November 2022 Markets Highlight Tapering Inflation Ahead of the New Year

After a long year of rising inflationary pressures, November 2022 markets now highlight change of pace heading into 2023. Recent data suggests that inflation is beginning to taper off. But how did we get here?

Rewind to 2020. During the first quarter of that year, the COVID-19 pandemic kicked off in the United States. Across the country, states began to impose lockdown measures. Furthermore, companies laid off thousands upon thousands of employees out of fears for a global recession.

In a reactionary move, the United States Federal Reserve initiated their strategy to support the economy. Federal Chair Reserve Jerome Powell announced that the Federal Reserve planned to purchase bonds as a method for carrying the United States financially through a challenging time. Overall, the strategy worked.

2021 Showcased Faster Than Expected Rebound

One year later, markets rebounded at a faster than expected pace. For example, despite the sluggish year for real estate in 2020, 2021 told a different story. As a matter of fact, home sales achieved their best year since 2006. In other sectors, similar trends followed. With states lifting lockdown legislation, American citizens reignited their travel bug, seemingly making up for lost time. Although travel and hospitality suffered greatly when the coronavirus pandemic first struck, 2021 marked a return to form.

But with the sudden economic resurgence, came consequences. Throughout the COVID-19 pandemic, countries around the world struggled to build up their manufacturing infrastructure, leading to ongoing supply chain bottlenecks. In addition, the previously laid off employees (and many of those who kept their jobs), found remote work to be just as efficient, if not more.

The United States Economy Felt a Hangover in 2022

With the pent-up demand, the United States economy faced a hangover of sorts in 2022. Prices ballooned due to the bursting demand and limited supply. The labor market tightened, leaving employees fighting to hire quality candidates. And the real estate market tangled with age-old housing inventory issues, now coupled with limited access to supplies and workers.

To reverse course on their prior direction, the Federal Reserve began to sell off its previously acquired bonds. Also, the Federal Reserve initiated regular hikes to the federal funds rate. While Chairman Jerome Powell initially hoped for a soft landing (lowering inflation without inducing a full-blown recession), talks of an economic downturn continued to spread.

Despite inflation reaching decades-old records, the United States economy now sees some better news ahead. With November 2022’s batch of economic reporting, inflation finally showed signs of the long-sought tapering. Notably, seasonal holiday shopping events, like Black Friday and Cyber Monday, posted record sales figures (more on those next month). To date, Jerome Powell and the Federal Reserve plan to continue raising interest rates at their meeting in December 2022. But analysts now foresee lower hikes than before.

Another Huge Rate Hike Sends Waves Throughout November 2022 Markets

Starting off the month, November 2022 markets reacted to another huge rate hike. Despite two major reports in the monthly Employment Data and Institute of Supply Management indexes, the Federal Reserve’s rate hikes held the most sway over mortgage-backed securities. Not only did the 75-basis point increase led investors to bump up their outlook for monetary policy tightening, it applied upward pressure to bond yields. As a direct result of the Fed meeting announcement, mortgage rates ended November’s first week at a higher level.

Federal Reserve Raises Interest Rates by 75 Basis Points

Heading into the November 22 Federal Reserve meeting, investors and analysts largely predicted that the Fed planned for a 75-basis point increase. However, this maneuver contributed greatly to investors raising their estimated target range for interest rates to fall between 3.75% and 4.00%. Holistically, this points to the highest interest rate target range since January of 2008.

At first, the meeting statement left investors and analysts feeling encouraged. During the statement, the Federal Reserve annotated that the upcoming pace of federal funds rate increases address the long lag effects. Generally speaking, when the Federal Reserve announces monetary policy changes, the impact doesn’t occur overnight. On a related note, this latest increase to the federal funds rate might take months to fully interact with the United States economy.

