Published March 29, 2023
Metrics to follow as the market economy continues to evolve
Here's the latest metrics we're following as our market economy continues to evolve...
INFLATION
The most recent reporting showed inflation is slowing from 6.3% to 6.0% from January to February. This is good, but not as fast as the Fed would like to see principally because of the lagging housing inflation which is a 12-month rolling average. Chairman Powell acknowledged this in the most recent March 22 press conference "housing services is really a matter of time passing, we continue to see new leases being signed at much lower levels of inflation." According to leading mortgage economist Barry Habib, "if the Fed were using the latest housing numbers rather than a 12 month running average, overall inflation would be 2.2% lower in February at a rate of 3.8%". Due to averaging we're likely to see housing costs lower in May-July, and with it overall rates of inflation which likely means the Fed will not raise rates more than another 0.25% if at all during the next meeting.
The most recent reporting showed inflation is slowing from 6.3% to 6.0% from January to February. This is good, but not as fast as the Fed would like to see principally because of the lagging housing inflation which is a 12-month rolling average. Chairman Powell acknowledged this in the most recent March 22 press conference "housing services is really a matter of time passing, we continue to see new leases being signed at much lower levels of inflation." According to leading mortgage economist Barry Habib, "if the Fed were using the latest housing numbers rather than a 12 month running average, overall inflation would be 2.2% lower in February at a rate of 3.8%". Due to averaging we're likely to see housing costs lower in May-July, and with it overall rates of inflation which likely means the Fed will not raise rates more than another 0.25% if at all during the next meeting.
MORTGAGE vs. FED FUNDS RATE
It's important to note while Fed Funds rate does influence mortgage rates through the broader market and banking system, they are not tied together. While the Fed Funds rate increased by 1.5% from October 2022 to March 2023, Mortgage Rates are the same when comparing October to March (6.66% vs. 6.65%).
Mortgage Rates were more volatile during this time generally reacting more to economic growth (aka recession) and inflation concerns which caused them to peak in November at 6.95% then fall to 6.09% in February on overall positive feelings on the economy. Most recently they jumped back up in March to 6.65% and declining to 6.42% this week based on greater confidence of lower inflation as well as the Feds intervention in shoring up banking liquidity concerns.
BANKING SECTOR
While there are some concerns in some segments of banking primarily relating to venture capital & crypto related banks, it appears the concerns for the broader banking market were addressed by the Fed with their intervention to buy treasuries back from banks without reflecting a discount due to increasing market rates. This is certainly a gift to those banks who didn't hedge their risks, yet a positive intervention for the stability of our banking system with a much lower cost for our economy than experiencing increased uncertainty in banking. Moving forward we don't expect to see concerns about bank failures continue based on the US and European banking interventions.
WHAT'S NEXT
The first quarter of the year was turbulent, and we're seeing many people taking it all in and working on revising their plans for the year. The increased costs of borrowing or raising money has many companies looking to trim costs and balance budgets to maintain profitability and stability into the future, so we won't be surprised to the see the pace of hiring slow in the coming months. However, we're not seeing major signs of decreasing consumer spending which is the ultimate driver of the economy, so we're hopeful this will mean we'll see a flat growth or a small recession in the coming two quarters.
When you look at the housing market, our low inventory with moderated demand are keeping prices relatively stable though 5-10% off their top values at the height of the 2022 market. The lack of new building and inventory combined with decreasing mortgage rates will likely minimize further price decreases or even provide month over month appreciation in the coming months.
