Fed Week, Another Bank Bailout
Last week's economic reports showed steady inflation, with core PCE at 4.6% YoY, and first-quarter GDP growth at 1.1%. New home sales in March increased by 10%, while First Republic Bank collapsed and was sold to JPMorgan Chase, sparking debate about a possible bailout. The upcoming Fed announcement shows an 82% chance of a 25 basis point increase, and any pause could result in a bond market rally and lower mortgage rates.
⭐️ Check This Out
- Mortgage rates inch up for a second week, but a decelerating inflation hints at a gentle decline through 2023, offering a silver lining for homebuyers seeking lower rates.
- A new federal rule aims to close the racial homeownership gap by raising mortgage fees for homebuyers with good credit scores and reducing fees for riskier borrowers, sparking concerns about the rule's fairness and effectiveness.
- Miami, Tampa, and Atlanta are stealing the home price spotlight, leading the pack with the highest year-over-year gains, while the rest of the country is feeling a bit left out as annual gains drop across the board.
- March 2023 was a party for new home sales, as they jumped 9.6% from February, but it seems someone forgot to invite last year's sales, which were 3.4% higher.
- The U.S. economy hit the brakes hard from January to March, slowing to a measly 1.1% annual pace. At least consumers kept shopping, but the Fed's interest rate hikes party might just crash the whole economy.
📊 Market Update
Last week's economic reports showed no major surprises. Inflation was on target, keeping mortgage rates steady. Core PCE, the Fed's preferred inflation indicator, was up 4.6% year-over-year in March, above their 2.0% target. The Fed has warned that reducing inflation will be challenging, and its success will impact financial markets.
First-quarter GDP growth was only 1.1%, lower than expected, with consumer and government spending being strong points. Early predictions suggest weaker GDP growth in the second quarter due to tighter monetary policy and banking industry issues.
New home sales in March rose 10% from February, reaching their highest level since March 2022. The median new-home price was $449,800, up 3% from last year.
Another Bank Bailout
First Republic Bank collapsed on Monday, and the U.S. government took control, selling it to JPMorgan Chase. The deal aimed to stabilize the financial system after recent major bank failures. JPMorgan Chase acquired most of First Republic's assets and all deposits, protecting its depositors.
To facilitate the rescue, the government provided $50 billion in financing to JPMorgan Chase, sparking debate on whether it was a bailout. President Joe Biden emphasized that taxpayers wouldn't be responsible for the costs.
First Republic Bank's downfall was due to rapid interest rate increases and customers withdrawing large amounts of deposits. The FDIC provided $50 billion in financing, leading some experts to consider it a bailout. However, the government funds for the sale came from the Deposit Insurance Fund, not from individual taxpayers.
Fed Week - Increase Imminent?
The expectations for the next Fed announcement (tomorrow, Wednesday May 3) has previously peaked at nearly a 92% chance of a 25 basis point increase. This week, however, that has fallen to just under 82%. Is there a chance of a pause tomorrow?
Should we see a pause, which still remains highly unlikely, we will likely see a significant rally in the bond market, and a corresponding drop in mortgage rates.
🗓️ Economic Calendar
Wednesday
- Fed Interest Rate Decision - Federal Open Market Committee (FOMC) members vote on where to set the rate.
Thursday
- Initial Jobless Claims - measures the number of individuals who filed for unemployment insurance for the first time during the past week.
Friday
- Unemployment Rate (Apr) - measures the percentage of the total work force that is unemployed and actively seeking employment during the previous month.
- Average Hourly Earnings (Apr) - measures the change in the price businesses pay for labor, not including the agricultural sector.