By Ryan Casey Stephens, FPQP®
Special Contributor
Mortgage interest rates will trend in an upward or downward direction this year, but it will not be a straight line. It’s normal to expect stretches of higher and lower rates, regardless of the overall trend line. Experts believe we might be entering another slump where slightly higher interest rates further slow homebuyer traffic.
Let’s review a few of the variables weighing on the markets in this week’s Three Things to Know.
An Unpleasant Surprise
OPEC+, led by Saudi Arabia, announced surprise cuts to oil production over the weekend. The unexpected lower output will begin in May and will almost certainly drive up prices at the gas pump. Saudi Arabia claims the move was designed to support stability in the market, though it’s possible the intention might be retaliatory based on Biden’s use of our strategic reserve last year and politics over Russia’s war in Ukraine.
Whatever the intentions behind the decision, its effect is not debated. Less production going into summer, when families spend more on gas for travel, will lead to higher fuel prices. It’s speculated oil could crest $100 per barrel, and markets are interpreting that as more damaging inflation. Remember, inflation is bad for bonds. Since mortgage rates are driven by mortgage bond support, higher inflation means higher interest rates.
First Thing to Know:
It’s another reminder that we live in an intricately linked global economy. Lower oil production in the Middle East might have an adverse effect on housing affordability right here in Texas.
Focus Back on The Fed
An acceptance that the Fed is going to continue to hike rates to combat inflation is beginning to settle on Wall Street. Even though markets still have a Fed rate cut priced in this year, the timing has shifted to late winter rather than September. During last month’s banking crisis, markets wanted a pause in hikes. Powell hiked last month anyway, and there’s now a greater than 60 percent chance they raise rates again at the next meeting.
Rate hikes are done to slow spending, thus lowering inflation. You might think that would help mortgage rates by easing pressure on bonds. Unfortunately, when markets want the Fed to do something and the Fed does the opposite, the volatility created can come back to bite mortgage rates in the rear.
Second Thing to Know:
In the long run, Fed rate hikes will help mortgage rates drop by causing lower inflation. In the short term, however, there will be periods where the tug of war between Wall Street and Washington will cause pain.
Jobs Reports Not on Our Side
Speaking on behalf of the Federal Reserve, Chairman Powell has been abundantly clear: they want to see weaker jobs figures. That means slower hiring and greater numbers of layoffs. This week brings fresh data from a slew of sources, including the JOLTS (Job Openings and Labor Turnover survey), Challenger Job Cuts, Initial and Continuing Jobless claims, Nonfarm Payrolls, earnings, and unemployment rate. Each report has the potential to come in stronger than expected, increasing inflation anxiety, and causing further damage to mortgage bonds.
Third Thing to Know:
Of all the weeks to face risky jobs numbers, it had to be this one. Hairs will already be standing on end over the surprise OPEC+ announcement, and strong jobs figures might cause a small inflation panic. We’ll need to be on guard.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
