February 2023 mortgage rates faced high levels of volatility, later reaching November 2022 highs after strong Employment data came out. With the onslaught of major economic news in the first week, markets experienced daily extremes. Notably, the week’s two biggest events were the Federal Reserve meeting and the Employment report.
The Fed meeting generated a favorable impact for mortgage rates. Conversely, the strong Employment report created an unfavorable aftermath. Essentially, the two major reports counterbalanced one another. As a result, mortgage rates ended the first week of February 2023 roughly unchanged.
Federal Reserve Meeting Creates Favorable Impact for February 2023 Mortgage Rates
Beginning with the Federal Reserve meeting, officials once again raised interest rates. As expected, the Federal Reserve hiked the federal funds rate at Wednesday’s meeting by 25 basis points. Thus, the new target range rose to 4.50% – 4.75%. Therefore, this marks the highest interest rate level since October 2007.
During the post-meeting press conference, Federal Reserve Chairman Jerome Powell remained firmly committed to fighting inflation. Powell went on to explain how the tight labor market applies upward pressure towards job wages and prices as a whole. However, Powell later alluded to the possibility of “a couple more rate hikes”. Currently, Powell believes that the additional rate hikes hold high potential to reach the “appropriately restrictive” level necessary to bring down inflation.
On the investing front, the current sentiment trends pessimistically. Generally, investors fear rate hikes well above 50 basis points. That said, anything at 50 or lower will come in as better news. Worth noting, Powell appeared to leave the door open to cutting rates before the end of the year. However, this largely depends on the speed of declining inflation.
Strong Employment Report Generates Negative Effect for February 2023 Mortgage Rates
In the week’s other high-profile report, the latest Employment data came out. At present, Federal Reserve officials closely watch for potential easing in the tight labor market. However, the most recent report seemed to fully justify Jerome Powell’s caution in regards to ceasing the rate hikes.
In January 2023, the economy gained a stunning 517,000 jobs. Thus, the labor market far exceeded the consensus forecast of just 185,000. While the job gains occurred broadly, leisure, hospitality, professional services, and healthcare all demonstrated particular strength. Also, the unemployment rate unexpectedly fell from 3.5% to 3.4%. This represents the lowest level since 1969. Average hourly earnings, an indicator of wage growth, climbed 4.4% higher than a year ago. As a result, average hourly earnings matched analysts’ expectations. As a silver lining, the increase in average hourly earnings reflects the smallest annual rate of increase since August 2021.
JOLTS Report Supports Federal Reserve Concerns Over Inflation Challenges
Further supporting the Federal Reserve’s concerns, the JOLTS report displays evidence of a tight labor market. For the unacquainted, JOLTS measures job openings and labor turnover rates. At the end of December 2022, the United States economy contended with a massive 11 million job openings, far above the consensus forecast. Furthermore, that figure was over 4 million more than in January 2020 prior to the pandemic. On average, the economy had 1.9 job openings for every unemployed worker, up from typical readings around 1.2 before the pandemic.
A high level of openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills. A very large number of employees also willingly left their jobs in December. Analysts view this as a sign of labor market strength as well, since people usually quit only if they expect that they can find better jobs. Looking at the big picture, Federal Reserve officials worry that low unemployment leads to larger and larger wage increases. This is because companies compete for workers, causing greater inflationary pressures. While rare, strong job gains with just moderate wage increases equate to an ideal outcome for the Federal Reserve.
Strong Labor Market Contributes to Increase in February 2023 Mortgage Rates
Unlike the first week of the month, the second contained very light economic news. For the most part, investors took their cue from the Federal Reserve.
Overall, Federal Reserve officials made it loud and clear that more work needs to be done to bring down inflation. Hence, expect continually tighter monetary policy going forward. As a result, February 2023 mortgage rates ended the week higher.
Federal Reserve Chairman Jerome Powell Alludes to More Rate Hikes in 2023
In a speech on Tuesday, Federal Reserve Chairman Jerome Powell emphasized a longer timeline for bringing down inflation. Once again, Powell pointed to the labor market’s continually exceptional strength. Thus, Powell mentioned that the economy requires more rate hikes than initially anticipated.
From an evidence standpoint, Powell pointed to the previous week’s massive job gains. Now, he believes that reaching the Federal Reserve’s annual target rate of 2.0% may be a “process that takes a significant period of time.” Furthermore, he also repeated that incoming data determines monetary policy. Thus, this suggests that the amount of tightening could be adjusted in either direction from the current outlook based on future economic reports.
Jobless Claims Indicate Historically Tight Labor Market
In addition to the Employment data, the Federal Reserve shows caution due to the jobless claims, or lack thereof. Each week, the Department of Labor releases the total number of new claims for unemployment insurance. Shockingly, the latest reading came in at just 196,000.
So far this year, claims have averaged just 195,000 per week. For reference, 2019 numbers averaged 220,000 per week. Even back then, 2019 showcased a historically tight labor market.
Application Volumes Show Signs of Life Despite Increase in February 2023 Mortgage Rates
According to the latest data from the Mortgage Bankers Association (MBA), mortgage application volumes finally showed signs of life, despite the increase in February 2023 mortgage rates by the end of the second week. Previously, mortgage application volumes fell to their smallest levels in 25 years.
