May 2023 MBS Volatility and Its Impact on Markets

May 2023 MBS brought significant volatility to the mortgage markets, driven by a range of major economic news and events. Despite the impact of these factors, mortgage rates experienced surprisingly little change. Let’s delve into the details and explore the key factors that influenced the mortgage market during this period.

Fed’s Expected Script and Rate Hike Creates Noticeable Impact for May 2023 MBS

In May 2023, the Federal Reserve stayed true to market expectations by increasing the federal funds rates by 25 basis points, reaching the highest level since August 2007. This decision demonstrated the central bank’s commitment to closely monitoring economic data and developments in the banking industry. The rate hike aimed to strike a balance between stimulating economic growth and managing potential inflationary pressures.

The impact of the rate hike on the May 2023 MBS market was noticeable, albeit relatively modest. Borrowing costs for homebuyers and homeowners with adjustable-rate mortgages saw a slight increase, reflecting the adjustment in interest rates by mortgage lenders. While this shift signaled a change in the lending environment, it did not cause significant disruptions.

Importantly, the Fed’s decision to leave room for future rate hikes indicated that this was part of a gradual normalization process rather than a one-time event. The central bank’s cautious approach sought to avoid abrupt economic and financial market disturbances.

Job Gains and Wage Growth

The most recent employment report unveiled positive trends in job growth and wage increases, surpassing expectations. In April, the economy added a substantial 253,000 jobs, with notable contributions from sectors such as professional services, health care, and leisure. As a result, the unemployment rate unexpectedly dropped to its lowest level since 1969, marking a significant milestone for the labor market and overall economic outlook.

The robust job gains and wage growth recorded in the report have far-reaching implications. A healthy labor market stimulates consumer confidence and spending, driving economic expansion. As more individuals secure employment and experience wage increases, their purchasing power strengthens, spurring demand for goods and services and supporting businesses across various industries.

The strong performance in professional services, health care, and leisure sectors underscores the diversity and resilience of the job market. These sectors not only contribute to overall economic stability but also provide employment opportunities for a wide range of skilled workers. The sustained growth in these areas strengthens the labor market and bolsters the broader economic landscape.

Wage Growth and Inflationary Pressures Affect May 2023 MBS

During the period under review, average hourly earnings demonstrated notable growth, surpassing consensus forecasts. The 0.5% increase from March and the 4.4% rise from the previous year signaled strong wage growth. Thus, this holds significant implications for future inflationary pressures.

Sustained wage growth is crucial in shaping the overall inflationary environment. When wages increase, it puts more money in consumers’ pockets, enabling them to spend more. This increased spending, in turn, can drive up demand for goods and services, potentially leading to higher prices. As a result, sustained wage growth can create upward pressure on inflation.

The Federal Reserve pays close attention to wage growth and its potential impact on inflation. If wage growth accelerates too quickly and poses a threat to the Fed’s inflation target, policymakers may consider implementing measures. These include raising interest rates to cool down the economy and curb inflationary pressures.

Market participants also closely monitor wage growth as it provides insights into the health of the labor market. Wage growth can influence consumer confidence, discretionary spending, and overall economic activity.

Consumer Preference for Services

The Institute of Supply Management (ISM) reports provided valuable insights into consumer preferences for services over goods during the period. The ISM national services sector index indicated an expansion with a reading of 51.9. Meanwhile, the ISM national manufacturing index showed contraction with a reading of 47.1. These figures highlighted the resilience of the services sector, which continued to drive economic activity and consumer spending.

The consistent preference for services over goods suggests that consumers prioritize experiences, personal services, and intangible benefits over physical products. Services encompass a wide range of sectors such as healthcare, entertainment, travel, hospitality, and professional services. The sustained expansion of the services sector indicates that consumers are actively engaging in these areas, contributing to economic growth.

The services sector’s strength can be attributed to several factors, including demographic shifts, evolving consumer preferences, and technological advancements. As societies become more affluent and focused on convenience and personalization, the demand for services continues to rise. Furthermore, advancements in technology made it easier for consumers to access and engage with various services.

The resilience of the services sector is vital for economic stability and growth as it accounts for a significant portion of employment and GDP in many economies. The sector’s expansion indicates ongoing opportunities for job creation, income generation, and entrepreneurial activities.

Understanding consumer preferences for services and their impact on economic activity helps businesses and policymakers align their strategies to meet evolving demands. By recognizing and responding to consumer needs, companies can tailor their offerings to enhance customer experiences and drive growth. Similarly, policymakers can design supportive policies and investments that foster the growth of the services sector and stimulate economic development.

Inflation Data and Mortgage Rates

During the month, the release of inflation data provided insights into the state of the economy and its impact on May 2023 MBS. The reported inflation figures were largely in line with expectations, leading to minimal changes in mortgage rates. The key indicator, the Consumer Price Index (CPI), indicated a 4.9% increase compared to the previous year. While this represented a decrease from the previous month, it remained significantly above the target level.

The sustained level of inflation raised concerns among policymakers and market participants. Inflation erodes the purchasing power of consumers and can lead to increased costs for businesses, affecting overall economic stability. The Federal Reserve closely monitors inflation levels to ensure they remain within its target range, typically around 2%. The higher-than-target inflation rate signaled a need for heightened attention and potential policy adjustments to address the situation.

