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Market Update

From the Desk of Jason Obradovich, Chief Investment Officer

Waiting For March 16th

Jason: Hello, everyone, and welcome back to the Mortgage Rundown. Today we’re going to talk about what's happening in the capital markets.

Inflation is the name of the game as the latest year over year figures on the Consumer Price Index (CPI) show that inflation continues to climb now almost 7.5%.

The chart on your screen shows how much inflation has grown, and we now have acknowledgment from the Federal Reserve that it's a real problem.

Now, CPI is not the Fed's preferred inflation measurement, but even PCE, their preferred index, is now almost 5%, well above their 2% target.

Inflation erodes the value of treasuries, and we've seen Treasury rates raise very rapidly recently. The market is placing much higher wagers that the FOMC will raise the benchmark rate five times this year. In fact, many are calling on the Federal Reserve to raise rates 50 basis points at their next meeting on March 16.

The reason for the 50 basis points call is that the market believes the Fed needs to take a more aggressive stance immediately to curb inflation.

It's hard to believe that the Fed will raise 0.5% in the next meeting, but it's also been very surprising how little the Fed has done to curb inflation for the past year. Will they go from undercorrecting to overcorrecting?

To get a sense on how much the market has shifted its position on anticipating the Fed's move, take a look at the chart of your screen, which shows the two-year Treasury over the past few months. The market started anticipating a Fed move since late September and we are now in February, and the only move the Fed has made so far has been to taper asset purchases.

The big question is whether or not the market is over anticipating a big Fed move or will the Fed play catch up and risk slowing down the economy too much?

And the movement in Treasury rates is about the exact same as we've seen in the mortgage space, with the average fixed rate mortgage moving higher by about one full percent since late September.

That's it, everyone from the capital markets desk this week. Thank you all for watching and have a great day.


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