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Signs of easing inflation boost markets after midterms

By: Movement Staff
November 11, 2022

The consumer price index (CPI) released Thursday gave a much-needed jolt to the American stock market. The data from the Bureau of Labor Statistics showed CPI climbed by 7.7% year-over-year and 0.4% month-over-month. This was less than predicted and is a good sign that inflation might be easing. The core CPI is one of the Fed's preferred measures of inflation as it excludes the more volatile sectors like food and energy costs. Core CPI increased by 0.3% month-over-month which was less than the 0.5% estimate.

Stock markets reacted with their best day since 2020. The Dow rose by over 1,200 points. The S&P 500 was up 5.5% with the Nasdaq up more than 7%. Conversely, Treasury yields dropped by more than 20 basis points, dipping back below 4% to just over 3.8%. That means mortgage interest rates likely dropped during that time period as well. The CPI is a good indicator that the Fed's QT measures are working, but much more positive data is needed before the Fed stops raising rates or even thinks about a timeline for cutting back.

Midterm elections drove volatility in stock markets in the second week of November with the Dow closing down 600 points the day after election day. A lack of clarity on which party would control Congress left investors unsure about the immediate future. 

Treasury bond yields also declined briefly but still stayed above 4.00%. This is the first time since 2007 that the 10-year yield has held steady above 4.00%. The yield curve between the 10- and 2-year yields remains firmly inverted and has been inverted since late June 2022. This is typically a sign of recession, but an even stronger sign of recession is an inversion of the 10-year and 3-month yields. Those yields inverted recently and remained inverted over the last week. 

Signs of easing inflation boost markets after midterms



The tight monetary policy might be slowly working to curb inflation, but it has slammed the brakes on the mortgage industry. Freddie Mac's 30-year fixed-rate mortgage average moved back above 7% this past week, hitting 7.08%. 

Freddie Mac economists said in their release, "As the housing market adjusts to rapidly tightening monetary policy, mortgage rates again surpassed seven percent. The housing market is the most interest-rate sensitive segment of the economy, and the impact rates have on homebuyers continues to evolve. Home sales have declined significantly and, as we approach year-end, they are not expected to improve."

The Mortgage Bankers Association's Market Composite Index report showed applications overall were down 0.1% week-over-week with refinances down 87% year-over-year and purchases down 41% year-over-year. 

The MBA's Vice President and Deputy Chief Economist, Joel Kan, said in the release, "Mortgage rates edged higher last week following news that the Federal Reserve will continue raising short-term rates to combat high inflation. The 30-year fixed rate remained above 7 percent for the third consecutive week, and there were increases for most other loan types. Purchase applications increased for the first time after six weeks of declines but remained close to 2015 lows, as homebuyers remained sidelined by higher rates and ongoing economic uncertainty. Refinances continued to fall, with the index hitting its lowest level since August 2000."

There is another phenomenon affecting the mortgage market. Falling home prices are erasing a lot of the built-up equity homeowners had acquired over the last year. The last S&P CoreLogic Case Shiller National Home Price Index showed home price appreciation cooled off at a record pace in August, with just a 13.9% annual gain. July's index showed a 15.6% annual gain.  Falling home prices are good news for buyers because it can slightly offset higher interest rates and also puts them in a better position to negotiate with sellers. 

For homeowners needing to pull out equity, a cash-out refinance generally isn't the best idea because of how high interest rates have moved. Instead, there seems to be a growing market for home equity lines of credit (HELOCs) or home equity loans (2nd liens). Both of these allow homeowners to tap into equity without having to refinance out of their current mortgage rates. As always, make sure to discuss any option with your Movement Mortgage loan officer so you can fully understand the costs associated with any modifications to your current home loan.

Author: Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.