Goodbye 2022 Rate Watch

Last week we saw a slight uptick in rates as investors digested economic data.

There was conflicting housing data. Existing home sales dropped while new home sales (aka new builds/new construction) surprised to the upside. The kicker this week was the move the Bank of Japan (BOJ) made.

The BOJ raised rates from 0.25% to 0.5%, essentially doubling the cost of borrowing. This was significant for a few reasons and we'll go over two of them here.

First, the BOJ was the last central bank practicing dovish policies. While the world was raising rates and unloading their balance sheets, the BOJ kept rates low and were buying bonds/treasuries. The market was nervous that this signaled a shift in policy. 

Second, the BOJ is the largest non-US holder of US treasuries. With the increased cost to borrow money, markets are afraid that they will slow down their US Treasuries purchases. This will cause the bond markets to fall and effectively lead to higher mortgage rates.

The BOJ did state this was not a shift in policy and will continue to provide stimulus as needed. How it plays out is yet to be seen.

Here is what we have going on during this shorter week

Tuesday

• S&P Case-Shiller U.S. Home Price Index
• FHFA U.S. Home Price Index

Wednesday

• Pending Home Sales Index

Thursday

• Initial & Continuing Jobless Claims

Friday

• Chicago PMI

The pending home sales index measures active/live contracts. This gives us a look into the current activity/health of the housing industry.

Chart Check

In last week’s issue, I mentioned how the 10yr couldn’t stay low this long. I mentioned how it being below the Fed’s fund rate didn’t make sense but to enjoy the ride while it lasted.

It has risen this past week and is now a quarter point above the summer’s support line mentioned before. For our new readers, mortgage interest rates move the same way the 10yr does – so we follow it closely.

As we enter 2023, here is what I’ll be keeping an out for

• FOMC minutes
• CPI/PPI/PCE (inflation data)
• Unemployment 
• Quarterly Earnings

There have been signs of inflation cooling. Fed chairman Powell already stated that he needs to “see a trend” before confirming we are on the right path. But, it’s a start.

Corporations are going to be under pressure with high rates (high cost of borrowing) and increasing wages. If layoffs are their solution to cut costs and meet margins, then we may see an uptick in unemployment. Quarterly earnings will be very telling.

My stance and thesis have not changed. We will see lower rates. Whether it’s due to inflation cooling, preventing a recession, injecting liquidity etc. is anyone’s guess. But the Fed’s hand will be forced in the next 6-18 months. (The interest payments alone is enough to bankrupt the Fed. I believe we are nearing $1 trillion on interest payments).

If you want more info, here are links the articles published this past week

Fed’s rate hikes creates fear in markets

Bank of Japan rattles markets but vows not QT

Existing home sales drop over 7%. The streak of declines continues

States set to increase minimum wage…

Index of Leading Economic Indicators continues decline

New home sales surprise to upside

That's it for this week, see you next year. As always, please reach out anytime with questions, comments, debatable topics, etc.