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Morning Report: Patrick Harker suggests this tightening cycle is over


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Stocks are lower this morning after weak economic numbers out of China. Bonds and MBS are up.

Philly Fed President Patrick Harker said that the Fed could hold rates steady at the September meeting and indicated this tightening cycle could be in the books. “Absent any alarming new data between now and mid-September, I believe we may be at the point where we can be patient and hold rates steady and let the monetary policy actions we have taken do their work,” Harker said in remarks prepared for delivery at an event in Philadelphia.

That said, he did pour cold water on the idea of rate cuts any time soon. Rates might have to hold at this level until inflation hits 2% or we hit a recession. “Allow me to be clear about one thing, however. Should we be at that point we will need to be there for a while. The pandemic taught us to never say never, but I do not foresee any likely circumstance for an immediate easing of the policy rate.”

The September Fed Funds futures agree with Harker’s sentiment, seeing only a 12% chance of a rate hike. The December futures see about a 25% chance of one more rate hike by the end of the year. The March 2024 futures see a 60% chance of a rate cut.

If the Fed does indeed signal that the rate hikes are over, that should go a long way towards decreasing bond market volatility which is a big driver of MBS spreads. Mortgage rates could work their way lower as long-term rates decline and MBS spreads contract. This probably won’t be in time to save 2023 for the originators, but 2024 could be better than 2023.

Small business optimism increased in July, however we remain below the long-term average. While inflation was listed as the biggest problem, fewer businesses reported raising prices. A net 25% reported raising prices, the lowest since January of 2021.

Given the strength of the labor market and consumer demand, it is surprising to see the index at lower levels, but here we are. It seems like small business is waiting for the next shoe to drop – i.e. the recession we have all been waiting for.

Lock volume in July was marginally higher than June, according to MCT. “While July’s mortgage lock volume remained relatively flat, mortgage rates continued to climb through July,” said MCT’s COO, Phil Rasori. “If rates continue to hold or climb from these new levels established in the first week of August, we can expect volume to drop.”

The Black Knight home price index rose in June as tight inventory continues to push up prices. That said, prices rose less than 1% on both a monthly and an annual basis. Home equity rose to $16 trillion. “Overall mortgage-holder equity is now back above $16T, with some $10.5T of that being ‘tappable,’ or available for the homeowner to borrow against while still maintaining a relatively conservative 20% equity stake. The average mortgage holder has some $199K in tappable equity available to them; down somewhat from 2022’s historic highs but still a historically large amount regardless. In terms of negative equity, or ‘underwater borrowers,’ it’s a nearly nonexistent phenomenon in today’s market – just 344K homeowners currently owe more on their homes than the properties are worth. Yes, it’s true that is a 70% jump from this time last year – which may sound ominous – but everything is relative. There are less than half as many underwater homeowners than there were in 2019 before the onset of the pandemic, with only 3.9% having less than 10% equity, down from 6.6% in 2019.”

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