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A good week for rates as they ticked to the best levels in a month. Let's discuss where they are headed, why and what's next.

Fed Says Higher for Longer – Mortgage Rates Improve

There was nothing stopping rates from improving this past week, not even Fed Chair Powell on Capitol Hill reiterating they are not cutting rates just yet.

The Fed "does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent." Jerome Powell, 3/6/24.

This quote highlighted the Fed's position that they are in no rush to cut rates until they are confident inflation is headed towards 2.00%.

Mortgage Purchase Applications up 11% on the Week

This positive headline from the Mortgage Bankers Association is good news but needs to be taken with a grain of salt as application volume is low and any move creates large percentage swings. Nonetheless, this number also didn't take into effect the full decline in rates from week to week. If you consider the "lag effect" or delay as to when consumers learn about the improvement in rates, it feels like even better days might be ahead for housing.

Labor Market Loosening

There were a couple of signs the labor market continues to loosen. First, the ADP Report, which shows private jobs created (versus government jobs) came in below expectations. Also, the JOLTS report, which shows how many "help wanted “signs or jobs that are available, came in below expectations.

The decline in jobs available is a welcome sign to the Fed, because if there are less jobs available, it lessens the need to pay more and thereby fuel inflation. Further loosening of the labor market will help pull forward Fed rate cuts.

Market Fed Cut Expectations

The Fed Funds Futures, which prices in the probability of rate cut/hike activity, is now pricing in the first rate cut in June at about 68%. It is important to note that the Fed Funds Futures have been very inaccurate in forecasting rate hike/cut activity. The only accurate source for Fed hikes has been the Fed and if they say they are coming later with the hike, that may very well happen. As the saying goes, "Don't fight the Fed".

Bottom line: Rates improved nicely this past week on the weaker labor market data and confirmation that the Fed will be cutting rates at some point. What's next? Read on…

This past week, interest rates held steady amidst a slew of market-moving events. Let's discuss what happened and see what lies in the week ahead.

Fed Has Been Right

Over the past couple of months, the bond market has adjusted to the idea that the Fed will only be cutting rates three or four times this year. The first of which is likely to happen in June. This is the main reason why the 10-year Note yield has climbed from 3.85% to 4.30% and 30-year fixed mortgage rates are back above 7%.

The Fed's Favored Gauge of Inflation

On Thursday, the Core Personal Consumption Expenditure (PCE) Index was reported and met expectations at 2.8% year-over-year. The bond market breathed a sigh of relief upon this report as there were fears of a hotter than expected reading heading into the release.

The Fed wants the 2.8% to move significantly towards 2% before cutting rates. Eighteen months ago, this reading was twice as high, so it does appear like inflation continues to moderate despite the recent fears of re-acceleration.

If this reading continues to decline, we should expect the Fed to cut rates, which should ease pressure on long-term rates.

Debt Remains an Issue

Early last week the Treasury Department unloaded a record amount of two-and five-year notes, a total of $127 billion sold within a couple of hours and the bond market didn't like it. The overwhelming amount of new bonds or supply that is being sold due to our deficit spending, has added weight on bond prices and has limited any further rate improvement. Longer-term, with deficits as far as the eye can see, Treasury auctions and the bond market appetite will be an ongoing story to follow for us in mortgage and housing.

Durable Goods Orders was Not Good

A sign that the consumer may be feeling the pinch, Durable Goods Orders, purchases of items intended to last multiple years, like dishwashers and ovens, came in well below expectations. Why is this important? The consumer makes up two-thirds of our economic growth. If the consumer contracts or spends less, the economy slows and the threat of a recession rises.

4.32% Still Standing

In addition to all the news we must watch key levels, and the key level in the Treasury market is 4.32% on the 10-year Note yield. We have not seen the 10-year yield close significantly above this level in 2024. If the 10-year moves above this level rates are going higher. The opposite is true.

Fed Speak Stirring Commotion

If watching the news and numbers were not enough, the markets must navigate Fed speak. This past week it was clear that the Fed was not only noncommittal as to when rate cuts could begin, but it's unclear as to what economic signals will prompt the Fed to cut rates.

"Should the incoming data continue to indicate that inflation is moving sustainably toward our 2% goal, it will eventually become appropriate to gradually lower our policy rate to prevent monetary policy from becoming overly restrictive. In my view, we are not yet at that point." Fed Governor Michelle Bowman.

Well, as we just shared above, inflation is well into the 2's after being twice as high 18 months ago. The question the market is asking is: Has inflation moved "sustainably toward" the Fed's 2.00% target?

Bottom line: Rates are moving sideways the past couple of weeks and the bond market was able to leap a few big hurdles such as debt, inflation and uncertain Fed speak. The next move for the Fed will be a cut and continued progress on lowering inflation will ensure that it comes sooner rather than later.

