The incredible flood of monetary stimulus from the Federal Reserve has resulted in inflation of all assets, including propery, stocks and bonds. Due to rising consumer price inflation, the Fed has announced its plan to raise the Fed funds rate and also gradually reduce its bloated book of mortgage and Treasury debt.
As a result, the 30-Year Fixed Rate Mortgage Average in the United States has risen to 5.0% from its 2020 low of 2.7% and slightly over 3% at the start of 2022.
**The Sky-High Pandemic Housing Market Finds Gravity Does Exist**
**Mortgage costs have jumped as the Federal Reserve has raised rates. With higher rates come fewer offers.**
**By Conor Dougherty and Jeanna Smialek, The New York Times, April 16, 2022**
**That rise [in mortgage rate] means the monthly payment on a $500,000 house would be about $500 more a month than it was at the end of last year, assuming a fixed-rate mortgage and 20 percent down payment. And the higher cost comes on top of a more than 30 percent rise in home prices over the past two years, according to Zillow.**
**“We’re seeing some early indications that a growing share of home buyers, especially in expensive coastal markets, are getting priced out...” For buyers, however, the market will still feel plenty competitive. Even if prices aren’t rising at the pace of the past two years, homes are selling within a week of being listed and posting no significant price declines....The problem is there are so few homes for sale that even a slower market is unlikely to create enough inventory to satisfy demand anytime soon. ...**
**If first-time buyers find that climbing mortgage rates and home prices put owning a home out of reach, they may linger in apartments or single-family rentals for longer. That will pressure the rental market, where prices are already increasing rapidly....** [end quote]
Anyone who doesn’t already own a home will be squeezed harder and harder.
The Fed’s announcement that it will raise rates has hit the bond market hard, since the values of existing bonds fall when rates rise.
**Bond Rout Promises More Pain for Investors**
**Rising yields are largely a good sign for the economy, but bondholders are paying for robust growth. Some investors suspect the Fed’s rate message hasn’t sunk in.**
**By Sam Goldfarb, The Wall Street Journal, April 17, 2022**
**The worst bond rout in decades shows few signs of abating, threatening further pain for both investors and borrowers.**
**Battered by high inflation readings and sharp messages from Federal Reserve officials about the need for interest-rate increases, bond prices have tumbled this year at a pace investors have rarely seen. In the first quarter, the Bloomberg U.S. Government bond index returned minus 5.5%, its worst performance since 1980. This month, it has lost another 2.4%...**
**Many investors are saying they expect bond prices to continue to fall this year, and some contend it won’t be clear that the central bank’s message is getting through until stock prices suffer more serious declines. ...Right now interest-rate derivatives show that investors expect the Fed to raise its benchmark federal-funds rate from its current level between 0.25% and 0.5% to just above 3% next year....** [end quote]
Though many METARs focus on stocks and turn up their noses at bond investing, it’s important to realize that the total U.S. fixed income market value is enormous: Outstanding (as of 4Q21) $52.9 trillion, +5.5% Y/Y.
The yield of bonds directly impacts the value of stocks since many investors will shift assets from stocks to bonds once the yields become more competitive. The yield of bonds also impact stocks since corporate borrowing will become more expensive. “Zombie” businesses may be forced into bankruptcy as their maturing debt must be rolled over at higher rates.
The Control Panel shows a decline in stock prices and market internals since the March 2022 rebound. Was it only a dead cat bounce? Too soon to tell.
The Treasury yield curve continues to rise across all durations. Bond yields are rising and their prices are falling continuously. Both stocks and bond prices are falling at the same rate. Junk bond prices are falling at the same rate as Treasury prices.
The Fear & Greed Index is falling from Neutral into Fear.
The USD is rising. Oil and natgas prices are rising. Gold and silver are rising but it’s too soon to tell if this is a trend or noise. Copper has stabilized.
The backdrop of the Macro economy is reasonably stable for now. Covid-19 cases (mostly the super-contagious Omicron BA.2 variant) are low but up 38% in the past 2 weeks. Expect a smallish spike after Memorial Day and the 4th of July.
The war in Ukraine has been factored into the markets. The economic impact will be rising energy and food costs which may cause later problems in low-to-moderate income countries and among low-to-moderate income people in the U.S.
The U.S. stock market continues in a bubble which will be punctured at some point in the future. Hard to say when. Let’s assume that it won’t be next week but only after the Fed starts raising yields in earnest, more than just jawboning.
The METAR for next week is cloudy. No storms, but neither will the investing weather be sunny. This is the kind of weather preferred by those who invest in dividend yielding stocks since stock prices are unlikely to rise much, if at all. In fact, they may continue to fall.