Dow finished down 84, advancers barely ahead of decliners & NAZ pulled back 14. The MLP index stayed near 226 & the REIT index fell 5 to 385. Junk bond funds were little changed & Treasuries remained in demand, taking yields a little lower. Oil slumped 2+ to the 73s recession worries & gold retreated 8 to 1834 (more on both below).
AMJ (Alerian MLP Index tracking fund)
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A key measure of home-purchase applications fell last week to the lowest level since 1995 as high mortgage rates, surging inflation & steep home prices sapped consumer demand from the housing market. The Mortgage Bankers Association's (MBA) index of mortgage applications tumbled more than 18%, the biggest weekly drop since 2015, to 147.1 for last. "This time of the year is typically when purchase activity ramps up, but over the past two weeks, rates have increased significantly as financial markets digest data on inflation cooling at a slower pace than expected," said Joel Kan, MBA's VP & deputy chief economist. The interest rate-sensitive housing market has borne the brunt of the Federal Reserve's aggressive campaign to tighten policy & slow the economy. Policymakers already lifted the benchmark federal funds rate 8 consecutive times & have signaled they plan to continue raising rates higher this year as they try to crush inflation that is still running abnormally high. Although mortgage rates have fallen from a peak of 7.08% notched in Nov, they have recently reversed that trend & started to march higher amid rate-hike fears. The average rate for a 30-year fixed mortgage climbed to 6.32% last week, according to data from mortgage lender Freddie Mac. That remains significantly higher than just one year ago, when rates hovered around 3.92%. "The increase in mortgages rates has put many homebuyers back on the sidelines once again, especially first-time homebuyers who are most sensitive to affordability challenges and the impact of higher rates," Kan added. Even with higher interest rates putting homeownership out of reach for Ms of Americans, prices are still steeper than just one year ago. The median price of an existing home sold in Jan was $359K, an increase of 1.3% from the same time a year ago, according to a separate report from the National Association of Realtors. This marks 131 consecutive months of year-over-year home price increases, the longest-running streak on record. Prices, however, have moderated slightly after peaking at a high of $413K in Jun.
Home purchase applications plunge to 28-year low as mortgage rates jump
Federal Reserve officials at their most recent meeting indicated that there are signs inflation is coming down, but not enough to counter the need for more interest rate increases, meeting minutes showed. While the Jan 31-Feb 1 meeting concluded with a smaller rate hike than most of those implemented since early 2022, officials stressed that their concern over inflation is high. Inflation “remained well above” the Fed’s 2% target, the minutes stated. That came with labor markets that “remained very tight, contributing to continuing upward pressures on wages and prices.“ Consequently, the Fed approved a 0.25 percentage point rate increase that was the smallest hike since the first Mar 2022, taking the fed funds rate to 4.5%-4.75%. But the minutes stated that the reduced pace came with a high level of concern that inflation was still a threat. “Participants noted that inflation data received over the past three months showed a welcome reduction in the monthly pace of price increases but stressed that substantially more evidence of progress across a broader range of prices would be required to be confident that inflation was on a sustained downward path,” the minutes said. The summary repeated that members believe “ongoing” rate hikes will be necessary. Though the qtr-point hike received unanimous approval, the minutes noted that not everyone was on board. A “few” members said they wanted a ½-point (50 basis points) hike that would show even greater resolve to get inflation down. Since the meeting, regional presidents James Bullard of St Louis & Loretta Mester of Cleveland have said they were among the group that wanted the more aggressive move. The minutes, however did not elaborate on how many a “few” were nor which Federal Open Market Committee members wanted the ½-point increase. “The participants favoring a 50-basis point increase noted that a larger increase would more quickly bring the target range close to the levels they believed would achieve a sufficiently restrictive stance, taking into account their views of the risks to achieving price stability in a timely way,” the minutes added. Since the meeting, Fed officials have emphasized the need to stay vigilant even while expressing optimism that recent inflation data has been encouraging. The minutes noted that “some” members see the risk of recession as “elevated.” Other officials publicly have said they think the Fed can avoid a recession & achieve a “soft landing” for the economy that sees growth slowing considerably but not contracting. “Participants observed that the uncertainty associated with their outlooks for economic activity, the labor market, and inflation was high,” the minutes continued. Among the risk factors cited were the war in Ukraine, the economic reopening in China & the possibility that the labor market could remain tighter for longer than expected.
