Rate Watch - Maybe to be Thankful For

Last week was yet another volatile week. The market has been salivating at any news in order to place their bets. We saw intraday volatility spike. PPI reports came in better than expected but then Fed members were more hawkish in their stances. Markets are trying to digest all this contradictory news which results in volatility (notably in the bond markets which affect our mortgage rates). 

If the tides have turned with inflation, and future CPI and PPI do come in better than expected, expect the Fed to jawbone hawkishly to prevent the markets from getting ahead of themselves. Remember, they attribute inflation to the “Wealth Effect” – stocks up > people feel wealthy > consumer spending goes up > prices inflate to meet increased demand.

Fed Chairman Powell has stated many times how he wants demand to decrease and that the increase in rates will bring “pain” to many households.

As I’m sure all of you are aware, there has been a plethora of tech industry firings recently. If next month’s unemployment numbers are higher, it will place the Fed in a tough spot sooner than anticipated.

On the one hand, the Fed will need to increase rates to fight inflation. On the other, they will need to decrease them to stimulate the economy to fight recession. 

We have a short week coming up. Here is what’s in store:

Monday

• SF Fed President Daly Speaks on Inflation

• Happy Thanksgiving!

• Initial and Continuing Jobless Claims
• US Manufacturing & Services
• 5 Yr Inflation Expectations
• New Home Sales
• Fed Chairman Powell Speaks at the Brookings Institution
• FOMC Minutes

Taking a look at what institutions are thinking, we are exactly in the same spot from a week ago. Over 80% believe the last Fed rate hike of 2022 will be a 50bp increase.
 

Chart Check (SEE ABOVE)
Last week I mentioned how we would test the early October support levels. I expected the 10yr Treasury to drop as the dollar loses some steam. We were at 3.8950 last week and today we are at 3.7970. This doesn’t seem like much of a move, but it is. We still have a little bit to drop if all plays out as expected. However, with the Fed raising rates, I don’t see how the 10Yr can stay this low for much longer . The Fed rate is currently at 3.75 and I don’t expect the 10yr to go below the Fed rate for any significant period of time.

That's it for this week. As always, please reach out anytime with questions, comments, debatable topics, etc. I'm always here to assist.