This past week interest rates ticked up to the highest level of the year, as the Minutes from the Fed's last meeting were released. Let's discuss what happened and look at the week ahead.

Fed Meeting Minutes Released

Last week's main event was the release of the Minutes from the January Fed meeting. Fed Chair Powell made it clear that a rate cut in March was not their "base case". Upon the Minutes being released, it became clear it was the same sentiment amongst most Fed members.

Most Fed members agreed they need to proceed carefully on cutting rates and not do it too soon as inflation remains above their intended 2% target.

Yet, at the same time, some Fed officials expressed concern about keeping rates too high for too long. This lack of consensus and mixed messaging highlights the uncertainty surrounding where inflation and the economy are headed, and when rate cuts are coming.

As always, the Fed reiterated they will be data-dependent and will rely on incoming inflation and economic readings to determine if and when to cut rates. The market is currently pricing in a rate cut this June, which is a lot different from a March cut priced in just one month ago.

So overall the Fed confirmed what we knew back in January - rate cuts are off the table for now and they need to see more disinflation for the Fed to move rates lower. But there was one note that could help long-term rates like mortgages in the future.

"Noting reductions in overnight reverse repo usage many officials said it would be appropriate to start in depth balance sheet reductions at next meeting." FOMC Minutes Feb 21 2024.

The Fed's balance sheet reduction is another form of tightening monetary policy, and it is a reason why long-term rates, especially mortgages, are higher. If the Fed starts to slow balance sheet reduction, it could lead to stabilization and possibly improvement in long-term rates.

Debt Everywhere

As mortgage and housing professionals, we must watch events around the globe. On Wednesday, during a day with not much news here outside the Fed Minutes, a German bond auction went off poorly and caused rates around the globe to rise.

Shortly thereafter, our Treasury Department sold $16 billion worth of 20-year bonds, and that auction also went off poorly… meaning investors needed to be compensated with more yield to buy the bonds. As those rates move higher, it causes mortgage rates to move higher as well.

LEI is BAD

The Conference Board's Leading Economic Indicator report showed the U.S. slowed quickly between December and January, highlighting the uncertainty around the strength of the economy. On one hand, we have strong labor market data, and on the other, we see numbers that suggest recession threats rising.

4.32%

The 10-year Note has a yield existence at 4.32%, which held yields from going higher the last week or so. If that level holds, it will keep long-term rates from moving higher. The opposite is true.

Bottom line: Uncertainty exists in the financial markets as to the strength of the economy and when the Fed will be able to cut rates. This means in the near term, any improvement in long-term rates may be short-lived. Upon clear data and direction, we will see further stabilization in interest rates.

This past week interest rates spiked to the highest levels since November. Let's review what happened and what to watch for in the week ahead.

Higher inflation, Higher rates

The high-impact Consumer Price Index (CPI), a closely watched gauge of consumer inflation, was reported higher than expectations. The headline reading, which includes food and energy, was expected to come in at 2.9% year-over-year, but instead came in hotter at 3.1%.

The all-important core reading, which excludes food and energy, came in at 3.9% year-over-year, still well above the Fed's target of 2%. Bonds and rates loathe inflation, and they didn't like this number. In response to the reading, the 10-year yield spiked from 4.18% to 4.31% in the matter of moments. And mortgage-backed securities, which drive mortgage interest rate pricing, fell to their lowest levels since November.

What caused the high reading of inflation? Shelter. The shelter component of Core CPI made up nearly 70% of the 3.9% climb in prices. There has been a lot of speculation that rents are declining, and it takes time for it to seep into the consumer price index. We haven't seen that happen just yet.

Fed's Next Move

This hot inflation number certainly creates an issue for the Fed. Back in 2022, the Fed said there would be "pain" and that higher rates were needed to slow economic growth and elevate unemployment so that it could tamp down demand and lower prices. Here we are seven months after the 11th rate hike and unemployment remains below 4% and inflation is near 4%. Yes, prices have come down from much higher levels, but did the Fed rate hikes make that happen? Looking through this lens, one would ask, how does the Fed cut rates? They will certainly not cut in March and right now the Fed Funds Futures have already removed two of their six forecasted rate cuts this year from the table.

This uncertainty and volatility surrounding economic readings and the Fed's next move is what has increased instability in the bond market and interest rates.

Japan Enters Recession

Last Thursday, Japan, the world's third largest economy, reported it entered a recession. This is happening just as China is mired in an awful deflationary slump and property crisis. Recessions generally lead to low economic activity and lower inflation. So, if the globe slows down and prices decrease, we import lower prices which could help limit how high rates increase.