Such sustained inflationary pressures can have implications for mortgage rates. Inflation erodes the value of fixed-income assets, including May 2023 MBS, leading to higher yields and potentially impacting mortgage rates. Lenders consider inflation trends when determining interest rates for mortgages, as they aim to maintain a balance between profitability and risk. If inflation continues to rise or remains above the desired level, it may prompt lenders to adjust mortgage rates accordingly.

The alignment of inflation data with expectations, coupled with its sustained level above the Federal Reserve’s target, highlights the importance of closely monitoring economic indicators and potential policy responses. As inflation plays a crucial role in shaping the broader economic landscape, market participants and policymakers will remain attentive to any developments that may necessitate adjustments in monetary policy or impact mortgage rates.

Mortgage Activity Rebound as May 2023 MBS Increases

May brought a glimmer of hope for the mortgage market as it witnessed a slight rebound in activity following a period of decline. This positive development was reflected in the data provided by the Mortgage Bankers Association (MBA), which reported a 5% increase in purchase applications compared to the previous month. Additionally, applications for refinancing also experienced a notable uptick, rising by 10%. While these figures indicate a shift towards increased demand for housing, it is crucial to note that both purchase and refinance applications remained lower compared to the previous year.

The housing market continues to grapple with the lingering impact of various economic factors that have shaped its trajectory in recent times. Despite the modest rebound in mortgage activity, it is evident that the sector is still recovering from the challenges posed by the COVID-19 pandemic, supply chain disruptions, and rising construction costs. These factors, coupled with tight inventory levels, have constrained the market and contributed to the lower number of applications compared to the previous year.

The lower year-over-year application figures underscore the ongoing dynamics in the housing market. While there are positive signs of recovery, the overall level of mortgage activity remains below pre-pandemic levels. Economic uncertainties, such as job market fluctuations and concerns about future interest rate movements, have influenced consumer confidence and their decision-making when it comes to homeownership and refinancing.

Industry experts and market observers will closely monitor the evolving landscape of the housing market in the coming months. Affordability, availability of inventory, and broader economic conditions play a significant role in shaping mortgage demand. Additionally, any potential changes in lending standards and mortgage rates will also impact the borrowing landscape and potentially influence future mortgage activity.

Retail Sales and Spending Habits

In April, retail sales data provided insights into the health of the economy, showing a 0.4% increase. While this growth fell below the consensus forecast, positive revisions to March figures provided some reassurance, aligning with expectations. The spending habits observed during this period reflected a cautious approach among consumers, with a notable shift in expenditure patterns.

One notable aspect of consumer spending was an increased focus on necessities. Essential goods and services, such as groceries, household items, and healthcare products, experienced steady demand and contributed to the overall growth in retail sales. This trend can be attributed to consumers prioritizing essential needs and ensuring their basic requirements are met amid economic uncertainty.

Conversely, spending on larger discretionary items exhibited a decrease during this period. Items such as automobiles, furniture, and electronics saw a relatively weaker demand compared to previous months. This decline can be attributed to consumers adopting a more cautious approach toward big-ticket purchases, likely influenced by factors such as economic uncertainty, higher inflation rates, and concerns about future financial stability.

The cautious spending behavior observed in April aligns with broader consumer sentiment and reflects a desire to manage personal finances prudently. Consumers may be adjusting their spending habits in response to various factors, including rising prices, supply chain disruptions, and potential concerns about future economic conditions. This cautious approach suggests that consumers are mindful of the economic uncertainties and are prioritizing their financial well-being.

Housing Market Challenges and Construction

In April, the existing home sales market faced a decline, accentuated by a persistent shortage of inventory. This scarcity of available homes on the market exerted significant pressure on the supply-demand dynamics. As a result, the housing market saw higher prices and a more competitive environment for potential buyers. The national inventory level remained critically low, with just a 2.9-month supply of homes available for sale.

The shortage of housing supply spurred a persistent issue in the housing market. Ultimately, it was driven by various factors such as limited new construction, a lack of available land, and challenges in the supply chain. Builders had the opportunity to address the inventory shortage by increasing construction activity. However, they encountered obstacles that hindered faster production and limited the potential impact on inventory levels.

One of the key challenges faced by builders is credit conditions. Access to financing and construction loans plays a vital role in enabling builders to initiate new projects. Tight lending standards and stringent qualification requirements made it difficult for some builders to secure the necessary funding. Therefore, this impedes their ability to contribute to inventory growth.

Additionally, rising costs have also posed challenges for builders. The increased prices of construction materials, including lumber, steel, and labor costs, significantly impacted the economics of new construction projects. Builders contended with higher input costs, limiting their ability to construct new homes at a pace that matches the demand.

The combination of credit conditions and rising costs limited the ability of builders to alleviate the inventory shortage. As a result, prospective homebuyers have encountered limited options and faced higher prices due to the prevailing supply-demand dynamics.

Looking Beyond the May 2023 MBS Market

As we analyze the intricacies of the May 2023 MBS market, it becomes evident that various economic factors influenced mortgage rates. Despite the volatility and impactful economic data, mortgage rates remained relatively unchanged. The mortgage market’s stability during this period can be attributed to the cautious approach of the Federal Reserve, the evolving landscape of economic data, and market participants’ reactions to these factors.

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