The recent declaration by the Saudi energy minister about potentially reducing oil production could cause oil prices to rise. The warning from the minister is a clear signal that this issue requires serious attention as it has inflationary implications.
Currently, oil prices are trading at around $74 on the WTO. The prices moved slightly in response to the warning, but they have yet to see a significant increase. That could change depending on several factors, such as the level of demand and US production rates.
If demand in the US decreases, it could counteract any rise in oil prices because lower demand would reduce upward pressure on prices. However, current US rig counts are falling, suggesting that domestic oil production may not be able to meet increasing demand, leading to potential price increases.
If the Fed decides to cut rates in response to an economic recession or job losses, it could inadvertently contribute to rising oil prices. Oil is denominated in dollars, with USD as the world’s reserve currency. If the dollar loses value, oil prices will need to increase to maintain balance for the rest of the world, which could lead to inflation in the US.
Mortgage Bonds and The Housing Market
Despite these concerns, the mortgage bonds market appears to be stabilizing, which could represent an inflection point that we’ve been waiting for. The Zillow forecast suggests we could see around 4% appreciation in 2023, aligning closely with our predictions of just over 5%.
Even modest appreciation like this can translate into significant gains for homeowners. For example, a 5% appreciation on a $500,000 home equals a $25,000 value increase. However, with interest rates rising (about a percent higher than a year ago), mortgage applications for the week have decreased. Purchase applications are down 4% for the week and 30% year over year. Refinances are down 5% for the week and 44% year over year.
The Debt Ceiling Drama
In addition to these economic factors, political uncertainty around the US debt ceiling is causing further market volatility. There was no progress in talks to resolve the issue yesterday, and with the Memorial Day weekend approaching, it’s unlikely that any significant steps will be taken in the near term.
Although many variables are in play, we could see positive market changes. The 10-year yield and mortgage-backed securities technical charts show some excellent patterns.
However, it’s crucial to note that the release of the Fed Minutes later today could impact these trends. As such, we’re starting the day with a cautious floating stance. Despite the current challenges, a strategic approach and a keen eye on market indicators can help us navigate these turbulent waters.