Uncategorized
Why are mortgage rates surging?
Mortgage rates hit a new yearly high last week of 7.65% before dropping just a little to end the week at 7.44%.
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Why are mortgage rates rising? This is a question many people are asking — even some of the Federal Reserve members.
We have had back-to-back weeks of the bond market getting wild since the key 10-year yield level of 4.34% broke higher. It didn’t help that the Fed was hawkish after the Fed meeting, as their forward outlook surprised some market players.
Jobless claims data has also improved in the last few weeks. The jobless claims data is my key 2023 economic data line for the bond market and mortgage rates because I don’t believe the Fed will pivot until the four-week moving average of jobless claims gets above 323,000. We are currently at 211,000; this is a shallow level historically.
This statement from the Fed is classic Fed at work.
The Fed has not helped its own cause here, as Austan Goolsbee, president and CEO of the Federal Reserve Bank of Chicago, said in a speech last week: “I’m still trying to process why long-end interest rates are increasing.”
My answer: “Stop talking about raising rate at this stage with a hawkish outlook!”
The Fed has expressed that real yields, meaning where inflation is currently and where rates are, are restrictive to the economy, so sounding hawkish on monetary policy at this stage can lead the bond market to go higher more than the Fed would like. Land the plane, folks, land the plane!
As you can see in the chart below, it was another wild week in the bond market. Mortgage rates went from 7.39% to a high of 7.65% and ended the week at 7.44%. Before last week the high for mortgage rates this year was 7.49%.
The bond market has been volatile, but after the 10-year yield broke the 4.34% level, I am watching for the 4.63% level. A close above that and follow-through bond market selling could lead to higher mortgage rates. Hopefully, the last two weeks caught the Fed’s attention. If they cared about a soft landing, which I have been skeptical about from the start, as I talked about here on CNBC, the Fed would be more mindful of what they say and do.
Weekly housing inventory data
One of the things I got wrong this year is that I believed if mortgage rates stayed higher for longer, active inventory would grow between 11,000 and 17,000 for at least some of the weeks; that hasn’t happened recently with higher rates — close but no cigar. T
Last week, the growth of active listings slowed to 6,808. Seasonality is kicking in now, but we should be able to continue growing housing inventory like we did last year, as higher rates slow sales down, keeping homes on the market longer.
Last year, the seasonal peak was Oct. 28. Last week, according to Altos Research:
- Weekly inventory change (Sept.22-29): Inventory rose from 527,938 to 534,746
- Same week last year (Sept. 16-23): Inventory rose from 556,865 to 561,229
- The inventory bottom for 2022 was 240,194
- The inventory peak for 2023 so far is 534,746
- For context, active listings for this week in 2015 were 1,187,2000
After some volatile weeks with the new listings data, things look similar to earlier in the year when we had an orderly seasonal decline in new listings data, which has been trending at the lowest levels ever for over 13 months. Even with rates spiking, the new listing data hasn’t created another new leg lower. This is important, as I expect flat to slightly positive data soon due to a shallow bar.
Historically, one-third of all homes have price cuts every year. Last week’s price cuts were lower than last year at the same time by 4%. This is happening even with rates over 7% and part of the reason is that housing inventory has been negative year over year since mid-June. As mortgage rates move higher, the percentage of price cuts can grow but it’s trailing last year’s percentage as home sales aren’t crashing like they did last year.
Price cuts for last week over the years:
- 2021: 29%
- 2022: 42%
- 2023: 38%
Purchase application data
Purchase application data was 2% lower last week versus the previous week, making the year-to-date count 17 positive prints, 19 negative prints, and one flat week. If we start from Nov. 9, 2022, it’s been 24 positive prints versus 19 negative prints and one flat week. The week-to-week data has gotten softer since mortgage rates have been trending above 7%. However, it’s not crashing like last year because we are working from a lower bar.
The week ahead: It’s jobs week! (If the government is open)
If we don’t have a government shutdown, the week ahead will be jobs week again! The Fed was happy about labor data last month as job openings have been falling, and the job growth data is cooling down. However, jobless claims are still going strong, so they have more work to do in attacking the labor supply. In addition to jobless claims, this week we will also have job openings, the ADP jobs report, and the BLS Jobs Friday report, which could move the bond market this week.
