Morning Report: The ECB paves the way for rate hikes

Vital Statistics:

 LastChange
S&P futures4,100-13.25
Oil (WTI)121.41-0.64
10 year government bond yield 3.05%
30 year fixed rate mortgage 5.51%

Stocks are lower this morning as the ECB prepares to hike rates. Bonds and MBS are down.

The ECB has ended quantitative easing and has paved the way for a 25 basis point hike in rates. Europe has been in a negative rate environment for a long time, so the adjustment will be worth watching. Since global bond yields generally correlate, a rise in European yields will push up US yields as well. That said, the US Treasury is still one of the highest-yielding sovereigns on the planet.

Stocks and bonds sold off on the announcement, with the 10 year ticking towards 3.05%.

Rising rates have decreased mortgage credit, according to the MBA. Interestingly, we are back at post-crisis levels, although much of it is driven by higher rates. “The index remains more than 30 percent below pre-pandemic levels, as credit tightening has occurred in recent months around refinance loan programs,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Last month’s tightening was most notable in the government and jumbo segments of the mortgage market. The decrease in government credit was driven mainly by a reduction in streamline refinance programs, as mortgage rates increased sharply through May, slowing refinance activity. Jumbo credit availability, which was starting to see a more meaningful recovery from 2020’s pullback, declined after three months of expansion.”

2.71 million mortgages were originated in the first quarter, according to data from ATTOM. This is down 18% from the fourth quarter and 32% from a year ago. “The drop-off in Q1 refinancing activity is no surprise with mortgage rates rising as rapidly as they have,” said Rick Sharga, executive vice president of market intelligence at ATTOM. “But many forecasts expected purchase loans to remain strong in 2022, and even increase in both the number of loans originated and the dollar volume of those loans. The weakness in purchase loan activity shows just how much of an impact the combination of escalating home prices and rising interest rates have had on borrower activity this year.”

While the percentage decline is grabbing attention, compared to post-bubble numbers current production is still pretty strong.

Initial Jobless Claims ticked up to 229,000 last week. These are still historically very low numbers, but we are beginning to see some layoffs happen.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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