First, purchase applications rose moderately. At a 3% increase, purchase application volumes still remain 37% lower from last year at this time. In addition, applications to refinance jumped 18% from the prior week. However, applications to refinance similarly stay 75% lower from just one year ago.
Core Consumer Price Index Fell from September 2022’s Recent Historical Peak
In another surprise, the third week of the month yet again produced strong economic data. First, the Consumer Price Index (CPI) notched a slight increase. Then, consumer spending experienced a rebound after a lackluster December 2022. As a result of the strong performance, February 2023 mortgage rates rose to their highest levels since November 2022.
Overall, analysts and investors closely watch the Core Consumer Price Index (CPI). This report excludes the volatile food and energy components. Therefore, the Core CPI report provides a clearer picture of the longer-term inflation trend. In January 2023, Core CPI increased 5.6% from a year ago, slightly above the consensus forecast. In line with the increasing housing costs, shelter once again contributed the largest portion of the increase in Core CPI.
While the annual rate of increase in Core CPI dropped from a peak of 6.6% in September 2022, it remains far above the readings around 2.0% seen early in 2021. As mentioned, the Federal Reserve currently targets that 2.0% range. To help reduce inflationary pressures and reach this goal, the Federal Reserve plans to continue to raise the federal funds rate. Looking ahead towards the March and May Federal Reserve meetings, investors anticipate respective 25-basis point increases. Notably, they also consider a roughly 50% chance for another at the June 2023 meeting.
Consumer Spending Surged Across the Board in January 2023
Consumer spending accounts for over two-thirds of the United States’ economic activity. Following two months of moderate declines, retail sales surged a massive 3.0% in January 2023. This well-exceeded the consensus forecast.
Consumer spending gains occurred in virtually every market category. In particular, spending at restaurants and bars jumped 7% higher than in December 2022. Also, vehicle sales climbed 6% from the prior month.
Home Builder Confidence Jumps Despite Weak Housing Starts Data
Throughout the United States, housing inventory has been a long-held economic challenge. However, the latest data showed disappointing numbers. In January 2023, housing starts fell 5% from December to the lowest level since June 2020. Of course, June 2020 was early in the COVID-19 pandemic.
In addition to elevated mortgage rates, builders reported that higher prices for materials and skilled labor continued to hold back a faster pace of construction. On a brighter note, though, builders show improved optimism surrounding future real estate conditions. As a matter of fact, the National Association of Home Builders (NAHB) housing index showed that home builder confidence unexpectedly jumped from 35 to 42. Holistically, this level reflects the highest reading since September 2022.
Surprisingly High Inflation Leads February 2023 Mortgage Rates to Reach November Highs
In the final week of the month, February 2023 mortgage rates climbed to even higher November 2022 levels. First, the major inflation came in much stronger than analysts and investors expected. The Federal Reserve favors the Personal Consumption Expenditures (PCE) price index as its go-to inflation indicator.
Core PCE excludes the volatile food and energy components. In January 2023, core PCE soared far above the consensus forecast of 4.3%. Furthermore, the latest Core PCE report achieved the highest annual rate of increase since October 2022.
Core Personal Consumption Expenditures Figures Reaffirm Long-Standing Battle with Inflation
With the current Core PCE data remaining far above the Federal Reserve’s target level of 2.0%, analysts anticipate more hikes in the coming months of 2023. Since September 2022, Core PCE steadily declined each month. That said, the most recent report broke the streak with a small increase from December 2022’s the annual rate of 4.6%.
While many investors thought that it would continue to ease every month, Fed officials warned repeatedly that the inflation battle will be difficult, with both ups and downs along the way. This is particularly relevant because how quickly their aggressive monetary policy tightening will bring down inflation has enormous implications for financial markets.
Sales of Existing Homes Fell for the Twelfth Month in a Row
In housing news, sales of existing homes, which make up about 90% of the market, fell for the twelfth straight month in January to the lowest level since 2010 and were 37% lower than last year at this time. Inventory levels remained a big trouble spot. While they were 15% higher than a year ago, they remained at just a 2.9-month supply nationally, still far below the roughly 6.0-month supply which is typically seen in a balanced market.
The median existing-home price of $359,000 was just 1.3% higher than last January, down from a record high of $413,800 in June. This was the smallest annual rate of price appreciation since 2012, and economists forecast that we will soon see year-over-year price declines. By contrast, new home sales, which account for the remaining 10% of the market, surprised investors with a nice gain of 7% from December.
Looking Ahead After Economic Impact on February 2023 Mortgage Rates
After February 2023 mortgage rates closed out the month at a higher point, investors closely watch for news from the Federal Reserve. In specific, investors hope for more insight on the Fed’s upcoming plans for federal funds rate hikes.
In the first week of March 2023, the ISM national manufacturing index releases on Wednesday. Later, the ISM national services sector index publishes on Friday. Often released on the first Friday of each month, the key Employment report instead comes out on March 10th, 2023.
Although Federal Reserve officials and investors expect to see a lengthy battle with inflation, January 2023 mortgage rates dropped in the first month of the new year. 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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