The Friday stock sell-off ended the week down sharply - After Federal Reserve Chairman Jerome Powell’s speech at the Fed’s annual symposium in Jackson Hole on Friday, the Dow dropped more than 1,000 points, a 3% drop. The S&P dropped by 3.4%, and the Nasdaq dropped by 3.9%. In his speech, he said that “there could be some pain for consumers and businesses” as the fed uses higher interest rates to fight inflation. He also said that there would be “forceful and rapid action on inflation”. He reiterated the desire to quickly attack inflation to bring it back to the Fed target range of 2% and that the tight jobs market is something they need to cool. He spoke about the need to get the unemployment rate higher to cool wage growth and consumer spending. The unemployment rate is currently at 3.5%, a 50-year low. The August jobs report will be released next Friday. Investors had felt that rate hikes would moderate as there have been some signs of inflation moderating, but Powell’s speech made it clear that holding back was not what the Fed has in mind. It is possible that he used such an inflammatory message to frighten businesses, consumers, and investors in hopes that they would all pull back on the rapid pace of hiring, spending, and investing that have added to overheating the economy and fueling inflation.
The Dow Jones Industrial Average closed the week at 32,283.49, down 4.2% from 33,706.44 last week. It is down 11.2% year-to-date.
The S&P 500 closed the week at 4,057.66, down 4% from 4,228.48 last week. The S&P is down 14.9% year-to-date.
The NASDAQ closed the week at 12,141.71, down 5.1% from 12,795.22 last week. It is down 22.4% year-to-date.
U.S. Treasury bond yields - The 10-year treasury bond closed the week yielding 3.04%, up from 2.98% last week. The 30-year treasury bond yield ended the week at 3.21%, almost unchanged from 3.22% last week. We watch bond yields because mortgage rates often follow treasury bond yields.
Mortgage rates – The Freddie Mac Primary Mortgage Survey reported that mortgage rates as of August 25, 2022, for the most popular loan products were as follows:
The 30-year fixed mortgage rate was 5.55%, up from 5.13% last week.
The 15-year fixed was 4.85%, up from 4.55% last week.
The 5-year ARM was 4.36% down from 4.39% last week.
Initial Jobless Claims
Initial Jobless Claims for the week ending August 20th came in at 243k, which is down from the market's expectations of 252k, and a tick down from the prior weeks revised amount of 245k. The four-week moving average rose slightly to 247k, compared to the prior week's 245.5k. This is the second week that jobless claims have fallen, which is a good sign of strength in the labor market. Continuing claims for the week ending August 13th came in at 1.415mm, which is down from the market expectations of 1.441mm and is down from the prior week's revised number of 1.434mm.
Q2 GDP was revised from -0.9% q/q to -0.6%, which is better than what the market was expecting, which was a revision to -0.7%. Consumer spending was at 1.5%, which is what the market was expecting. The most interesting part of the report was that Gross Domestic Income (GDI) rose 1.4% q/q, which measures activity by calculating all income generated from producing those goods and services, such as compensation and company profits. "We continue to think that the decline in real GDP across the first two quarters of the year does not meet the NBER's definition of a recession, and if the GDP data are eventually revised up to be more consistent with the GDI data, the first half of the year may end up looking stronger (or at least less weak) than the data currently show," JPMorgan Chase & Co. economist Daniel Silver said in a note.
U.S. Pending Home Sales
U.S. Pending Home Sales for the month of July came in -1.% MoM, which is a beat compared to market expectations of -2.6%. For the year, home sales are down 22.5%, which is lower than expectations of -21.4%. This is the lowest level pending home sales have been at since the start of the pandemic. "This month's very modest decline reflects the recent retreat in mortgage rates," Lawrence Yun, NAR's chief economist, said in a statement. "Inventories are growing for homes in the upper price ranges, but limited supply at lower price points is hindering transaction activity."
MBA Mortgage Applications
MBA Mortgage Applications for the week ending August 19th came in down 1.2%. Purchase applications are down 0.5%, and refinances are down 2.8% week over week. From a year ago, purchase and refinance applications are down 21.2% and 82.7%. "Mortgage applications continued to remain at a 22-year low, held down by significantly reduced refinancing demand and weak home purchase activity," said Joel Kan, MBA's Associate Vice President of Economic and Industry Forecasting, as "Mortgage rates increased for all loan types." Additionally, "The average purchase loan size continued to trend lower, as purchase activity at the high end of the market is weakening," he said. Specifically, the average purchase loan size declined 1.1% week over week to $406.4k and is just 3.6% higher YoY. It is well back from the survey high of $460.1k hit in mid-March and not too far away from this year's low at $401.7k, which was right at the start of 2022.