Economic News Mixed
It was a packed week for major economic events. The comments from Fed officials and the inflation data were favorable for mortgage markets, while the labor market report was not, and mortgage rates ended last week a little lower.
Fed Rate Hikes May Slow
In a speech on last Wednesday, Fed Chair Powell acknowledged that some progress has been made in bringing down inflation but added that a lot more work needs to be done. Given the long lag in the effects of monetary policy changes on the economy, he said that the pace of rate hikes could slow as soon as the next meeting on December 14. Most investors now anticipate a 50 basis point hike, following several larger 75 basis point hikes at recent meetings.
Strong Job Gains Continue
After a string of good news last week for mortgage rates, stronger than expected job gains and wage growth on last Friday increased concerns about inflationary pressures. The economy gained 263,000 jobs in November, above the consensus forecast of 200,000. The best performing sectors were leisure, hospitality, and health care. Average hourly earnings, an indicator of wage growth, were 5.1% higher than a year ago, far above the consensus forecast for a decline to 4.6%.
Core PCE Above Fed Expectation
The PCE price index is the inflation indicator favored by the Fed because it adjusts for changes in consumer preferences over time. In October, core PCE was up 5.0% from a year ago, slightly below expectations, and down from a peak of 5.4% in February. However, this remains far above the Fed’s target level of 2.0%. This is particularly relevant because how quickly aggressive monetary policy tightening will bring down inflation is a widely debated question with enormous implications for financial markets.
Slow Economic Growth
Another significant economic report released last week from the Institute of Supply Management (ISM) hinted at slower economic growth. The ISM national manufacturing index dropped to 49.0, below the consensus forecast, and the lowest since May 2020. Levels below 50 indicate that the sector is contracting.
Conforming Loan Limits Increased
The Federal Housing Finance Agency (FHFA) announced that the baseline conforming loan limit for Fannie Mae and Freddie Mac mortgages in 2023 will increase 12% from $647,200 to $726,200. The new limit for most high-cost areas will be $1,089,300 or 150% of $647,200. This will be the seventh consecutive year of increases.
Major Economic News Due This Week
Investors will be hoping for more specific Fed guidance on the pace of future rate hikes and bond portfolio reduction. The biggest economic report next week will be the ISM national services sector index on Monday. After that, attention will turn to the CPI inflation report on December 13 and the next Fed meeting on December 14.
Mortgage Rates for the week of 12-05-2022