Last Week in Review: Three Things Moving the Markets
Interest rates ticked up week over week and are near the highest levels of 2021. Let's break down three things moving the markets and what to watch for in the weeks ahead.
1. Buy on the Dip is Back
Stocks had a bad September, with the S&P 500 falling 4.8%, its worst month since March. After a multi-year rally with major indices doubling in value since March 2020. Many market analysts called for a much bigger drop in September.
It has not come to pass and in October, we are seeing investors jump back in and "buy the dip", sending stocks to fresh historic highs. What has been the main driver of the stock gains?
Earnings, earnings, earnings. Many firms from the banking to the technology sector reported stronger than expected 3rd quarter earnings and maintained their future growth targets.
As stocks go higher, it is typically at the expense of bonds/rates as has been the case this month.
2. Fed Taper Cometh
November 3rd is just around the corner. That is the day the Federal Reserve meets and, likely announces their intentions to start tapering or scaling back their $120B monthly bond purchases.
The Fed started this bond-buying program in March 2020 to help stabilize the mortgage-backed security (MBS) market and help pin down long-term rates to stimulate the purchase and refinance market. Those goals have been met, so the Fed is ready to taper.
MBS prices have been moving lower the past few weeks in anticipation of the Fed taper announcement. Are we seeing a sell on the rumor and a potential buy on the news? Meaning, is the bond market moving lower on the news we expect to hear only to stabilize once the official announcement is made? It's quite possible if history is any guide. Back in 2013, the bond market endured a "taper tantrum" when the Fed remarked about possibly scaling back purchases. However, when the Fed started the tapering many months later, MBS prices improved as did home loan rates.
This will be an important event and subsequent bond market reaction to follow as rates do threaten to move to the highest levels of the year.
3. Supply Chain Disruption
We are seeing shortages of many goods as the globe struggles to ramp up production to meet demand. Apple just announced they expect to sell far less of their iPhone 13s this holiday because of chip shortages.
On top of this, we currently have nearly 200 cargo ships floating in our waters waiting to be unloaded and shipped throughout the country. The problem?
We do not have enough people working in the ports and driving trucks to help move the goods throughout the country. It has been reported that we may need an additional 80,000 truckers here in the US just to get past this current supply chain disruption and meet demand.
What will be the effect? Scarcity and higher prices. It now appears the supply chain disruption is going to last well into 2022 and that means higher prices (inflation) will be more persistent.
Just this past week, the National Association of Home Builders said the supply chain problems have caused shortages in cement, drywall, and many other materials required to build homes. This will lead to even higher new home prices in the year ahead.
Inflation is the archenemy of bonds. If inflation remains stubbornly high, it will put upward pressure on rates, especially if the Fed is buying fewer bonds.
Bottom line: Home loan rates are testing the highest levels of the year. A price to move lower from here would usher in even higher rates.
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