rates, moved higher on due to the prospect of tighter monetary policy in Europe.

Federal Reserve Comments Lead to Rise in February 2022 Mortgage Rates

Due to the strong Consumer Price Index report (CPI), investors raised their expectations for the pace of Fed tightening this year. Later that day, Fed official James Bullard surprised investors with unexpectedly hawkish (in favor of tighter policy) comments. Bullard said that he would “like to see 100 basis points in the bag by July 1,” which would mean federal funds rate increases totaling a full point over the next three Fed meetings.

Investors again raised their outlook for the pace of rate hikes after the comments. Now, investors anticipate a 50-basis point increase instead of a 25-basis point increase at the next meeting on March 16th. Also, investors expect the Federal Reserve to scale back its bond purchase program more quickly. Since this will reduce demand for bonds, including mortgage-backed securities (MBS), mortgage rates rose on the news.

Russia Invades Ukraine Causing Massive Volatility for February 2022 Mortgage Rates

Towards the latter end of February 2022, headlines about Ukraine began to smother global news. When Russia invaded Ukraine in February, mortgage rates experienced massive volatility. As tensions increased, investors reduced risk by shifting from stocks to relatively safer assets such as bonds. This increased demand for mortgage-backed securities (MBS). Concurrently, the asset shifts generated a favorable effect for mortgage rates. News which hinted at reduced tensions created the opposite effect.

To date, mortgage rates hit their highest levels since the middle of 2019. Looking ahead to March 2022, news of the Russia-Ukraine war pours across media on a daily basis. Investors closely follow the news, especially as the United States and NATO bombard Russia with unprecedented sanctions.

Furthermore, investors await the latest news from the Federal Reserve as it escalates its effort against inflation. With quelling inflation being the primary focus for the European Central Bank and Federal Reserve, MBSQuoteline expects greater insights after the March meetings.

With the latest news surrounding inflation and the Russia-Ukraine war, February 2022 mortgage rates experienced massive new levels of volatility. To receive by-the-minute updates on mortgage-backed securities, try MBSQuoteline free for 14 days.

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