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Central Banks Hold Key

Overview: Last year was unforgettable in terms of the extraordinary rise in mortgage rates. After beginning the year below 3.5%, rates reached a peak above 7%, before falling to around 6.5% during the final weeks of the year. The cause of the increase was clear. The enormous fiscal and monetary stimulus needed to help support the economy during the pandemic eventually caused inflation to surge, forcing global central banks to aggressively tighten monetary policy in response. Heading into the new year, investors are trying to figure out how many additional rate hikes will be required by central banks and how big an impact this will have on the economy.


The minutes from the December 14 Federal Reserve meeting released on Wednesday did not contain any major surprises, but they did provide some new insight. Most notably, the minutes indicated that no officials expect any rate cuts in 2023. In other words, the Fed will eventually stop raising the federal funds rate in coming months and then will hold rates steady at least through the end of the year. Some investors disagree and anticipate that the Fed will cut rates late in 2023 due to weakness in the economy and lower inflation. The minutes also continued to state that future monetary policy will be determined by incoming economic data.

The most significant economic report released over the past week came from the Institute of Supply Management (ISM) and hinted at slower growth in the manufacturing sector. The ISM national manufacturing index dropped to 48.4, the lowest since May 2020. Levels below 50 indicate that the sector is contracting. During the pandemic, consumers ramped up their purchases of goods. Since the economy reopened, however, they have been shifting their spending back to services.

While many sectors of the economy have felt the impact of rising rates, one of the hardest hit has been the housing market. As of the latest report for November, sales of existing homes were down roughly 35% last year to the lowest level since 2010. According to the Mortgage Bankers Association (MBA), mortgage application volumes have fallen to the lowest levels in 26 years. Purchase applications are down 42% from last year at this time, and applications to refinance a loan have plunged a massive 87% from one year ago.


ISM Manufacturing Index


Week Ahead

January 6

Employment Report

Institute for Supply Management (ISM) Services Index

January 12

Consumer Price Index (CPI)


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