October 2022 MBS Now Highlights Tightening Policy Around the World

Looking back at October 2022 MBS trends, inflation once again dominated headlines. As the Federal Reserve and other global banks continue to combat inflation, the latest Employment report did little to quell their concerns. Meanwhile, home sales persist in their freefall after 2021’s banner year for the American real estate market.

On a more positive note, Gross Domestic Product (GDP) rose year-over-year. Thus, recession discussion might be postponed off. In addition, consumer spending also experienced a nice upward trend of activity, particularly in bars and restaurants.

Heading into November 2022, mortgage rates declined during the final week of the month. Notably, rates did achieve their highest levels in over 20 years during October. Moving forward, much of the mortgage-backed securities market comes down to trends regarding inflationary pressures.

Employment Report Drives Down October 2022 MBS with Unemployment Drop

As is usually the case, last month’s highly anticipated Employment report held market-moving potential. The big shocker came with the latest unemployment rate data. In a significant surprise for investors, the unemployment rate unexpectedly dropped from 3.7% to 3.5%. Not only did this match the lowest level in decades, it also drove down October 2022 MBS. Because of the inverse relationship between MBS and mortgage rates, this outcome led rates to rise.

For attribution, analysts pointed to many people leaving the labor force. Typically, Federal Reserve officials hope to see an expanding workforce. In essence, when more workers seek jobs, they drive down wage inflation. Speaking of which, Average hourly earnings increased 5.0% year-over-year. As an indicator of wage inflation, average hourly earnings also dropped from an annual rate of 5.2% last month.

In other news, the economy exceeded expectations in job gains. Against a consensus forecast of 250,000, the economy gained 263,000 jobs in August 2022. Notably, leisure, hospitality, and healthcare made up the best performing sectors. In fact, leisure and hospitality suffered greatly during the early days of the COVID-19 pandemic. Now, their bounce back continues. However, government hiring fell.

Capping off employment trends, October’s JOLTS report revealed signs of a loosening labor market. In August, job openings plunged to 10.1 million. As a result, job openings plummeted far below the consensus forecast of 11.0 million. A lower level of openings means that it is easier for companies to hire workers with the required skills.

Consumer spending accounts for over two-thirds of economic activity in the United States. Therefore, consumer spending reflects key indications of the economy’s overall health. In September 2022, retail sales stayed flat from August. As a result, retail sales fell below the consensus forecast for a slight increase. Having said that, retail sales still hover a strong 8.2% higher than a year ago.

In part, analysts point to the annual increase in spending as a side effect of higher prices. Despite rising prices, bars and restaurants still received nice sales gains. Conversely, furniture and sporting good sales posted significant declines.

Holistically, the Institute of Supply Management (ISM) indicates continual expansion in both the manufacturing and the service sectors. First, the ISM national services sector index came in at 56.7. Due to this outcome, the national services sector index posted stronger than expected results. By contrast, the ISM national manufacturing index fell to 50.9, below the consensus forecast. In addition, the national manufacturing index sank to its lowest level since May 2020. Despite the decline, levels above 50 indicate that the sectors are expanding. Despite the expansion, recent trends indicate a shift for consumer spending from goods to services.

Lower October 2022 MBS Leads Home Sales to Fall for the Eighth Straight Month

In a brutal week for the real estate industry, mortgage rates skyrocketed to their highest levels in over 20 years. With downward pressure on October 2022 MBS, sales of existing homes fell for the eighth straight month in September. Moreover, existing home sales declined to the lowest level since 2012. While this statistic excludes a brief period early in the coronavirus pandemic, existing home sales plummeted 24% lower than last year at this time.

Housing Inventory Presents Ongoing Obstacle to Potential Home Buyers

Once again, the inventory of homes available for sales decreased. As a matter of fact, inventory levels dropped slightly lower than a year ago. Currently, housing inventory sits at just a 3.2-month supply nationally. Generally speaking, a 6.0-month supply represents a healthy market balance between prospective home buyers and home sellers. While the median existing-home price of $384,800 increased 8% higher than a year ago, this declined from a record high of $413,800 in June.

For years, housing inventory presented an obstacle to potential home buyers. Despite the prevalent issue, new construction relief remains painfully slow. In September 2022, overall housing starts fell well short of expectations and were 8% lower than a year ago. Single-family starts deteriorated a much larger 19% from a year ago. Now, single-family housing starts remain near the lowest levels since early in the pandemic.

In a recent survey of home builder sentiment from the NAHB, the outlook declined for the tenth straight month to 38. As a result, home builder sentiment plunged to half what it was just six months ago. Furthermore, home builder sentiment hit its lowest reading since 2012. Once again, this excludes a brief dip in 2020. A level below 50 reflects negatively for sentiment. For home builders, they attribute higher prices as a chief concern. More so, shortages for land, materials, and skilled labor create major issues. In whole, both factors hold back a faster pace of construction.

Downward Pressure on October 2022 MBS Leads Rates to 2002 High

Similar to housing inventory, the downward pressure on October 2022 MBS generated a massive obstacle to prospective home buyers. With mortgage rates continually rising, they took a large toll on mortgage application volumes. Consequently, mortgage application volumes tumbled to their lowest levels in 25 years. According to the latest data from the Mortgage Bankers Association (MBA), average 30-year fixed rates climbed “well over” 3% higher than a year ago. Now, average 30-year fixed rates achieved their highest level since 2002.

