Last month, January 2022 mortgage rates achieved their highest levels since early 2020. With the latest market reports, investors once again saw record-setting inflation, a white-hot housing market, and a thriving United States economy. Overall, the positive economic drivers generated a negative impact for mortgage-backed securities. Thus, the month capped off with mortgage rates climbing to their highest level since early 2020.
Inflation Leads January 2022 Mortgage Rates to Reach Early 2020 Levels
Throughout the coronavirus pandemic, the United States saw an unexpectedly fast economic recovery. While this occurred, inflation continuously climbed, quickly gathering attention from investors and analysts. Because of this, they focused heavily on the Consumer Price Index and the Personal Consumption Expenditures Price Index.
Consumer Price Index Climbs to Highest Level Since 1991
For the unacquainted, the Consumer Price Index (CPI) looks at price changes for a broad range of goods and services. When talking about “Core CPI”, the statistic excludes the volatile food and energy components. Because of this exclusion, Core CPI provides a clearer picture of the longer-term trend. In December 2021, Core CPI rose 5.5% higher than a year ago. Not only did Core CPI increase from an annual rate of increase of 4.9% in November 2021, it achieved its highest level since 1991.
Investors wasted little time in searching for the cause of the massive jump. In the middle of the coronavirus pandemic, Core CPI hovered below 2.0% in early 2021. Analysts attribute the current spike to numerous factors, including a tight labor market, strong consumer demand for goods, rising energy prices, and supply chain disruptions. Additionally, global transportation delays and component shortages for many items caused enormous cost increases. Currently, investors conflict as to whether the higher inflation is due to temporary factors induced by the COVID-19 pandemic or more structural, long-lasting changes.
Personal Consumption Expenditures Price Index Achieves Highest Annual Rate Since 1983
While the Consumer Price Index showed quite the increase, the Personal Consumption Expenditures (PCE) Index may have been even more impressive. Generally, the Federal Reserve favors the PCE Price Index as its go-to inflation indicator.
In December 2021, the PCE Price Index increased 4.9% higher than a year ago. Simultaneously, the PCE Price Index jumped up from 4.7% last month. In doing so, it achieved its highest annual rate since 1983. For comparison, readings fell below 2.0% during the first three months of 2021. Investors now ask themselves how quickly inflation will moderate as pandemic-related disruptions are resolved.
Federal Reserve Plans Bond Purchase Conclusion
Early in the coronavirus pandemic, the Federal Reserve initiated a new bond purchase program to help stimulate the economy. Given the progress of the recovery and the rise in inflation, the Federal Reserve now plans to wind down that program. They intend to conclude the program around the end of March 2022. With that in mind, investors sought guidance on the timing for additional tightening measures including federal funds rate increases. Also, investors hope for information regarding a reduction in the Federal Reserve’s massive portfolio of bonds accumulated on the Fed’s balance sheet during the purchase programs.
Reaction to December 15th Federal Reserve Meeting Minutes
Concerned about the record-setting inflation rate, investors began the year by pushing up bond yields. Last month, the Federal Reserve minutes from its December 15th, 2021 meeting produced a hawkish attitude. While the Federal Reserve remains in favor of tightening monetary policy, investors sparked another round of bond sales. At the time, this fired mortgage rates to their highest levels since April of 2021.
Regarding the federal fund rate hikes, the meeting minutes led investors to move forward their expectations for these other tightening measures. Now, investors anticipate that the first rate hike occurs shortly after the bond purchase program ends. Also, they expect two subsequent rate hikes prior to the end of 2022. In addition, all Fed officials expressed support for a reduction in the enormous balance sheet holdings of Treasuries and mortgage-backed securities (MBS) “at some point” after the first rate hike. This sooner than anticipated reduction in Fed demand for MBS caused mortgage rates to rise.
Reaction to Federal Reserve Meeting in January 2022
Later in January, the key Federal Reserve meeting took place. After mortgage rates climbed following the publication of December’s meeting minutes, investors highly anticipated this meeting. Following the discussion, investors continually anticipated a faster pace of monetary policy tightening. Similar to the earlier meeting minutes, this created a negative impact for mortgage-backed securities. Thus, mortgage rates climbed to early 2020 levels.
Meeting expectations, the Federal Reserve announced that they would soon be ready to increase the federal funds rate. Not only will this help bring down the inflation rate, it also marks the first federal funds rate increase since 2018. Concurrently, Federal Reserve Chair Powell said that their massive balance sheet of mortgage-backed securities (MBS) and Treasuries purchased to aid the economy early in the pandemic is now larger than needed and should be scaled back.
