Last month, investors focused heavily on elevated inflation levels on as April 2022 mortgage rates climbed to their highest levels since 2009. In terms of inflation, the Federal Reserve launched an aggressive plan to stop the persistent rise. While doing so, the Federal Reserve decided to aim for a soft landing, tightening monetary policy just enough to combat inflation.
Federal Reserve Creates Negative Reaction for April 2022 Mortgage Rates
To review, the Federal Reserve loosens their monetary policy to boost the economy during periods of weakness. For example, at the start of the COVID-19 pandemic, the economy experienced a partial shutdown. In order to facilitate economic growth (or maintenance), the Federal Reserve loosened its policy.
On the other hand, when the economy exceeds a certain capacity, the Federal Reserve seeks to tighten its monetary policy. As a matter of fact, the demand for goods and services becomes so strong that prices must rise to balance supply and demand, forcing the Federal Reserve’s hand. As part of the Federal Reserve ongoing responsibilities their job is to implement the optimal level of tightening. In essence, the Federal Reserve plans to restrain economic growth just the right amount to bring down inflation without causing an undesirable recession (i.e., a soft landing).
In his most recent comments, Federal Reserve Chair Powell continued to express a firm resolve to fight inflation. He stressed that it is “absolutely essential” to maintain price stability for the economy to function properly. Chairman Powell suggested that it might be better to reach the target level for the federal funds rate sooner rather than later. This sentiment lends support to a rapid pace of raising rates.
According to Powell, a 50-basis point rate hike was an option for the Federal Reserve’s May 4th (which ultimately came to pass). And investors acted accordingly, pricing the outcome. At the current pace, the Federal Reserve fully intends to reduce its massive portfolio of bonds more quickly than expected. At the time, this generated a negative reaction for April 2022 mortgage rates. Thus, mortgage rates rose to their highest levels since late 2018.
Balance Sheet Reduction & the Federal Funds Rate
For the Federal Reserve, the federal funds rate and their bond portfolio represent two of their most important tools for monetary policy. By adjusting the federal funds rate and the size of the bond portfolio, the Federal Reserve hopes to achieve its policy goals and bring down inflation. Last month, the Federal Reserve provided fairly precise guidance on the projected pace of rate hikes. Later, they revealed their plans for their bond portfolio. In short, officials expressed more concern about upside risks to inflation than downside risks to economic growth.
With the release of the Federal Reserve March 16th meeting minutes, the Fed clearly indicated their plans to allow its holdings of Treasuries and mortgage-backed securities (MBS) to decrease by up to $95 billion per month. Not only did this catch investors off-guard with a faster than anticipated reduction pace, but their plan also began this month in May. In terms of the split between Treasuries and mortgage-backed securities, the Federal Reserve plans to offload $60 billion and $35 billion, respectively. More so, this plan is set to take place over the course of the next three months from May 2022 onward.
These quantities reflect a large amount on the basis of history. However, analysts must also view them in the context of nine trillion dollars of total bond holdings. These nine trillion dollars double the levels held prior to the pandemic. Mortgage rates are largely based on MBS prices. In conclusion, the reduced outlook for Federal Reserve demand for mortgage-backed securities caused April 2022 rates to move higher.
China’s COVID-19 Spread Shutting Down Activity
Last month, COVID-19 case counts resurged across China. Throughout the pandemic, the Chinese response mandated shutting down regions (or even entire cities) after finding coronavirus cases.
With ongoing news of the latest lockdowns in China, investors reduced their outlook for economic growth. With that said, inflationary pressures may see a reduction to some degree. For April 2022 mortgage rates, this characterized one of the few pieces of favorable news from last month.
Consumer Price Index Rose to Highest Level Since 1982
Speaking of inflationary pressures, investors and analysts closely watch the Consumer Price Index (CPI) every month. CPI looks at price changes for a broad range of goods and services. Meanwhile, Core CPI excludes the volatile food and energy components. In addition, Core CPI provides a clearer picture of the longer-term trend. In March 2022, Core CPI rose 6.5% higher than a year ago. Not only did Core CPI jump up from an annual rate of increase of 6.4% last month, but it also achieved the highest level since 1982.
As the economy steadily recovered from the coronavirus pandemic, strong consumer demand, supply constraints, and surging commodity prices pushed prices much higher for a wide range of goods and services. Subsequently, the Russia-Ukraine Conflict and the recent COVID-19 shutdowns in China worsened shortages for many key items. For example, airline fares soared 24% higher than a year ago. Simultaneously, used car prices skyrocketed 35% higher than last year at this time.
Over time, analysts suspect that supply chain disruptions will ease. Plus, with the Federal Reserve’s monetary policy initiative, inflationary pressures are set to decline. Having said that, investors remain unclear as to how quickly this will occur.
Core PCE Rose Year-Over-Yera
Meanwhile, the Federal Reserve favors the PCE price index as its go-to inflation indicator. In March 2022, core PCE rose 5.2% higher than a year ago. However, core PCE dropped down from 5.3% last month, the highest annual rate since 1983.