Fed minutes show members resolved to keep fighting inflation
The one-year anniversary of Russia’s invasion of Ukraine will arrive on Fri & as the war enters its 2nd year, the conflict has had a global economic impact amid disruptions to supplies of energy & food commodities. After Russia launched its invasion on Feb 24, 2022, the US & a number of other countries around the world imposed sanctions on Russia for its renewed escalation of the conflict which had simmered since Russian-backed forces seized Crimea & part of the Donbas region in 2014. The economic fallout has been wide-ranging & hit supply chains ranging from Russia's oil & gas, which European nations have historically been leading consumers of, to food commodities like wheat that are produced in large quantities by Russia & Ukraine & exported to developing countries. Those disruptions have caused significant price volatility, hitting consumers' pocketbooks worldwide. The war's impact has dampened the outlook for global economic growth, which fell below the 2-decade average of 3.8% based on the annual World Economic Outlook to 3.4% in 2022 & is expected to decline further to 2.9% in 2023. Global inflation, driven in part by the ongoing effects of the COVID-19 pandemic in addition to the war, spiked to 8.8% in 2022 but is projected to remain around 6.6% in 2023 – well above the pre-pandemic level of roughly 3.5%. The Organization for Economic Cooperation & Development expects that the war will result in $2.8T in lost economic output in 2023 alone. As the war in Ukraine reaches the one-year mark, sanctions have hampered Russia's economy but haven't caused its collapse, in part due to the country deepening its ties with China & Iran. Russian energy exports were a prime target for sanctions & made up a substantial portion of the global supply prior to the war. Russian oil output made up 14% of the world’s total supply in 2021 according to the Intl Energy Agency. Russia exported about 4.7M barrels per day (bpd) of crude oil out of the 10.5M bpd of crude & condensate it produced in 2021, with Europe & China as its largest consumers at 2.4M & 1.6M bpd, respectively. At the outset of the war, the US only imported 672K barrels of oil from Russia, which were cut off under an exec order issued in Mar 2022. Russia was also the world's 4th-largest exporter of natural gas prior to the war & supplied nearly 40% of the EU's demand.
War in Ukraine: The economic impact on energy and food one year after Russia's invasion
Gold futures declined again to mark a 3rd session loss in a row. Gold is currently bearish, with prices trading below the 50-day moving average of $1866. Minutes from the Federal Open Market Committee's Jan 31 - Feb 1 policy meeting will be relevant in terms of hints on the pace of interest-rate hikes or a possible ending or pause in the rate increases. Gold has fallen due to an expectation of a rising interest rate trend until mid 2023. Gold for Apr fell $1 to settle at $1841 an ounce.
Gold Futures Settle Lower For A Third Straight Session
Oil prices declined, with US prices down a 6th session in a row. There appears to be a growing sense that central bankers are not done tightening monetary policy & the oil market still has a recession obsession. Oil prices were under pressure as rate fears are raising larger concerns of oil demand destruction. US benchmark West Texas Intermediate crude for Apr fell $2.41 (3.2%) to settle at $73.95 a barrel. Front-month contract prices have posted declines for 6 consecutive sessions, the longest streak of losses since the 6-session loss ended on Dec 9.
U.S. Oil Futures Post A Sixth Straight Session Loss
Traders worry that aggressive interest-rate hikes by the Fed could lead to a
recession. The minutes released today, did not provide comfort. The Fed still has work to do which means higher interest rates & that can cause a further economic slowdown. Dow remains near the bottom of its recent 33-34K trading range.
Dow Jones Industrials
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