Mortgage Market Commentary, 5-06-2022

May 6, 2022 6:40:10 PM

We are excited to partner with one of our favorite mortgage minds, Lou Barnes, to bring you his biweekly commentary. Lou is a loan officer in Boulder, CO, but his insight is relevant across the country. Lou's opinions should not be construed as the opinions of CENTURY 21 Redwood Realty or our partner, Day 1 Mortgage.

The Fed and inflation. That’s all, folks.

New Data. The twin surveys of purchasing and logistics managers by the ISM for April show little change. The manufacturing sector was forecast to rise from 57.1 and instead slid to the lowest since mid-2020, still a strong 55.4 overall. Two sub-indices are more descriptive: employment crashed to 50.9 from 56.3 last month -- not weak, too few people to hire -- and the prices index stayed close to the all-time highs at 84.6. The service-sector survey, same thing: a solid and steady overall 57.1%, employment from 54.0 to 49.5. 

April payrolls recovered another 428,000 jobs, now close to the pre-Covid total. It is impossible to tell what fraction returned from premature Covid retirement, or from new demand in a too-hot economy. The all-important clue is wages -- are employers paying up across the economy to attract workers?

No. Paying down. In the last year average hourly earnings rose 5.5%. In the last three months by 3.2%, annualized. One-half the gain in overall CPI. If there is a spiral here, it is wages unspooling under pressure from unaffordable prices, a thought beaten to death below.

Rates. The Fed’s meeting concluded Wednesday, and markets enjoyed a few hours of imaginary relief. The good news: Powell said “no” to .75%-per-meeting hikes, will unload its QE holdings in June at half the expected pace. By evening, given a little thought and some gin, markets noticed that Powell nodded to .50% hikes at the next two meetings, and reverse-QE would proceed at full bore in September.

Beginning then the Fed will dump $60 billion in Treasurys each month and another $35 billion in MBS, and “stop when reserve balances are somewhat above the level it judges to be consistent with ample reserves.” So says the Fed statement in considerable bull byproduct. The Fed will stop when something big breaks. Then markets will begin to wager on how soon the Fed will buy again.

The 10-year T-note was 2.73% on April 26, and this week blew through chart support at 3.00% to 3.13%. Chart below. Looking way back, in October 2018 a slender reed at 3.19%, then no support at all looking back to 3.75% in 2011. Retail 30-fixed no-point mortgages are an inch from 6.00%, and the spread to 10s is a clear sign of MBS trouble in the face of QE dumping. The Fed-sensitive 2-year T-note is trailing at 2.75%, the pause reflecting concern for the damage done by catch-up hikes, and the odds of a Fed overshoot.

Inflation-Fighting COMMUNICATION. Has never been worse. Poor Ol’ Joe is too old to fly top cover for the Fed and nation. The White House is empty of useful domestic people, still dreaming of Build Back Better when fiscal stimulus is the last thing we need. Yellen did a fine job as Fed chair, but has been weak at Treasury. It’s a lot to ask of Powell, but you... are... it.

As honest and fearless as Powell is, and has become a fine communicator, his post-meeting press conference this week was awful. Explaining to the nation aside, our words often reveal our thinking, and he was oh-for-everything.

The full transcript of the presser is here. A dozen single-spaced pages and worth your time. Powell opened: “It is essential that we bring inflation down if we are to have a

sustained period of strong labor market conditions that benefit all.” Then twice in the same half-page, “The labor market is extremely tight.”  When inspired Nick Timiraos tried to hand a useful thought to Powell (“... the feasibility of slowing hiring without pushing the economy into recession?”), he fumbled, off into “Beveridge curve” econo-babble about job vacancies.

“There's a path by which we would be able to have demand moderate in the labor market, and therefore have vacancies come down without unemployment going up.”

Horsefeathers. Tell the people: to get inflation back in the box, the Fed has to slow the economy. This process like so many in life will involve short-term pain for long-term gain. There is no painless remedy for inflation, and a slowing economy brings unequal discomfort, including losses of jobs.

State The Problem, Then Revise Policy. Powell is under assault for allowing inflation to get out of the box. People who should offer support and explanation to the nation instead wield the long knives of ego -- Summers and Dudley, and inside the Fed, Bullard and Mester.

Powell sounds panicky while trying to explain. He is giving far too much weight to old Phillips-isms, that a tight labor market is the root of all evil. That is not the problem today. We are in the worst supply-shock of all time, tough before Ukraine and now far worse, China late to the Covid party. At mid-presser, Powell: “Our tools don’t really work on supply shocks.” With all respect... then consider doing something else? 

Britain and the Bank of England are different. Dissent is routine. Also routine thinking out of the box. Inflation in Britain is now 10%, half-again ours and more vulnerable to energy disruptions. The BOE this week raised its cost of money by only .25% to the same 1.00% as our Fed. The vote in the Monetary Policy Committee was 6-3 -- three wanted a bigger hike. Andrew Bailey, Governor of the BOE: “We’re seeing this unprecedentedly large shock to real income in this country coming from abroad, it’s a terms of trade shock. ... And that is having a negative effect on real income, we think that’s going to feed through to activity during the course of this year in a big way.”

Many in Europe feel the same way: this supply-shock inflation, prices running up far faster than wages has an excellent chance to moderate inflation under the weight of prices themselves. Adding the weight of interest rates risks worse trouble. Faltering demand shows in oil prices holding close to $100, which could double briefly under embargoes. Overall demand in the US will surely be suppressed by natural gas, now more than doubled at $8/mbtu, going higher and doing the same to electricity.

Jobs? The chair’s focus on jobs may turn out to be right, but two elements of study are missing. First, markets react to job data today exactly as in the Volcker era. But jobs are not the same! This is an IT world. If you don’t work with your hands, you work in front of a screen. Fed policy thinking has not adapted (nor has social policy). In an IT world the likelihood of skills mismatch is enormous and without precedent. How many vacancies are caused by inadequate IT skills in a thriving, super-productive, and revolutionary economy? How much real inflation pressure, if any has come from one-time outsize wage gains in retail and hospitality? 

Second, how much of our labor shortage is due to cramped immigration? Especially the supply for tough, hands-on, entry-level work? During the last forty years of heavy immigration, Anglo youth has lost interest. 



The 10-year US T-note in the last 20 years, the last two days added in red, and support noted.


The 2-year has priced 2.75% for year-end. The flattening indicates suspicion that the Fed will get more slowdown than it thinks:

Thanks for tuning in to our collaboration! Remember that our friends at Day 1 Mortgage are here for you for all of your mortgage needs.

Lou Barnes

Written by Lou Barnes

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