More so, the statement also indicates a smaller magnitude for future increases to the federal funds rate. Throughout 2022, investors and analysts grew accustomed to 75-basis point jumps. Once considered large movements, this rate is growing more commonplace. Having said that, hiking interest rates by 75 basis points creates greater, faster economic effects. For this reason, investors anticipate smaller jumps at upcoming meetings (such as the one in December 2022).

Unfortunately, the moment of optimism was short-lived. Chairman Jerome Powell quickly rained on the parade by alluding to a higher peak for the federal funds rate. To simplify, although the Federal Reserve might increase interest rates at a slower pace, they hold the potential to summit at a higher point than analysts suspected at first. With this messaging, investors quickly raised their inflation outlook. Currently, investors forecast the federal funds rate to exceed 5.0% early in 2023. Further complicating things, the current consensus expects the federal funds rate to remain at its new peak for most of the new year.

Employment and ISM Indexes Generally Meet Expectations

Aside from the monumental announcement at last month’s Federal Reserve meeting, November 2022 markets reported mostly status quo economic data in its first week. Starting off with job gains, the United States economy accumulated 261,000 jobs in October. While this marks the smallest monthly increase since December 2020, it does exceed the consensus forecast of 205,000. Once again, leisure, hospitality, professional services, and healthcare demonstrated the best numbers. Notably, all four of these sectors faced extreme pressure during the COVID-19 pandemic.

With the United States still carrying a tight labor, the unemployment rate did manage to increase. In fact, it rose from 3.5% to 3.7%. Particularly noteworthy, that 3.5% figure represents the lowest unemployment level in decades. Last but not least, the average hourly earnings data also increased. As an indication of wage growth, average hourly earnings climbed 4.7% higher year-over-year. Despite the growth, this does reflect a drop from the prior month’s annual rate of 5.0%.

Capping off the first week of reporting, the Institute of Supply Management (ISM) released its two indexes: the National Services Sector Index and the National Manufacturing Index. First, the ISM National Services Sector Index fell to 54.4. Later, the ISM National Manufacturing Index dropped to 50.2. thus, both of the most recent readings show the lowest respective levels since May 2020, near the earlier portion of the coronavirus pandemic. However, levels above 50 show expanding sectors, which both achieved. Examining the big picture, both hint at slowing economic growth, in line with the recession discussion. but levels above 50 indicate that the sectors are still expanding.

November 2022 Markets Reflect Tapering Inflationary Pressures

After the Federal Reserve raised the federal funds rate by 75 basis points during the first week of the month, the second showed the fruits of their labor. With the release of the Consumer Price Index report (CPI), price changes fell far below its consensus forecast. Evidently, increasing the federal funds rate helped inflation to taper off heading into the holiday season. Therefore, November 2022 markets reacted accordingly. By the week’s end, the downside inflation surprise sent mortgage rates spiraling downward quite substantially.

Consumer Price Index Highlights Missed Inflation Forecast

In general, investors and analysts review the Consumer Price Index (CPI) because it looks at price changes for a broad range of goods and services. Thus, CPI makes for a sound inflation indicator. Diving into the numbers, October 2022 CPI did increase 7.7% over the previous year. That said, this increase actually marks a steep drop from the consensus forecast of 8.0%. Similarly, the most recent Core CPI data, which excludes the volatile food and energy components, also came out. With those sectors removed from view, October 2022’s Core CPI also climbed year-over-year, notching a 6.3% increase. However, just like with the primary CPI report, this also failed to reach the consensus forecast. Moreover, the October Core CPI  decreased from 6.6% in September. To date, September 2022 set the recent record for the highest annual rate since 1982.

Naturally, analysts sought out attribution for the missed consensuses. Overall, used car prices declined 2.4% in October of this year. Furthermore, apparel and medical care services also posted steep monthly declines. On the other hand, housing costs (shelter) posted sizable gains last month. Conspicuously, housing costs account for roughly one-third of the CPI index. However, the housing costs component generally operates with a lag. Looking at current indicators, newly signed rental agreements allude to downward inflationary pressure heading into the new year.

