Overview: The dominant influence on mortgage markets over the past week was the conflict in Ukraine, which caused investors to shift to safer assets. Testimony from Federal Reserve Chair Jerome Powell and major inflation data produced little reaction. As a result, mortgage rates ended the week lower.
Investors have responded to the conflict between Russia and Ukraine by shifting from risky assets such as stocks to relatively safer assets such as bonds, including mortgage-backed securities (MBS). The added demand for MBS is favorable for mortgage rates. When the news suggests an easing of tensions, the reverse takes place. Some of the price movements have been quite large.
Wednesday’s testimony to Congress from Fed Chair Powell was complicated somewhat by the conflict in Ukraine. High inflation requires tighter monetary policy, but a geopolitical event of this nature, which might slow global economic growth generally, would favor loosening. Powell balanced these considerations by repeating that the Fed will begin raising the federal funds rate this month to help bring down inflation. He added that the impact of the situation in Ukraine on the U.S. economy is “highly uncertain.” Also notable, he stated that he would not rule out a larger than usual 50 basis-point rate increase at some point if inflation doesn’t decline at the expected pace. Investors continue to anticipate a 25 basis-point rate hike at the next meeting on March 16.
The Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Fed, and the latest reading matched expectations. In January, core PCE was 5.2% higher than a year ago, up from 4.9% last month and the highest annual rate since 1983. For comparison, readings were below 2% during the first three months of 2021. How quickly inflation comes down later in the year as pandemic-related disruptions are resolved will be a major factor driving future Fed policy.
Sales of new homes fell 5% in January to an annualized rate of 806,000, which was close to the consensus forecast. New-home sales peaked at a rate of 993,000 units in January of last year, which was the highest level since 2006. The median new-home price was 13% higher than last year at this time at $423,300. Higher prices and shortages for crucial materials and skilled workers restrained the pace of building.
Core PCE (annual % change)
Looking ahead, investors will closely monitor news about Ukraine and will look for additional guidance from Fed officials on the timing for future rate hikes and balance sheet reduction. Beyond that, the Institute for Supply Management (ISM) Services Index will be released on Thursday. The monthly Employment Report will come out on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month.