| Market Update – February 16 From the desk of David Battany Executive Vice President, Capital Markets Market Overview The January Retail Sales report came out this morning showing a 0.8% decline in January sales, much more of drop than the 0.1% expected by the markets. However, many economists had cautioned before today’s report that January sales almost always drop from December and that technical seasonal adjustments can also add to much of this distortion. For this reason, the markets took this report with a grain of salt. The net impact of this report is that it is one indication that the economy is slowing down, but it may not be slowing as much as this report suggests. The other key reports that came out today were the January Industrial Production, showing a 0.1% decline, worse than the 0.3% increase the markets had predicted. The prices of goods imported to the U.S. in January was down 1.3%, which eases inflation pressures. The Philadelphia Fed Business Index was 5.2, with a positive index meaning growth in this Federal Reserve district, and this was the opposite direction of the market’s prediction of a -8.0 index which would be a decline in activity. Also, the New York Fed’s manufacturing survey showed a -2.4 index, much better than the -15.0 index predicted by the markets. These last two reports signaled the markets that business activity is improving more than expected. The final key report today was the weekly jobless claims report, showing 212,000 new claims for unemployment benefits were filed last week, slightly less than the market’s prediction of a 220,000 number. The overall message to the markets from all of these reports is mixed signals today, with some reports showing increased economic activity and other reports showing a slowdown. Given that the U.S. consumer drives about 2/3rds of all U.S. economic activity, the Consumer Spending report tilted the markets view towards seeing the sum of the reports today to be taking a little pressure off of inflation.  Market Details Where will mortgage rates go in 2024? The answer will depend on how fast inflation and overall economic activity slows, which will drive the Fed’s timing of their first rate cut. The Fed is very worried that if they do their first cut too soon, the bond markets will have an immediate rally, meaning bond prices shoot up, and bond yields fall. This would drive rates lower for businesses and consumers and this savings in interest payments every month would inject cash into the economy, potentially spurring inflation just when the Fed thought they had it under control. But if the Fed waits too long to do their rate cut, they risk the U.S. economy slipping into a deeper recession than needed, which would increase unemployment more than needed to tame inflation. The Fed’s hope is to achieve a “soft landing” meaning they can slow the economy enough to tame inflation, without slowing it too much to create a painful and deeper recession. In a soft-landing scenario, the economy could slow down to only a 0.1% annual GDP growth rate, or maybe only go to a negative GDP of 0.1%, then stay low for a while, then start to increase in the coming years, hopefully without inflation increasing too much at the same time. Fed Futures Predictions. The Fed Futures market which allows investors to make bets on the future level of Fed Funds is currently predicting about only a 10% chance the Fed will make a cut in March, a slightly higher, but not likely probability of a cut in May, and over a 90% chance of a cut by June. Below is the current implied rate of Fed Funds over the next two years. The gold line represents the predicted levels as of last night, and the red line represents the Fed Funds prediction 30 days ago.  The Fed members, independent economists, and the worldwide bond markets are all predicting rates will drop in the next two years. The only question is how much and how fast. Buying a home in this market? In a time of uncertainty as to where and when rates are going, this is a great time to buy a home with a 30-year fixed rate prepayable mortgage. This is a heads you win, tails you win, financial strategy. If you buy a house today with a fixed rate mortgage, you have capped the majority of your future housing costs for the rest of your life. This by itself will create significant future wealth for a homeowner, meaning future rising rents do not strip away your future income. If rates trend higher this year for any reason, you are nicely protected. If rates do go down, you can do a rate term refinance and lock in lower rates every time they drop. We are the only country in the world that allows a homebuyer to lock in a 30-year fixed rate and have 100% protection from higher interest rates for the rest of your life, and at the same time allow a person to get a lower rate every time rates drop. This is a powerful tool to create wealth for a homeowner, that you cannot use if you are sitting on the sidelines and renting a home. Thank you, David David Battany Executive Vice President, Capital Markets Guild Mortgage Company This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Account. |
