Overview: Over the past week, concerns about a new COVID variant caused investors to shift to less risky assets, which was positive for mortgage markets. The decline was partially offset by unexpected comments from the Federal Reserve, however, and mortgage rates ended the week just a little lower.
The new omicron COVID variant emerged over Thanksgiving weekend, and investors are worried that it could slow global economic growth. If this occurs, it would reduce the outlook for future inflation, which would be positive for mortgage rates. New information on omicron will heavily influence financial markets in coming weeks.
In testimony to Congress on Tuesday, Powell caught investors off guard with his unexpectedly hawkish (favoring tighter monetary policy) stance. He acknowledged that inflationary pressures likely will remain high for longer than anticipated and said that the Fed should consider scaling back its massive bond purchase program at a faster pace. For months, officials have maintained that the current elevated levels of inflation were due to disruptions caused by the pandemic and were “transitory” in nature. In his testimony, Powell said that it was time to stop using that term and to try to “explain more clearly what we mean.”
Powell’s comments were understandable in light of the latest inflation report. The core Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Fed. In October, core PCE was 4.1% higher than a year ago, matching the consensus forecast, but up from 3.7% the prior month and the highest annual rate since 1990. By contrast, readings were below 2% during the first three months of the year.
In October, existing-home sales, which make up about 90% of the market, rose slightly from September and modestly exceeded the consensus forecast. The median existing-home price of $353,900 was 13% higher than last year at this time. Inventory levels were down 12% from a year ago, at just a 2.4-month supply nationally, well below the 6-month supply that is considered a healthy balance between buyers and sellers. New-home sales, which account for the remaining 10% of the market, unexpectedly were just 745,000 in October, far below the consensus forecast of 800,000. The median price of a new home of $407,700 was 18% higher than last year. In general, the pace of both new and existing sales is being dictated by the supply of homes available each month.
Core PCE (annual % change)
Week Ahead
December 3 — Employment Report
December 3 — Institute for Supply Management (ISM) Services Index
December 10 — Consumer Price Index (CPI)
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