Fed Maintains Rate Hike Path Due To Jobs Report
An in-line Jobs Report will keep the Federal Reserve on hold until its next meeting in May. As a result, market forecasters predict there will be another .25 bp rate hike to 60%. Wage inflation continues to normalize, which is a welcome sign, while job growth in the private sector has slowed. The unemployment rate fell to 3.500%, which suggests the job market is still too tight, especially with the approximately 10 million jobs left unfulfilled. Viewing the economy based on the jobs picture, the economy is proving to be much more resilient than many had thought. This is despite the almost 500 basis points tightening in such a short period.
Yet, there are other economic metrics flashing warning signs. This includes a crucial aspect, the de-inverting yield curve. Also, of concern is the senior loan officer survey which confirms our day-to-day view that bank underwriting is tightening up. There has been an increase in consumer debt and an uptick in auto loan defaults. In addition, keep in mind the recent bank failures. They have not only passed the panic phase but will also continue to impact bank underwriting of risk. This remains a very confusing market and we certainly do not have a crystal ball. Nonetheless, the risk of a recession or of a recession already in its early phase remains high. Oil moving up over 80 per barrel does not help those with brighter expectations.
Some of you are wondering why mortgage rates continue to remain elevated despite the 10-year Treasury falling to around 3.35%. There are several reasons for this, but the most promising is the average spread of Bank Rates for 30-year mortgages moving to nearly 3.33% over the 10-year Treasury. Should that spread tighten to the low of 1.35%, 30-year mortgage rates would be closer to 4.75% -5% rather than the 6.00% to 7.00% many banks are offering. The demand by investors for a bigger spread on mortgage loans is very much affecting the ability of potential borrowers to qualify for home mortgages. This is also why Insignia Mortgage spends a considerable amount of time meeting with various smaller to mid-sized banks who are willing to sharpen their pencil on loan terms, as opposed to seeking large banking relationships on larger jumbo loans. The goal is to partner with a resource that offers commonsense decisions on loan approvals. It is precisely this optionality that makes the mortgage broker model so important in today’s particularly challenging marketplace.
