Inflation and Chinese Lockdowns


Overview: Over the past week, investors balanced the impact of two opposing forces on mortgage rates. For months, the main influence has been elevated levels of inflation and the resulting monetary policy tightening cycle from the Federal Reserve. However, the recent spread of Covid in China has caused investors to consider the potential for slower global economic growth, which would be positive for mortgage rates. These two factors were roughly offsetting, and mortgage rates ended the week little changed.

 

On Thursday, Fed Chair Powell continued to express a firm resolve to fight inflation. He stressed that it is "absolutely essential" to maintain price stability for the economy to function properly. He suggested that it might be better to reach the target level for the federal funds rate sooner rather than later, lending support to a rapid pace of raising rates. According to Powell, a 50-basis-point rate hike is an option for the next meeting on May 4, and investors have priced in this outcome.

Covid case counts have been increasing in China. Throughout the pandemic, the Chinese response has been to shut down regions or even entire cities where cases have been found. The latest lockdowns have caused investors to reduce their outlook for global economic growth, which was positive for mortgage rates.

The negative effects of rising home prices and higher mortgage rates on recent housing market activity have been increasing. Sales of new homes in March dropped 9% from February and were 13% lower than last year at this time. The median new-home price was 21% higher than a year ago at $436,700, a record high. Just 14% of new home sales in March were priced below $300,000, down from 34% a year ago. While sales of previously owned homes are based on closings, new home sales are calculated when contracts are signed, making them a more current indicator of housing market activity.

 

New-Home Sales (thousands)

 

Week Ahead


Apr. 28 — First-quarter gross domestic product (GDP)

Apr. 29 — core Personal Consumption Expenditures (PCE) Price Index

May 2 — Institute for Supply Management (ISM) Manufacturing Index

May 4 — Federal Reserve meeting