While no specific time frame was provided for these policy changes, investors currently anticipate that the first rate hike will occur at the next meeting in March. Meanwhile, investors expect the Federal Reserve to reduce its balance sheet reduction in the summer of 2022. Also, Federal Reserve Chair Powell did not provide a target for the total number of rate hikes. However, he stated that “there’s quite a bit of room to raise interest rates without threatening the labor market.”
Employment Report Reveals Mixed Bag Despite Rising January 2022 Mortgage Rates
January 2022’s closely watched Employment report revealed mixed results. Against a consensus forecast of 420,000, the economy gained just 199,000 jobs in December 2021. However, revisions added 141,000 jobs to the figures for prior months, offsetting most of the shortfall. Noticeably, the leisure and hospitality sectors demonstrated particular strength. Of note, these industries suffered greatly throughout the coronavirus pandemic due to lower consumer activity. Compared to February 2020, the United States economy holds roughly 3 million fewer jobs.
Aside from job gains, the other major components of the report came out stronger than expected. The unemployment rate, which is based on a survey of individuals, declined from 4.2% to 3.9%, below the consensus forecast of 4.1%, and the lowest level since February 2020. Average hourly earnings, an indicator of wage growth, exceeded expectations and were an impressive 4.7% higher than a year ago.
GDP
During the final three months of the year, Gross Domestic Product (GDP) faced less of a COVID-related impact, even as Omicron spread. Holistically, GDP represents the broadest measure of economic activity. With the release of the Fourth-Quarter GDP report, the United States showed annualized growth of 6.9%. In conclusion, GDP growth exceeded the consensus forecast of 5.5%, up from just 2.3% during the third quarter.
Both the consumer spending and inventory replacement segments displayed particular strength. Overall, GDP growth for the entire year of 2021 reached its highest point since 1984, as the economy continued to recover from the effects of the pandemic.
Manufacturing
On the manufacturing front, both the ISM Services Sector Index and the ISM Manufacturing Index came in at high levels. The national services sector index came in at 67.6 and the national manufacturing index at 58.7.
Levels above just 50 indicate that the sectors are expanding. That said, the indexes rarely see readings above 60. Supply chain issues play a major role on the manufacturing front. While manufacturing companies need materials to produce goods, service-based organizations (such as those in tech and banking) face less of an impact.
Retail Sales
Consumer spending accounts for over two-thirds of United States economic activity. Due to this representation, consumer spending indicates economic health. In December 2021, retail sales plunged 1.9% from November, far below the consensus forecast for just a slight decline of 0.1%. Despite this recent weakness, however, sales rose an impressive 17% in 2021, recovering nicely from a tough 2020.
There are several factors which contributed to the drop in consumer spending at the end of the year. First, due to shortages of a wide range of products, consumers started doing their shopping sooner than usual. As a result, the holiday season saw stronger than expected spending throughout the earlier months. In addition, rising Covid case counts and surging prices caused people to scale back their purchases in December.
Home Sales Hit Best Year Since 2006, Leading to Higher January 2022 Mortgage Rates
After three strong months, sales of existing homes unexpectedly dipped in December, falling 5% from November. However, sales for all of 2021 still improved 8.5% over 2020, hitting the best level since 2006. Inventory levels in December declined 14% from a year ago. Remaining at just a 1.8-month supply nationally, inventory levels fell well below the 6-month supply mark. Analysts consider a 6-month supply to maintain a healthy balance between buyers and sellers, and a record low level. The median existing-home price increased 16% higher than last year at this time at $358,000.
Also notable, the mix of homes currently selling changed. Sales of homes priced between $100,000 and $250,000 decreased 23% lower compared to this point a year ago. Rising prices and competition from investors made it more difficult for buyers to find affordable homes, especially at the lower end of the market. By contrast, sales of homes priced between $750,000 and $1,000,000 jumped 32% during that period.
With the shortage of available homes in many areas, investors closely watched the monthly reports on housing starts. In December, housing starts unexpectedly increased from November to the best level since March, and 2021 was the strongest year since 2006. In addition, the number of single-family housing units under construction soared to its the highest level in almost 15 years. Building permits, a leading indicator of future activity, also beat the consensus forecast, rising to the best level since January 2021. Higher prices and shortages for land, materials, and skilled labor remained obstacles to a faster pace of construction.
Looking Ahead After Rising January 2022 Mortgage Rates
Looking ahead, investors plan to closely follow news on the Omicron. Also, investors continually seek additional Fed guidance on the pace of future rate hikes and balance sheet reduction.
With the repercussions of January 2022 mortgage rates, 2022 mortgage-backed securities are set for an interested year. To receive by-the-minute updates on mortgage-backed securities, try MBSQuoteline free for 14 days.
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