For comparison, readings fell below 2.0% during the first three months of 2021. Now, investors question how quickly inflation will moderate as disruptions due to the pandemic and the conflict in Ukraine clear up.
ISM Reflects Continual Expansion
Another significant economic indicator released this week from the Institute of Supply Management (ISM) remained at a high level by historical standards.
The national manufacturing sector index for March came in at 57.1. Levels above 50 indicate that the sector is expanding. Readings above 60 are rare.
Employment Report Right on Target
April 2022’s closely watched Employment report came in right on target. Against a consensus forecast of 475,000, the economy gained 431,000 jobs in February 2022. Beyond that, revisions added 95,000 to the results from prior months.
The unemployment rate fell from 3.8% to 3.6%. This statistic reflects the lowest level since early 2020. Average hourly earnings increased an impressive 5.6% higher than a year ago. Moreover, average hourly earnings climbed an annual rate of 5.2% last month.
Disappointing GDP Due to Temporary Factors
Gross Domestic Product (GDP) indicates the broadest measure of economic activity. During the first quarter, GDP fell at an annualized rate of 1.4%. Beforehand, analysts forecasted an increase of 1.0%, meaning the latest GDP report fell well below the consensus. Also, this number is down from massive growth of 6.9% during the fourth quarter. With the latest GDP report, economic activity witnessed its weakest reading since the spring of 2020. During that time, the coronavirus pandemic caused a partial shutdown of the economy.
While investors expressed disappointment at the headline number for GDP, it is necessary to look below the surface at the different components to evaluate the underlying strength of the economy. In this case, analysts pointed out that the shortfall was due to an unexpectedly large decline in inventories. They view this as a temporary factor.
For example, during the quarter, manufacturers found themselves unable to produce enough cars to meet demand due to supply chain disruptions. As a result, dealerships sold fewer cars, and their inventories shrank. However, demand remained solid. Investors expect that future sales will ramp up as production capacity increases. In short, economic activity was simply postponed. Therefore, financial markets generated a minor reaction.
April 2022 Mortgage Rates Disincentivize Existing Home Sales
Higher April 2022 mortgage rates dragged down sales of existing homes in March 2022. Rising mortgage rates took a large toll on mortgage application volumes this year. According to the latest data from the Mortgage Bankers Association (MBA), average 30-year fixed rates increased more than 1.75% higher than a year ago. Purchase applications declined 6% from last year at this time. Even worse, applications to refinance a loan have plunged a shocking 62% from one year ago. The Mortgage Bankers Association now forecasts that total mortgage originations this year will be 35% lower than last year due to the massive decline in refinancings.
The latest data showed that existing home sales posted an expected small decline from February. Additionally, existing home sales decreased 5% compared to this time in 2021. Notably, inventory levels, down 10% from a year ago, remained a major headwind. Currently, housing inventory for existing homes sits at just a 1.7-month supply nationally. This number falls well below the 6.0, which analysts consider to be a healthy balance between home buyers and home sellers. The steadily rising median existing-home price jumped 15% higher than last year at this time. As a matter of fact, the median existing-home price rose to a record $375,300.
Across the U.S., home buyers desperately need more inventory. Fortunately, the most recent data on housing starts proved to be mildly encouraging. In March 2022, overall housing starts increased slightly from February to the highest level since 2006. Analysts pointed to the major boost from multi-family units. On the single-family front, housing starts declined a bit from February. Despite the decline, starts hovered well above the levels seen prior to the pandemic. Builders continued to cite higher prices and shortages for land, materials, and skilled labor as obstacles to a faster pace of construction.
Looking Beyond April 2022 Mortgage Rates
In May 2022, investors continue to keep a close eye on news about the conflict between Russia and Ukraine. In addition, news of spreading COVID-19 cases in China concern investors and analysts. However, the May 4th Federal Reserve meeting took center stage.
During the meeting, the Federal Reserve implemented a 50-basis point increase to the federal funds rate. During Chair Powell’s post-meeting press conference, he generated a big market reaction. When asked whether the Fed might implement 75-basis point rate hikes at upcoming meetings, Powell responded that this was not an option currently considered.
As a result, investors ignited a substantial rally in both stocks and bonds. Later that week, however, investors displayed a change of heart. and decided that ruling out larger rate hikes did not change their underlying concerns about inflation. Stocks and bonds completely reversed their gains from the prior day. Beyond that major source of news, investors look for additional guidance on the pace of future rate hikes and the size of their bond holdings.
On the economic front, investors highly anticipated May’s significant, monthly Employment report. Also, the data on new unemployment claims released every Thursday provides valuable information about labor market conditions. Finally, investors pay close attention to the reports on inflation, retail sales, and housing.
Last month, April 2022 mortgage rates soared to late 2009 levels. Never miss an update with MBSQuoteline. To receive by-the-minute updates on mortgage-backed securities, try our platform free for 14 days.
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