Also, I will watch this week to see if more Fed members comment about rising long-term rates. The Fed would like to keep rates higher for longer, but if the bond market gets a whiff of any terrible recession data, it will take yields down. So far, jobless claims data hasn’t given them any reason to do so.
Uncategorized
Inversions, Bear Steepening Dis-Inversions, and Recessions
Does it matter if spreads are dis-inverting because short yields are falling, or long yields are rising? MacKenzie and McCormick (Bloomberg) say yes. With…
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Does it matter if spreads are dis-inverting because short yields are falling, or long yields are rising? MacKenzie and McCormick (Bloomberg) say yes. With long yields rising…
If it looked at first glance as though the shift in the yield curve was a solidly positive sign — one indicating that the economy is now at less risk of a recession than it was — that’s probably not the case. True, it shows traders aren’t expecting the Fed to shift into firefighting mode soon. Even so, it’s almost certain to further dampen the economy as it ripples through to mortgages, credit cards and business loans. That will tighten financial conditions further, which may be a welcome development to the Fed. The risk, though, is that it hits the brakes so hard that the economy stalls completely.
Does having a bull steepening prevent a recession? Figure 1, covering the Great Moderation, is somewhat conducive to that hypothesis, at least eyealling it. h
Figure 1: 10 year-3 month Treasury spread, % (blue, left scale), and 3 month change in 10yr-3mo spread, ppts (green, right scale). October observation for data through 10/13. NBER defined peak-to-trough recession dates shaded gray. Red arrows when 3 month change is positive during period when dis-inversion is occurring. Source: Treasury via FRED, NBER, and author’s calculations.
The evidence in favor of the bear steepening hypothesis is stronger when evaluating the proposition formally. I estimate probit models for (i) spread only, (ii) spread and short rate, and (iii) spread, short rate and 3 month change in spread. The 3 month change in spread is statistically significant and adds to the pseudo-R2.
(ii) Pr(recession=1)t+12 = 0.813 – 76.11spreadt + 9.80itshort
Pseudo-R2 = 0.28, Nobs = 241, bold denotes significant at 5% msl.
(iii) Pr(recession=1)t+12 = 0.736 – 98.37spreadt + 11.99itshort + 98.28Δ3spreadt
Pseudo-R2 = 0.34, Nobs = 241, bold denotes significant at 5% msl.
The recession probabilities are shown below.
Figure 2: Recession probability 12 month ahead estimated over the 1986-2023M10 period for spread (blue), for spread and short rate (tan), and spread, short rate, and 3 month change in spread (green). NBER defined peak-to-trough recession dates shaded gray. Source: NBER, and author’s calculations.
The bear-steepening specification implies 90% probability of recession in 2024M09, while it’s only 66.4% using the spread + short rate (peak probability for this specification is May 2024). Does this make me more pessimistic about avoiding a recession? Not really; the Ahmed-Chinn specification with the foreign term spread (but no steepening measure) was about 90.8% probability for September 2024.
recession yield curve fed recessionUncategorized
Inversions, Bear Steepening Inversions, and Recessions
Does it matter if spreads are dis-inverting because short yields are falling, or long yields are rising? MacKenzie and McCormick (Bloomberg) say yes. With…
Share this:
Does it matter if spreads are dis-inverting because short yields are falling, or long yields are rising? MacKenzie and McCormick (Bloomberg) say yes. With long yields rising…
If it looked at first glance as though the shift in the yield curve was a solidly positive sign — one indicating that the economy is now at less risk of a recession than it was — that’s probably not the case. True, it shows traders aren’t expecting the Fed to shift into firefighting mode soon. Even so, it’s almost certain to further dampen the economy as it ripples through to mortgages, credit cards and business loans. That will tighten financial conditions further, which may be a welcome development to the Fed. The risk, though, is that it hits the brakes so hard that the economy stalls completely.
