Big sell off last week, will rates improve this week?

10 · 17 · 22

Hey, it’s Mike Lynch with Ameri First Financial. It’s Monday morning and it’s time for your Monday morning mortgage update for the week of October the 17th. Hope you all had a great weekend. Love this cooler weather. So let’s dive right into it and talk about last week and what’s gonna happen this week.

So last week, big sell off on the bond market. Mortgage backed securities were down almost 100 basis points. So they, from the day they started on Monday and when they ended on Friday, a hundred basis points sell off. Let’s just go to the charts. I wanna show you really what this looks like. So this is a.

Representation or a chart of the trading of mortgage back securities in the bond market. I’ve shown you this many times. Each one of these bars represents one day of trading. You can see as I move my cursor you can see how the days change. And we call these candlesticks because you can see the little wicks on these things.

And it shows the highs, the lows, and where, where the day ended trading. And this is a reputation. The bond market. Mortgage backed securities are sold in the bond market, and that’s where mortgage rates are determined. If we go to the right side, you can see the end here, big sell off. Red means money’s flowing out of that bond market.

Mortgage rates are going up and basically you can see last week big downturn in the market. One of the main reasons for that is because of inflation. CPI came out last week. The consumer price index, PPI came out. Also the producer’s Price Index. One measures consumer inflation. One me measures industry or production inflation, 40 year highs.

Inflation is the death of mortgage rates. We’ve talked about this, and basically nobody wants to buy mortgage bonds because their return is low, because inflation’s eating at their returns, money’s flowing out, and that’s why mortgage rates are going up and until inflation gets under control, we’re not going to see mortgage rates come down or start to level off.

And so last. A 40 or high, and that’s what caused these rates to go up. So when we talk about a hundred basis points, let me put it in perspective here. If I quarter you a rate on Monday and it was a par rate or no points, no discount points that same rate on Friday now cost you one point. Because the market got worse by a hundred basis points or close to a hundred basis points.

So the, the cost of that same rate got more expensive or I’d have to g give you a higher rate quote to give you a part or no discount rate. So hopefully that makes some sense. So what are we looking at this week? Three things I always give you. We’re looking at the Fed. We’re looking at other economies around the world and we’re looking at some data domestically manufacturing and housing data.

So let’s talk about the Fed. The Fed is have, has two more meetings coming up this year in November and in December and leading up to the November meeting. They start talking a lot and, and having interviews all those Fed members and giving some insight on what they’re going to do at the Fed meeting in November.

Now everybody expects them to raise the rate again, another three quarters of a percentage point. Now, keep in mind when the Fed raises that rate, that doesn’t have a direct impact on mortgage. It actually long term is gonna be good for mortgage rates cuz it means if Fed’s taking inflation seriously and the Fed raises that Fed fund rate to fight inflation.

So we expect it to be three quarters of a percent in November. We actually expect it to be three quarter of percent even in December. They’ve gotta get inflation under control. So we’re gonna be listening to what they’re saying. Are they on the same path? Because guess. They’re getting a ton of pressures from politicians, from businesses, from corporations, from investors saying, Stop, stop that.

You’re hurting us. You’re causing a lot of pain. Well, they are. They kicked the can down the road in 2020 when they ignored inflation. And now we’re, we’re paying the piper, if you will. They have to do this to fight inflation cuz they don’t want to kick the can further because inflation will. Horrible if they don’t get it under control, and this is how they do it.

But everybody’s starting to feel the pain and the, and the discomfort from it consumers and businesses. And they’re putting pressure on the fed to change course. So that’s what we’ll be listening for. Are they going to keep track and, and cause some pain now so that it gets better or they gonna change.

The second thing is other economies. So the Bank of England has caused a lot of volatility in the market because basically they have said inflation wasn’t a big deal. And then all of a sudden a couple weeks ago they said, Oh my gosh, we’ve got horrible inflation. And it’s caused a ripple effect around the world with other economies is including our bond market, which is one of the reasons we’ve seen such a sell.

And so they are going to talk about future rate hikes. Are they gonna be more aggressive with their future rate hikes to fight inflation? China is starting to show some really weak economic data that they’re releasing if you believe it. And that they’re, they’re suffering. That economy is not doing well.

In fact, it’s so, it’s having such a big problem that they come out with a monthly report this week and they’re just not gonna produce a report. They’re just not gonna let us know what’s going on on their economy. So, Might be worse than we think, and then. The ecb, the European Central Bank is gonna release some of their data, big recessionary issues around Europe.

Big recessionary issues. Fuel prices expect to go up 200% by the end of the year, so they’re really hurting over there and because of their big inflation period and, and they’re really heading in and already in a recession. And then the third thing is manufacturing housing data. So I wanna show you another chart here.

That talk shows you the Empire State Manufacturing survey. And this obviously shows you from you know 20 years ago until now. And I want you to see that any time we see this, if you can see the gray lines there. You actually see that those numbers below zero. Whenever we see the manufacturing data below zero, where I’ve circled in the red line, that’s when we head into a recession.

And Empire State Manufacturing? Yes, it’s New York. It represents, it has a, a, a, a representation of which related to what’s happening around the country. And we’ve seen three negative reports from them. We’re really indicating that we’re in or headed into a recession. And typically we see manufacturing recessions before we.

Economic recession. So there’s some strong indications here that we are headed or already in a a recession. The other thing that we are looking at is housing data. We’ve got builder sentiment coming out, existing home sales coming out. We don’t expect those to be very strong. And that could have some impact on rates.

So we started off today actually with bond rates. The bond pricing a little better. Rates actually improved slightly. Now, it didn’t make up any of the losses that we saw last week but we expected to be a volatile market. So we’re gonna start off the week floating today. Very, very cautiously wa watching the market with a quick move to locking if we see any changes.

So if you have any questions about rates about pricing, go ahead and give me a call. If you know somebody can benefit from this video, please forward it to them. Have a great productive week and I’ll talk to you next week. Bye bye.