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Market Minute Write-Up

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May 29, 2023 – Debt ceiling has been in the headlines of many news coverage in the past couple weeks and will likely remain the focal point this week. Concerns about a possible government default have had negative effects on both interest rates and consumer sentiment and are directly impacting the housing market. While new home sales continued to improve as tight supply remained an issue in the existing housing market, demand could dip in the short term as rates remain elevated. With consumer spending staying solid and inflation not easing in the latest reading, the housing market could face additional headwinds as the Fed contemplate on having another rate hike in their June meeting.     

New home sales increase for the second month in a row: Builders benefited from low inventory of existing homes again in April, as more buyers turned to new construction as an alternative. Sales of new homes rose 4.1% to a 683,000 seasonally adjusted annual rate in April - the highest pace since March 2022, and was 11.8% higher than its pace one year ago. Builder incentives continue to motivate buyers towards new construction, but their use by builders is becoming less common as housing demand stabilizes. Meanwhile, the median sales price of new homes dropped 7.7% month-over-month to $420,800. The April median price also went down 8.2% from the year-ago level and the dip was the first since August 2020. At the regional level, sales in the West declined 9.1% month-over-month in April, after surging to the highest level in ten months in March. April sales also dipped 2.8% from the same month of last year. Higher mortgage in recent weeks will have a negative impact on buyers’ demand and will likely lead to lower new home sales in May.

Mortgage rates surge to the highest level in two months: The average 30-year fixed rate mortgage (FRM) for the week ending May 25, 2023, climbed to 6.57%, the highest level since mid-March. The resilience in the U.S. economy, coupled with debt ceiling concerns led to higher mortgage rates this week. Fears about a government default have created more volatility in the bond market and continued to apply upward pressure on interest rates. While an agreement in principle to raise the debt ceiling was reached this past weekend, Congress still needs to pass a legislation addressing the issue by June 5, before the government runs out of money. Congress has raised the debt limit 78 times in the past 73 years, so a new ceiling will likely be set in time before a government default takes place. Nevertheless, the earlier the debt impasse gets resolved, the sooner we will see some easing in mortgage rate volatility.

Consumer sentiment dips as economic worries persist: An index produced by the University of Michigan shows a decline in consumer sentiment by nearly 7%, as worries about the future of the economy exacerbated. Sentiment on current conditions was down 4.8% from the prior month and the index of consumer expectations dropped even more sharply by 8.4%. The downward adjustment in the indices reflects the Americans’ concerns of the potential economic fallout of a government default and the negative impact it could have on their personal finance. Consumers reacted similarly with a plunge in the sentiment index 12 years ago during the 2011 debt ceiling crisis.

Consumer debt passes $17 trillion for first time: Total consumer debt hit a new high in the first quarter of 2023, as economic uncertainty remained elevated. The Americans’ debt increased $148 billion from the fourth quarter of 2022 and reached $17.05 trillion in the first three months of this year. The total indebtedness was up $2.9 trillion since the end of 2019, right before COVID hit. The increases in debt during the first quarter could be observed in all categories, including mortgages, auto loans, student loans, and other consumer loans. Especially concerning was credit card debt. Balances in this category typically decline in the first three months of the year as consumers ease on spending and pay down some debt after a busy holiday season. The first quarter of this year, however, was the first time in more than 20 years that credit card balances did not decline. This could be a reflection that more people are struggling financially and are using their credit cards to pay for their day-to-day necessities. 

Sharp increase in consumer spending clouds next Fed’s rate hike move: U.S. consumer spending and inflation both accelerated in April, as fresh data released last Friday shows. Consumers increased their spending by 0.8% in April, as they spent more on vehicles and services such as insurance and healthcare. The latest spending growth figure was much stronger than the 0.1% increase reported in both March and February. Inflation, meanwhile, has not eased as much as the Fed anticipated. The personal consumer expenditure price index (PCE) - the Fed’s preferred gauge of consumer prices - jumped 4.4% year-over-year in April, up from 4.2% in March. Strong increases in consumer spending and inflation suggest that the aggressive Fed’s rate hikes have yet to slow the economy enough and tame inflation down to the Fed’s desired level. This could mean another 25bps increase on the Fed funds rate in their June’s FOMC meeting. 

Note: The weekly market minute report is updated every Monday by 6:00 PM PST.

Weekly Data for Week Ending 2023-05-27


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