Market volatility continued over into the first week of the new year as the Dow closed 300 points lower on Thursday after the release of a stronger-than-expected private payrolls report. ADP's private payrolls report showed 235,000 jobs added in December which was well above the estimate. This spooked investors who see any sign of resiliency in the Labor Market as a sign that the Federal Reserve will continue its aggressive rate hikes.

That feeling was slightly assuaged Friday morning when the Department of Labor released its jobs report. The report showed nonfarm payrolls rose by 223,000 in December with unemployment falling to 3.5%. Many economists predicted the report would come in around 200,000. But more importantly, wage gains were lower than expected growing 0.3% month-over-month and 4.6% year-over-year. Slow wage growth is typically an indicator that inflation pressure is waning. 

The minutes from the Federal Open Market Committee's December meeting were released earlier in the week, showing the language policy makers used to express their sentiments on inflation and the need for keeping restrictive monetary policy in place. The meeting summary indicated this would only move higher in the near future, stating, "Participants generally observed that a restrictive policy stance would need to be maintained until the incoming data provided confidence that inflation was on a sustained downward path to 2 percent, which was likely to take some time. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy."

Currently, the Federal Funds rate is at 4.25%-4.5% which is its highest level in more than a decade. The minutes show that no FOMC members foresee any rate cuts in 2023 which is consistent with the messages delivered by Fed Chairman Jerome Powell in previous months. Minneapolis Fed President Neel Kashkari published an essay on the Federal Reserve Bank of Minnaepolis' website where he went a step further, calling for raising rates at least three more times this year. That would push the federal funds rate to about 5.4%.

APPLICATIONS DRY UP AS RATES STALL

Applications for a mortgage hit a 25-year low this week, according to Freddie Mac, as the 30-year fixed-rate mortgage average moved up slightly to start the year, hitting 6.48%. In their analysis, Freddie Mac's economists pointed to the potential for an upswing in 2023 saying, "While mortgage market activity has significantly shrunk over the last year, inflationary pressures are easing and should lead to lower mortgage rates in 2023. Homebuyers are waiting for rates to decrease more significantly, and when they do, a strong job market and a large demographic tailwind of Millennial renters will provide support to the purchase market. Moreover, if rates continue to decline, borrowers who purchased in the last year will have opportunities to refinance into lower rates."

The Mortgage Bankers Association showed a 42% reduction in applications year-over-year for purchases and refinances. The MBA's Vice President and Deputy Chief Economist Joel Kan pointed to the end of the year as part of the issue, which is traditionally a slower time for purchases. However, as Kan points out, "Purchase applications have been impacted by slowing home sales in both the new and existing segments of the market. Even as home-price growth slows in many parts of the country, elevated mortgage rates continue to put a strain on affordability and are keeping prospective homebuyers out of the market."

The National Association of Realtors showed pending home sales were down 38% year-over-year in November and 4.0% month-over-month. The 73.9 index reading was its second-lowest monthly reading in 20 years. The higher interest rates and slower purchase activity have resulted in an extreme slowdown in home price growth. October's S&P CoreLogic Case-Shiller National Home Price Index showed home prices grew by 9.2% year-over-year, much lower than September's 10.7% pace of growth.