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Borrowers Are Feeling the Bite of Rate Hikes; Mortgage Rates Slow Unwinding of Fed Balance Sheet -September 26, 2023 at 07:16 am EDT

Borrowers Are Feeling the Bite of Rate Hikes; Mortgage Rates Slow Unwinding of Fed Balance Sheet By James Christie

Good day. Fed officials signaled last week that they plan to keep interest rates high for quite a while. For families who don’t need to borrow, higher rates might not affect daily life too much. But for those who do, the Fed’s aggressive rate increases are really beginning to sting. “The bite is starting now,” said Liz Ann Sonders, chief investment strategist at Charles Schwab. Borrowers shopping for mortgages or auto loans are experiencing sticker shock. New 30-year fixed-rate mortgages today carry rates around 7%, up from 3% two years ago. That increase can mean a home buyer has to pay hundreds of dollars more a month compared with two years ago. What’s more, rising mortgage rates are slowing the Fed’s efforts to unwind its mortgage-bond holdings.

Now on to today’s news and analysis.

Top News Americans Finally Start to Feel the Sting From the Fed’s Rate Hikes

Rising interest rates are hitting Americans’ finances .

Consumers in the market for loans to buy homes and cars are discovering that, because of the Federal Reserve’s rate increases, their money gets them a lot less than it would have a few years ago. Meanwhile, those with credit cards and other loans that carry rates pegged to broader benchmarks are finding they have gotten much more expensive.

Buying a home or car right now is “completely unaffordable for the typical American household because you’re mixing the higher borrowing costs with the high prices,” said Mark Zandi, chief economist at Moody’s Analytics.

How Mortgage Rates Slow the Fed’s Effort to Shrink Its Balance Sheet

It could take six more years for the Federal Reserve to shrink its mortgage bondholdings to less than $1 trillion, according to a new Goldman Sachs estimate. The Fed’s balance sheet already has fallen to about $8 trillion from a near $9 trillion peak last year. But progress has been slow in shedding its $2.5 trillion in mortgage-bond holdings, an enduring vestige of its pandemic-era policies. A big reason for that has been climbing U.S. mortgage rates, now north of 7%, with the Fed’s interest rate hikes putting refinancing and sales activity largely on ice. Read more .

Corporate Bond Markets in U.S. and Europe Tell Very Different Stories

Usually, the corporate bond markets of the U.S. and Europe move in tandem. That’s logical. The U.S. is a major market for most European companies, and the reverse is true to an extent as well. But that relationship has broken down. Torsten Slok, the chief economist at Apollo Global Management, points out that spreads for CCC-rated securities are much tighter in the U.S. than in Europe since the Fed began lifting interest rates. That is even though both regions are grappling with inflation, and the odds of a recession in the U.S. (60%) are actually higher than eurozone recession odds (50%). Read More .

U.S. Economy Will Work Permits Fix New York’s Migrant Crisis?

After months of lobbying the White House, New York officials finally got work permits for more than 470,000 Venezuelan migrants . The question now is whether that will improve the migration crisis or exacerbate the problem.

What Happens During a Government Shutdown?

Congress is running short on time to pass new spending legislation. If Republicans and Democrats don’t reach a deal before Oct. 1, much of the federal government must shut down. Here is what it would mean for Americans.

Commercial Real Estate’s Next Big Headache: Rising Insurance Costs

Commercial property owners, already struggling with high interest rates and rising vacancies, face exploding insurance costs that keep hitting new highs. Commercial real-estate insurance costs have risen 7.6% annually on average since 2017.

Railroads to Receive $1.4 Billion for Fixes and Upgrades

Dozens of aging U.S. rail bridges and tracks have been chosen to receive $1.4 billion in federal grants for repairs and upgrades, with businesses and rail commuters expected to benefit from these funds as early as next year.

Key Developments Around the World Trillions in Climate Funds Could Sow Turmoil in Poor Nations

A tsunami of cash from wealthy nations is headed for developing countries to address climate change-and with it growing worries that the money will overwhelm the poorer economies it is meant to help.

Intel’s Big Chip-Making Push in Germany Hits Bottleneck

A shortage of skilled workers, high energy prices and an at-times Byzantine bureaucracy are among the hurdles that Intel’s planned semiconductor factory and similar projects face in Germany.

A Crisis Is Brewing at U.K. Universities

The U.K.’s storied universities lose money on almost every British student they teach. The university system’s health has an outsize impact on both the future of the world’s sixth-biggest economy and globally important research.

