Dow jumped 303 (but 300 below highs after the Fed announcement), advancers over decliners 3-1 & NAZ gained 270. The MLP index fell 2+ to the 201s & the REIT index recovered 9+ to the 397s. Junk bond funds remained in strong demand & Treasuries saw heavy buying, bringing lower interest rates. Oil dropped 3+ to the 115s & gold went up 19 to 1833 (more on both below).
AMJ (Alerian MLP Index tracking fund)
![Live 24 hours gold chart [Kitco Inc.]](https://www.kitco.com/images/live/gold.gif?0.2180338269244485)
The Federal Reserve raised its benchmark interest rate by 75-basis points for the first time in nearly 3 decades as policymakers intensify their fight to cool red-hot inflation, a move that threatens to slow US economic growth and exacerbate financial pressure on Americans. The 75-basis point hike – the first since 1994 – underscores just how serious Fed officials are about crushing rising prices after a string of alarming economic reports. The move puts the key benchmark federal funds rate at a 1.50-1.75%, the highest since the pandemic began 2 years ago. Officials also laid out an aggressive path of rate increases for the remainder of the year, with new economic projections released after the 2-day meeting showing that policymakers expect interest rates to hit 3.4% by the end of 2022, which would be the highest level since 2008. By comparison, the Mar estimate showed that officials had penciled in rates hitting 2.5% by year's end. The question now is whether the Fed can successfully engineer the elusive soft landing — the sweet spot between tamping down demand to cool inflation without sending the economy into a downturn. Hiking interest rates tends to create higher rates on consumer & business loans, which slows the economy by forcing employers to cut back on spending.
Fed announces rate hike not seen in decades to fight inflation
Total mortgage application volume was 52.7% lower last week than the same week one year ago, according to the Mortgage Bankers Association's (MBA) seasonally adjusted index. Sharply rising interest rates are decimating refinance volume, & those rates, along with sky-high home prices and a shortage of houses for sale, are hitting demand from potential buyers. Last week, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($647K or less) increased to 5.65% from 5.40%, with points rising to 0.71 from 0.60 (including the origination fee) for loans with a 20% down payment. This week they surged even higher, with the average rate hitting 6.28% yesterday. “Mortgage rates followed Treasury yields up in response to higher-than-expected inflation and anticipation that the Federal Reserve will need to raise rates at a faster pace,” said Joel Kan, an MBA economist. Weekly mortgage application volume rebounded slightly compared with the previous, holiday-adjusted week. Refinance demand rose 4% for the week but was 76% lower than the same week one year ago. Mortgage applications from homebuyers rose 8% for the week but were 16% lower compared with a year ago. “Despite the increase in rates, application activity rebounded following the Memorial Day holiday week but remained 0.29 percent below pre-holiday levels,” Kan added. The housing market is now reeling in a rising interest rate environment. After 2 years of record-low rates, fueled by the Federal Reserve's Covid pandemic-induced purchases of mortgage-backed bonds, home prices are overheated & affordability is now in the basement
Mortgage demand is now less than half of what it was a year ago
The National Association of Home Builders warned that soaring inflation & higher mortgage rates are slowing home sales, with CEO Jerry Howard calling the combination a "perfect storm." Howard said that the cost of capital has increased for the consumers & builders alike. He noted that the "cost of labor remains high" as does the "availability of labor." "The cost of building materials has gone up 19% year-over-year," he noted. Howard provided the insight on the same day the National Association of Home Builders posted its 6th straight monthly decline in Jun for builder confidence in the market for newly-built single-family homes. Howard pointed to the new data, stressing that it is a "sign of a real slowdown." Builder confidence dropped 2 points to 67, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI) released today, which marks the lowest reading since Jun 2020. The index can range between 0 & 100 with any print over 50 indicating positive sentiment. Any reading above 80 signals strong demand. NAHB Chair Jerry Konter, a builder and developer from Georgia, warned in a news release that "six consecutive monthly declines for the HMI is a clear sign of a slowing housing market in a high inflation, slow growth economic environment." He noted that the "entry-level market has been particularly affected by declines for housing affordability" & that builders are "adopting a more cautious stance as demand softens with higher mortgage rates." The average rate on the popular 30-year fixed mortgage soared above 6% yesterday for the first time since 2008, according to Mortgage News Daily. Howard pointed out that "traffic at our job sites is down below 50," noting that 50 is the equilibrium mark. "I’m afraid it is a sign of a real slowdown," he added, noting that housing "leads us into recessions."
Housing industry insider warns market seeing signs of a ‘real slowdown’
Gold prices settled higher to recoup some of the losses they suffered a day earlier, then seesawed between losses & gains after the Federal Reserve's policy-setting committee announced the largest interest-rate increase in nearly 30 years. Aug gold rose $6 to settle at $1819 an ounce, recouping part of yesterday's 1% decline. It traded at $1822 in electronic trading shorty after the Fed announcement. About a ½ hour after gold futures prices settled today, the Fed said it would hike the federal-funds target rate by ¾ of a percentage point to 1.5-1.75%. In its “dot-plot forecast,” the Fed said it planned to raise its benchmark interest rate to a mid-range of 3.4% by the end of this year & to 3.8% by the end of 2023. Gold prices had settled higher ahead of the decision, rebounding a bit from Tuesday’s 1% decline, then bobbed between losses and gains shortly after the Fed announcement. The ICE US Dollar Index, a measure of the $'s performance against a basket of its rivals, was little changed following the Fed announcement, after trading between a high of 105.788 & a low of 104.713 today. Treasury yields moved lower, with the 10-year down 5 basis points to 3.4301% while benchmark US stock indices traded higher.
Gold prices end higher, bobbing between gains and losses after Fed decision
Oil futures fell to their lowest settlement in 2 weeks, as US crude inventories climbed for a 2nd straight week & the Federal Reserve announced its largest interest-rate increase in almost 30 years in a move to combat inflation. West Texas Intermediate crude for Jul fell $3.62 (3%) to settle at $115.31 a barrel, the lowest for a front-month contract since Jun 1. Aug Brent crude the global benchmark, lost $2.66 (2.2%) to $118.51 a barrel, the lowest finish since Jun 2. Yesterday, a number of factors were cited as a drag on crude, with some analysts attributing the softness as largely tied to jitters over the Fed. Other factors included optimistic remarks around the Iran nuclear deal, a waiver extension allowing US banks to process Russian energy transactions & a report that a US senator intends to propose a federal surtax on certain oil companies in a move to curb inflation. Today oil prices extended their losses after the Fed announcement. US benchmark stock indices continued to trade higher, but if the markets reverse, crude prices could go lower. The Intl Energy Agency said it expects global demand for oil to rise above pre-pandemic levels next year following 3 years of COVID-19 lockdowns & the economic shock of the Ukraine war. Much of the growth in demand next year will be driven by China, as it emerges from stop-start COVID-19 lockdowns, while developed economies are expected to contend with a worsening economic outlook & rampant inflation, the agency said in its monthly report.
Oil prices settle at a 2-week low as U.S. supplies climb a second week and the Fed hikes rates
Investors liked what they heard about raising interest rates to fight inflation. Their gut reaction today was to buy. However high interest rates mean there will be pain. The track record for the Fed's interest rates shows that it has been below 2% for most of the last roughly 15 years. There was an increase in 2009 to fight the recession. For the prior ½ century it was generally above 4% with an ugly period in the early 1980s when it was in double digits approaching 20%. Higher interest should slow consumer demand which is key in fighting inflation. However a weak economy suggests the employment story will not be pretty. Tomorrow could be a very wild day in trading.
Dow Jones Industrials
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