Worth noting, purchase applications declined 38% from last year at this time. Moreover, applications to refinance a loan plunged a shocking 86% from one year ago. As buyers seek lower rates, the share of adjustable-rate applications climbed to 13%, the highest level since 2008.

Inflationary Pressures Play Heavy Role in October 2022 MBS Movement

Capping off the month, we turn back to inflation. With rising inflationary pressures, October 2022 MBS further dropped. However, there was a silver lining at the end of the month when mortgage-backed securities reversed course.

While the Consumer Price Index report (CPI) exceeded the consensus forecast, the Personal Consumption Expenditures Index (PCE) fell right in line with it. Despite the latest inflation reports, both the European Central Bank and the Federal Reserve planned for 75-basis point increases.

August 2022 Consumer Price Index Exceeded Consensus Forecast

One of the most highly anticipated reports, the Consumer Price Index (CPI) exceeded its consensus forecast. As a result, mortgage rates increased a bit. As a closely watched report, CPI indicates inflation trends while looking price changes for a broad range of goods and services. In August 2022, CPI jumped 8.2% higher than a year ago, above the consensus forecast of 8.0%.

Following a similar path, Core CPI also rose in August. To differentiate between the two, core CPI excludes the volatile food and energy components. Additionally, core CPI provides a clearer picture of the longer-term trend. In August 2022, core CPI in August increased 6.6% from a year ago. While doing so, core CPI concurrently climbed above the consensus forecast. Now, core CPI reached its highest annual rate since 1982.

Holistically, inflation remains far above the readings around 2.0% seen early in 2021. As mentioned before, the Federal Reserve stated that 2.0% is still their target level. For the root cause, analysts identify large September increases across medical care services and new car prices. Also, shelter (housing) costs, which account for roughly one-third of the CPI index, also continued to post significant gains. To help reduce inflationary pressures, investors anticipate that the Federal Reserve planned to raise the federal funds rate by 75 basis points at the November 2nd meeting. Although we now know this came increase came to pass, MBSQuoteline will further cover this during next month’s recap.

Personal Consumption Expenditures Index Matches Expectations and Lowers Mortgage Rates

After weeks of downward pressure on October 2022 MBS, the Personal Consumption Expenditures Index (PCE) helped to reverse course. With the PCE data meeting expectations, investors scaled back their outlook to a slightly less aggressive pace of monetary policy tightening by global central bankers to fight inflation. As a result, mortgage rates ended the week lower.

As far as the Federal Reserve is concerned, officials favor the PCE price index over the CPI index. Overall, the PCE price index adjusts for changes in consumer preferences over time. In September 2022, core PCE jumped up 5.1% from a year ago. Not only did this result match expectations, it also fell from a peak of 5.4% in February. Despite the decline in PCE, the report still flies high above the Fed’s target level of 2.0%. To date, investors and analysts debate the impact of aggressive monetary policy tightening. While some believe policy tightening lowers inflationary pressures, others fear the enormous implications for financial markets. Regardless, both sides argue over the timeline needed to achieve the Fed’s stated target of 2.0%.

Optimistically, Gross Domestic Product (GDP) rose last month. As the broadest measure of economic activity, GDP increased during the third quarter. At an annualized rate of 2.6%, GDP inched above the consensus forecast for an increase of 2.3%. Clearly, this demonstrates an improvement, especially compared to the decline of 0.6% during the second quarter. Notably, trade and consumer spending showed particular strength. On the other hand, residential investment (aka housing) remained a source of weakness.

European Central Bank Raised Interest Rates to Highest Level Since 2009

As predicted, the European Central Bank (ECB) raised benchmark interest rates by the widely expected 75 basis points. Thus, the ECB’s interest rates hit the highest level since 2009. Despite the effort to help bring down inflation, investors find themselves more uncertain of the ECB’s bond purchase program. Unlike the United States Federal Reserve, the ECB has not yet begun to reduce the size of its bond portfolio.

Furthermore, some investors thought that the ECB would announce a start date. However, officials decided to wait until the next meeting in December. At that meeting, investors expect ECB officials to discuss the conditions for further tightening monetary policy by shrinking the bond portfolio. This delay in a reduction in the demand for bonds created a favorable effect for global yields, including U.S. mortgage rates.

Looking Ahead After October 2022 MBS Impact

After last month’s economic reporting impacted the October 2022 MBS figures, investors look towards the November 2022 Federal Reserve meeting. Heading into the new month, investors expected a 75-basis point hike to the federal funds rate. As previously mentioned, MBSQuoteline plans to cover the most recent rate hike in detail during the next monthly recap.

Additionally, investors still hope for more specific guidance on the pace of future rate hikes and bond portfolio reduction. Aside from the next Federal Reserve meeting, analysts look forward to the latest ISM national manufacturing sector index and the ISM national services sector index statistics. However, the Employment report remains the most highly anticipated economic data of the month.

As the Consumer Price Index and Personal Consumption Expenditures reports gave the markets whiplash, October 2022 MBS rose throughout the month prior to lowering slightly before it ended. Never miss an update with MBSQuoteline. To receive by-the-minute updates on mortgage-backed securities, try our platform free for 14 days.

Stay connected with MBSQuoteline on social media by following us on FacebookTwitter, and LinkedIn.

All material Copyright © Ress No. 1, LTD (DBA MBSQuoteline) and may not be reproduced without permission. To learn more about the MortgageTime™ newsletter, please contact MBSQuoteline at 800.627.1077 or info@mbsquoteline.com.