Despite the fresh change of pact, inflation hovers far above the Federal Reserve’s stated target threshold of 2.0%. To help the United States economy return to 2021 levels, the Federal Reserve proposes to continue its scheduled federal funds rate increases at upcoming meetings. Now, investors question their magnitude. Prior to November’s CPI report, investors debated the merits of a 50-basis point and 75-basis point increase. At present, investors largely swung over to the 50-basis point side.

Quiet Final Week for November 2022 Markets

With the Thanksgiving holiday, MBSQuoteline released its final MortgageTime newsletter during the third week of the month. After the polar opposite reactions for November 2022 markets during the first two weeks, the third week displayed a state of calm. Overall, investors outlook remained stable across inflation, economic growth, and the Federal Reserve’ future economic policy. With that in mind, mortgage rates ended the week at approximately the same levels.

Existing Home Sales Fall for the Ninth Month in a Row

As mortgage rates rose vastly higher throughout 2022, home demand declined drastically. Ravaged by higher mortgage rates, existing home sales achieved their ninth month in a row of declines. As a result, existing home sales plummeted to their lowest level since 2011. Percentage-wise, this marks a 28% drop year-over-year.

Further complicating matters, the United States continues its struggles with a decades-long housing inventory crisis. November’s report showed that the inventory of homes available for sales fell slightly lower than a year ago. Sitting at a 3.3-month supply nationwide, this falls to roughly halfway of the 6.0 equilibrium between buyers and sellers. Despite declining demand, the median existing-home price of $379,100 jumped 7% higher than last year. Statistically, this falls short of June 2022’s record high of $413,800.

Alongside the lingering housing inventory issue, new construction is disappointing, to say the least. As a matter of fact, October’s overall housing starts decreased by 4% from September. Now, housing starts dropped 9% annually. To make the situation worse, single-family starts share an even bigger percentage of the decline. Falling 22% year-over-year, single-family housing starts plunged to May 2020 lows.

In line with the rest of the real estate data, the NAHB’s home builder survey reflected the eleventh straight month of declining sentiment, falling below the point of equilibrium at 50. Coming in at 33, the latest data represents less than half of where it was this time just six months back. Particularly, home builders point to the higher inflation-induced prices. In addition, home builders struggle against shortages for land, materials, and skilled labor.

Consumer Spending Thrives Heading into the Holiday Shopping Season

To end the month on a more optimistic note, consumer spending saw big October numbers. Accounting for over two-thirds of the United States economy, October’s retail sales surged 1.3% from September. Not only did this exceed the consensus forecast, it hit a strong 8.3% higher than a year ago.

At first glance, analysts point to inflation contributing to higher prices. Having said that, bars, restaurants, furniture stores, and auto dealers demonstrated large gains. In conclusion, this mitigated some investor concerns pertaining to an economic slowdown. Especially, this considers the positive impact for a crucial 2022 holiday season.

Looking Ahead After the Action Surrounding November 2022 Markets

After the fluctuation surrounding November 2022 markets, Federal Reserve officials reemphasized their need for an aggressive inflation fight. In particular, James Bullard said that the existing policy decisions generated “limited effects” in helping the Federal Reserve to reach their target goal of 2.0%. Also, Bullard goes on to claim that the federal funds rate must be raised further to be “sufficiently restrictive.” Shockingly, he described a current analysis pointing to an interest rate peak between 5.0% and 7.0%.

With investors planning for a 5.0% terminal rate, this took many by surprise. That in mind, other Federal Reserve officials might disagree with Bullard. Therefore, financial markets didn’t face a lasting impact. Looking ahead, investors hope for specific Federal Reserve guidance on the pace of future rate hikes. In addition, investors seek insights into the Federal Reserve’s bond portfolio reduction strategy.

With the Consumer Price Index report falling well short of consensus expectations, November 2022 markets experienced a heavy whiplash. 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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