Does having a bull steepening prevent a recession? Figure 1, covering the Great Moderation, is somewhat conducive to that hypothesis, at least eyealling it. h
Figure 1: 10 year-3 month Treasury spread, % (blue, left scale), and 3 month change in 10yr-3mo spread, ppts (green, right scale). October observation for data through 10/13. NBER defined peak-to-trough recession dates shaded gray. Red arrows when 3 month change is positive during period when dis-inversion is occurring. Source: Treasury via FRED, NBER, and author’s calculations.
The evidence in favor of the bear steepening hypothesis is stronger when evaluating the proposition formally. I estimate probit models for (i) spread only, (ii) spread and short rate, and (iii) spread, short rate and 3 month change in spread. The 3 month change in spread is statistically significant and adds to the pseudo-R2.
(ii) Pr(recession=1)t+12 = 0.813 – 76.11spreadt + 9.80itshort
Pseudo-R2 = 0.28, Nobs = 241, bold denotes significant at 5% msl.
(iii) Pr(recession=1)t+12 = 0.736 – 98.37spreadt + 11.99itshort + 98.28Δ3spreadt
Pseudo-R2 = 0.34, Nobs = 241, bold denotes significant at 5% msl.
The recession probabilities are shown below.
Figure 2: Recession probability 12 month ahead estimated over the 1986-2023M10 period for spread (blue), for spread and short rate (tan), and spread, short rate, and 3 month change in spread (green). NBER defined peak-to-trough recession dates shaded gray. Source: NBER, and author’s calculations.
The bear-steepening specification implies 90% probability of recession in 2024M09, while it’s only 66.4% using the spread + short rate (peak probability for this specification is May 2024). Does this make me more pessimistic about avoiding a recession? Not really; the Ahmed-Chinn specification with the foreign term spread (but no steepening measure) was about 90.8% probability for September 2024.
recession yield curve fed recessionUncategorized
Latin America takes global lead in preference for centralized exchanges: Report
According to Chainalysis, Latin American crypto users show a significant preference for centralized exchanges, in contrast to the worldwide pattern.
…
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According to Chainalysis, Latin American crypto users show a significant preference for centralized exchanges, in contrast to the worldwide pattern.
According to a recent report from blockchain analytics firm Chainalysis, Latin America has a distinct inclination toward centralized exchanges when compared to the rest of the world, as opposed to decentralized exchanges.
Published on October 11, Chainalysis stated that Latin America has the seventh-largest crypto economy in the world, trailing closely behind the Middle East and North America (MENA), Eastern Asia, and Eastern Europe.
However, it notes that crypto users in Latin America strongly favor using centralized exchanges:
Latin America shows the highest preference for centralized exchanges of any region we study, and tilts slightly away from institutional activity compared to other regions.
Furthermore, in some countries within the region, crypto activity by platform type significantly exceeds the global average. The worldwide average is 48.1% for centralized exchanges, 44% for decentralized exchanges, and 5.9% for other decentralized finance (DeFi) activities.
However, Venezuela shows a 92.5% preference for centralized exchanges, compared to a 5.6% preference for decentralized exchanges (DEXs).
Furthermore, it pointed out that Venezuela has a unique reason for its surging adoption, primarily attributed to a "complex humanitarian emergency."
Related: Crypto adoption is booming, but not in the US or Europe — Bitcoin Builders 2023
The report explains that amid the COVID-19 pandemic in 2020, crypto played a pivotal role in directly assisting healthcare professionals in the country.
Therefore, crypto became a necessary form of value as traditional payments were difficult, given the government's refusal to accept international aid, influenced by political reasons.
On the other hand, Colombia shows a 74% preference for centralized exchanges, while decentralized exchanges account for just 21.1% of their preferences.
Meanwhile, three Latin American countries secured positions in the top 20 ranks on Chainalysis' Global Crypto Adoption Index. Brazil stands at the 9th position, with Argentina following at 15th, and Mexico at 16th.
At the global level, India claims the leading spot, with Nigeria and Vietnam securing second and third positions, respectively.
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