By Ryan Casey Stephens, FPQP®
Special Contributor
Wall Street looked to the midterms last week for salvation, only to find disappointment. Investors wished a decisive red wave would provide some much-needed predictability, but their hopes were dashed. By the end of Wednesday, the picture looked bleak, but Thursday brought the reprieve we all needed.
Now that the celebrations are over and a new week is upon us, the focus is back on a familiar subject – the Fed. Let’s take a look at the week ahead in this edition of Three Things to Know.
A Welcome Surprise
Mortgage rates dropped significantly Thursday following a cooler-than-expected CPI inflation report. Investors desperately needed positive inflation news and rejoiced by returning interest rates all the way back to their levels from September 22 of this year in a single day of trading. Most lenders saw half a percent better rate by the end of the week, which translates to $117 per month less payment on a $350,000 30-year fixed loan.
Data Might Complicate the Picture
The Fed doesn’t focus solely on CPI inflation of course. This week they’ll be watching the results of several key reports – and we’ll be watching their reactions. The latest Producer Price Index inflation report, U.S. retail sales data, and home sales will reveal themselves on Tuesday, Wednesday, and Friday respectively. As we get closer to the end of the week, traders will begin to leave for the holiday week ahead, which can sometimes result in lower trade volumes and higher volatility.
Powell’s Critical Moment
Throughout the packed week, we’ll hear 10 Fed members give their assessments of the job they’ve done tackling inflation. We’ll listen intently for signs of a Fed pivot on interest rate hikes. While 80 percent of experts predict a smaller 50 basis point hike next month, inflation is still more than three times greater than the Fed’s acceptable level. Their tone on December’s hike is important because there won’t be another Fed meeting until February, leaving a lot of time for markets to feel the effects of the last hike of the year.
The average of key economic indicators signals the economy is only now on the line between growth and decline and is nowhere near shrinking. Chairman Powell has repeatedly stated that the Fed is watching for recession-like conditions as a sign they need to ease up, and that seems distant. How the Fed chooses to meet this moment is important. Fed Chairman Volker briefly eased on hikes in 1980 after receiving positive data, but inflation came back to bite him big time. Chairman Powell no doubt remembers this and will not want to make the same mistake.
Ryan Casey Stephens FPQP® is a mortgage banker with Watermark Capital. You can reach him at [email protected].