Russia’s Invasion Triggers Baby Bust in Ukraine

Even before Russia invaded, Ukraine’s fertility rate-the number of babies born per woman-was the lowest in Europe. Ukrainian demographers are now forecasting it will become the lowest in the world .

Financial Regulation Roundup SEC Fines Deutsche Bank Fund Unit for ESG Claims

Deutsche Bank’s investment arm agreed to pay $25 million for overstating how it used environmental, social and governance factors in its funds, one of the first cases that questioned ESG claims by money managers.

U.S. Blacklists 28 Entities From China, Russia and Other Countries

The addition to the export blacklist included nine firms implicated in violating existing export controls through a scheme to supply a Russian company with components to build unmanned aerial vehicles for Russia’s intelligence agency .

South Korea to Extend Forex Trading Hours Next Year

South Korea will extend its onshore foreign-exchange trading hours next year and ease rules on foreign traders next month, to help foreign financial institutions and their client investors get better access to the local forex market .

Forward Guidance Tuesday (all times ET)

8:30 a.m.: Philadelphia Fed Non-Manufacturing Survey

9 a.m.: S&P CoreLogic Case-Shiller Home Price Index for July

10 a.m.: U.S. new home sales for August; The Conference Board Consumer Confidence Index for September; Richmond Fed Survey of Manufacturing Activity

1:30 p.m.: Fed’s Bowman speaks at FedCommunities event “Keys to Opportunity in the Housing Market”


4 a.m.: Euro area money supply for August

8:30 a.m.: U.S. durable goods report for August

10:30 a.m.: Dallas Fed Energy Survey

Research Germany’s Gloomy Mood Masks Case for Optimism

Germany’s Ifo index might have stagnated at a low level, ticking down to 85.7 in September from 85.8 in August, but the outlook for the country’s economy belies the gloomy mood, according to KfW chief economist Fritzi Köhler-Geib. Germany is seeing significantly rising wages, stable employment and declining inflation, which should help consumption in the foreseeable future, she says. Moreover, global monetary easing could begin over the course of 2024, such that Germany as a producer of capital goods can benefit, she adds. But even with the relief of cyclical elements such as these, there remain structural challenges in Germany such as an aging population and the energy transition that need focus, Köhler-Geib writes.

-Ed Frankl

Canadian Rates Seen Higher for Longer

The surprise acceleration in underlying inflation in Canada in August amid clearer signs of economic weakness means the Bank of Canada is more likely to leave interest rates at current levels for longer rather than raise further, says Capital Economics’s Stephen Brown. He pushes back the forecast for the first rate cut to the second quarter of next year from the first quarter to reflect the renewed rise in oil prices, which likely means it will take longer for the central bank to be confident in the inflation outlook.

-Robb Stewart

Commentary The Long-Term Capital Management Crisis Took Just One Bailout

At the time, the gathering of leading investment bankers at the behest of the Fed felt like an extraordinary intervention, but in light of all that followed, the resolution of the LTCM crisis now seems quaint , Telis Demos writes.

Basis Points U.S. economic growth slowed in August as industrial activity moderated, according to the Federal Reserve Bank of Chicago. Its Chicago Fed National Activity Index fell from a revised 0.07 in July to minus 0.16 last month. Readings below zero suggest economic activity is expanding at a slower rate than the index’s average historical trend. (Dow Jones Newswires) Factory activity in Texas contracted more in September despite signs that manufacturing conditions are improving, according to the latest Texas Manufacturing Outlook Survey of the Federal Reserve Bank of Dallas. Its index for general business weakened from a minus 17.2 reading in August to minus 18.1. (DJN) Confidence among Belgian businesses improved slightly in September driven by brightening prospects in the services sector, lifting the confidence gauge of the National Bank of Belgium from minus 14.9 in August to minus 14.4, the first rise in six months, data showed Monday. (DJN) Thailand’s central bank is expected to maintain its benchmark interest rate at 2.25% at its policy meeting on Wednesday, though views are almost evenly split between a pause and an increase among 11 economists polled by The Wall Street Journal. Six of the 11 expect the central bank to stand pat on its policy rate, while the remaining five economists forecast a quarter-percentage-point increase to 2.50%. (DJN) Feedback Loop

This newsletter is compiled by James Christie in San Francisco and Perry Cleveland-Peck in Barcelona.

Send us your tips, suggestions and feedback. Write to:

James Christie , Nell Henderson , Nick Timiraos , Tom Fairless , Megumi Fujikawa , Perry Cleveland-Peck [mailto:perry.cleveland-peck@wsj.com], Nihad Ahmed , Michael Maloney , Paul Kiernan

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09-26-23 0715ET

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