March 2023 Mortgage Rates Hit by the Volatile Banking Sector

Taking a look back at March 2023 mortgage rates, the big news of the month stemmed from the volatile banking sector. But before getting into that, investors laser-focused on inflation at the beginning of March. As a result, mortgage rates climbed a bit to the highest levels since November.

Perhaps the most significant economic report released this week was close to expectations. The ISM national manufacturing index rose a little to 47.7, but levels below 50 show that the sector is contracting. In the report, the “prices paid” component caused a negative reaction for mortgage rates. Moreover, this hints at a protracted inflation battle for the Federal Reserve.

The latest news from Europe also disappointed investors hoping for signs that inflation is easing. Eurozone consumer prices in February were 8.5% higher than a year ago, well above the consensus forecast of 8.2%. Excluding the volatile food and energy categories, core inflation jumped to a record high annual rate of 5.6%. This marks a 0.3% from the prior month. In short, the high readings clearly supported additional monetary policy tightening by the European Central Bank. Investors raised their outlook for future rate hikes.

It should come as no surprise that mortgage rates have a huge impact on application volumes. When rates declined significantly in January, applications shot higher. Over the last month, however, rates have jumped again, putting a heavy damper on housing market activity. According to the Mortgage Bankers Association (MBA), purchase applications are down 44% from last year at this time. This marks the lowest level in 28 years. Even worse, applications to refinance are down a massive 74% from one year ago.

Mixed Labor Market Data Spur Decline for March 2023 Mortgage Rates

Smaller than expected wage increases and a reduced outlook for global economic growth due to troubles in the banking sector were favorable for mortgage markets this week. As a result, mortgage rates moved lower.

The latest Employment report contained mixed news. After the economy added a stunning 517,000 jobs in January, the consensus forecast for February rose 225,000. This exceeded the consensus with gains of 311,000. The gains were broad based with particular strength seen in leisure, hospitality, professional services, and retail. The unemployment rate rose to 3.6% from 3.4%, which was the lowest level since 1969.

Average hourly earnings, an indicator of wage growth, climbed 4.6% higher than a year ago. While high by historical standards, this fell below the consensus forecast for an annual rate of 4.8%. A major concern for Fed officials is that low unemployment facilitates larger wage increases. As companies compete for workers, the economy faces greater inflationary pressures.

The JOLTS report measures job openings and labor turnover rates. Conclusively, the latest data indicated that the labor market remains very tight. At the end of January, there were an enormous 10.8 million job openings, above the consensus forecast and over 4 million more than in January 2020 prior to the pandemic. There were 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.

Federal Reserve Chairman Jerome Powell Provides Congressional Testimony

In semi-annual testimony to Congress this week, Fed Chair Powell maintained a very aggressive stance on fighting inflation. He emphasized that the federal funds rate may need to increase even higher than anticipated and remain there for a longer period of time to bring down inflation.

He warned that future rate hikes could be 50 basis points rather than just 25 depending on the strength of economic data. Given the mixed message from the relatively good news on wages and the continued strong job gains, investors are divided about the size of the rate hike at the next Fed meeting on March 22nd.

Banking Troubles Cause March 2023 Mortgage Rates to Drop

The impacts of the largest bank failure in the US since the financial crisis in 2008, as well as serious issues at a second big US bank and a major European bank, were positive for mortgage rates for a couple of reasons. Since the issues developed mostly as a result of the rapid monetary policy tightening by the Fed to fight inflation, investors now are concerned to what degree other banks have similar problems and whether higher rates will cause cracks to emerge in other areas of the financial system.

The reaction to this increased uncertainty was to shift from risky assets such as stocks to relatively safer ones such as bonds, including mortgage-backed securities (MBS). Added demand for MBS causes mortgage rates to decline. In addition, banks are expected to tighten their lending standards, meaning that it would be more difficult for businesses to obtain loans. This would slow economic growth, reducing the outlook for future inflation. This benefits mortgage markets.

On Thursday, the European Central Bank meeting may have provided a preview of how the US Fed will address the troubles in the banking sector at its meeting next week. Although the ECB had signaled at their prior meeting that they planned to raise rates by 50 basis points at this meeting, many investors anticipated that the banking sector troubles would result in a smaller 25 basis point increase to lessen the negative impact on banks. However, the ECB did raise rates by 50 basis points, while carefully drawing a distinction between its roles for maintaining price stability and for ensuring the safety of the financial system. The ECB stated that it was ready to provide liquidity to the banks if needed, but also stressed the need to aggressively fight inflation.

Core CPI Rises While Consumer Spending Falls

The latest key inflation data came in very close to expectations and caused little reaction. The Core Consumer Price Index (CPI) is a closely watched inflation indicator that excludes the volatile food and energy components. Core CPI in February was up 5.5% from a year ago, down from an annual rate of 5.6% last month. Shelter (housing) costs remained stubbornly high and again were responsible for the largest portion of the increase.

Even with all the dramatic economic news this week, the Retail Sales report on Wednesday still received some attention, since consumer spending accounts for over two-thirds of US economic activity. After a massive surge of 3.0% in January caught investors off guard, retail sales in February contained no major surprises, falling modestly from January as expected. In general, consumers spent more on necessities such as groceries, while cutting back at restaurants, auto dealers, and department stores.

Federal Reserve Balancing Act Lowers March 2023 Mortgage Rates

Concerns about the banking sector in the US and Europe caused investors to continue to shift to relatively safer assets, which again was favorable for mortgage markets. The Fed more or less stuck to the anticipated script at its meeting and the market reaction was minor. As a result, mortgage rates ended the week lower.

Due to the recent troubles in the banking industry, the Fed meeting on Wednesday generated further anticipation. Investors were eager to see how the Fed would balance its conflicting objectives of bringing down inflation (requiring tighter policy) and helping support the banks (requiring looser policy). As expected by most investors, the Fed raised the federal funds rate by 25 basis points to a target range of 4.75% to 5.00%, the highest level since September 2007. The latest projections from officials for the terminal (peak) rate remained near 5.10%, indicating that they anticipate one more 25 basis point hike before concluding this tightening cycle.

Beyond that, the Federal Reserve still aims for its target level of around 2.0% annually, along with banking stability. In short, the Fed chose to preserve its flexibility in making future policy decisions. Finally, Chair Powell explained that banks would likely be more selective now, leading to fewer loans to businesses and consumers. According to Powell, it is too soon to tell how much tighter lending standards will slow economic growth, but it could “easily have a significant” effect.

Existing Home Sales Rose for the First Time in a Year

In housing news, sales of existing homes rose in February for the first time in twelve months. Overall, existing home sales make up about 90% of the market. Despite the increase, existing home sales remained 23% lower than last year at this time. Inventory levels remained a big trouble spot. While they rose 15% higher than a year ago, they remained at just a 2.6-month supply nationally. This falls far below the roughly 6.0-month supply which is typically seen in a balanced market.

After reaching a record high of $413,800 in June, the median existing-home price was down to $363,000. This was 0.2% lower than last February, the first year-over-year price decline since 2012. New home sales, which account for the remaining 10% of the market, matched expectations with a small increase from January.

March 2023 Mortgage Rates See Calmer Markets

After several weeks of extreme volatility, March 2023 mortgage rates experienced a calmer week. While investors remained alert for troubles spreading to additional banks, daily mortgage rate swings returned to more normal levels. Just as the increased uncertainty earlier in the month caused investors to shift from equities to safer assets such as mortgage-backed securities, reduced concerns created the opposite effect. Thus, mortgage rates ended the week higher.

Overall, the Federal Reserve favors the PCE price index. In February, core PCE, which excludes food and energy, was up 4.6% from a year ago. Not only is this slightly below the consensus, it also dropped from an annual rate of 4.7% last month. The cost of services continued to increase more than prices for food and other goods.

The annual rate of increase in Core PCE remains far above the Fed’s target level of 2.0%. After peaking in September, many investors thought that it would continue to ease every month. However, the actual path contained additional bumps. Fed officials repeatedly warned of the inflation challenges. Particularly, this impacts their aggressive approach to monetary policy.

Mortgage activity, which was recently at the lowest levels in 25 years, has picked up a bit lately. According to the latest data from the Mortgage Bankers Association (MBA), purchase applications rose modestly from last week. That said, purchase applications dropped 35% from last year at this time. Applications to refinance increased 5% from the prior week, but remain down a massive 61% from one year ago.

Looking Ahead to April 2023 Mortgage Markets

Investors will continue to keep a close eye on the banking sector to see if troubles spread to other institutions. They will also monitor to see if Fed officials elaborate on their plans for future monetary policy.

In addition, the ISM national manufacturing sector index comes out on Monday. Later, the ISM national services sector index on Wednesday. Finally, the key Employment report releases on Friday. Holistically, these figures on the number of jobs, the unemployment rate, and wage inflation reflect April’s highest anticipated economic data.

Despite ongoing challenges from global banks, March 2023 mortgage rates experienced a calmer period at month’s end. 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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