Price Discovery Mode

Last week, the 10-year yield broke out of a range, and above 4.18%, which led to a spike in yields. The market is in price discovery mode, trying to assess what bonds and interest rates are worth with inflation threatening to move higher. Soft economic data will allow rates to come back down. The opposite is true.

Bottom line: Interest rates broke above key levels and are now waiting for the next high-impact reading to determine whether this spike and yield is justified or not.

This past week there were only a few economic reports for markets to digest. As a result, rates remain stuck near key levels. Let's talk about what happened and look at this week's calendar as things heat up.

Volatility Continues

Interest rates have moved all over the place since the beginning of the year. The 10-year Note yield, as a proxy for mortgages, started 2024 at 3.85% and climbed to 4.18% in mid-January. Then we watched it decline sharply back to 3.85%, only to spike up to 4.18% in the last several days.

Volatility has mimicked the economic readings, which has shown a lot of good news and bad news. On top of that, the chance of a Fed rate cut in March has disappeared, eroding some of the optimism for lower rates coming sooner. This range that bonds are stuck in will be broken by a high impact news item, and last week didn't offer enough big news to drive bonds out of this range.

China Deflation

China, the world's second largest economy is having a rough go. Aside from real estate woes, and an overall economic malaise, they are now dealing with deflation…an outright decline in prices. On Thursday, it was reported that prices declined year-over-year by 0.8%. That sounds great right? Prices are moving lower. As the saying goes "Be careful what you wish for". Deflation is very harmful to an economy. It makes cash worth more and prices of real assets decline. For housing, it is awful, as people wait on the sidelines for prices to drop further before buying. Let's hope any whiffs of deflation that we may import from China doesn't grow into a larger issue.

Debt Remains a Headwind

Last week, the Treasury department sold over $100 billion worth of Treasuries, $42 Billion of which was in 10-year Notes, the largest auction size in the history of our country for that security. This is a story to follow, as longer-term debt like 10-year Notes and 30-year bonds, carry more risk because of the time premium. We have seen investors demand higher interest rates to take the risk of purchasing longer term debt. If this story continues throughout the year as we continue to run deficits, it will be difficult for rates to meaningfully improve.

Fed Speak in Full Bloom

On the heels of last week's Fed meeting, Fed officials were out and about pouring cold water on the notion that the Fed will cut rates in March. In fact, most towed the same line and shared that a cut might not happen until the summer. This is yet another reason why long-term interest rates are stuck in a range. We entered 2024 with the Fed telling us they were going to cut rates three times, and the Fed Funds Futures pricing in as many as six or seven. Now it's clear that the Fed is only going to cut a few times based on some of the stronger than expected economic news of late.

Bottom line: In the short term, any improvement in interest rates may be fleeting as we look for clear signals in the next direction. If the 10-year Note yield moves above 4.20%, rates are heading higher. And if the 10-year yield moves beneath 3.85%, rates are going to move nicely lower.

This past week the Federal Reserve paused a hike of rates for the fourth consecutive time. Interest rates ticked down to the best levels in nearly a month. Let's discuss what happened and look at the events to watch this week.

Sustainably Toward 2%

As mentioned above, the Federal Reserve did not hike rates. In fact, they removed any reference to future hikes in their Policy Statement. So, the good news is that the next move will indeed be a rate cut, the bad news is when.

Fed Chair Powell said he wants to have greater confidence that inflation is moving "sustainably towards 2%". He repeated this phrase several times in his press conference. What was unclear to the market is the measure the Fed is looking at to determine if inflation is moving sustainably towards 2%.

A couple of weeks ago the Fed's "favored gauge" of inflation, the Core Personal Consumption Expenditure (PCE) Index came in at 2.9%, the lowest level in years. Powell made it clear, he needs to see more data and confirmation that inflation is still moving lower before the Fed considers rate cuts.

March Rate Cut Off Table

After the Fed's statement and press conference the chance of a rate cut in March went from a probability of 60% to just 30%. Even Fed Chair Powell said a chance of a rate cut in March is not his base case. So now we must look to the April/May meeting for a potential rate cut, unless of course surprising data comes in to support one sooner.

 Good News is Bad News 

In addition to the Fed Meeting, which helped lower rates, there was a slew of bad economic news which also helped support bond prices and push rates lower.

Additionally, the ADP Report which shows the number of private payrolls created in the economy, came in at just over 100,000 job creations for the month of December. This was well below expectations and a downright weak print. Adding to the inflation story was the employment cost index, another gauge the Fed likes to watch, which showed inflation is indeed moving lower.

Consumer Remains Confident

Despite the elevated rates, and some of the bad news in the labor market, the consumer remains confident. Consumer Confidence came out last Tuesday and was reported to be the highest level in three years highlighting that consumers feel there may be better days ahead...lower inflation and lower rates.

4%

As we discussed in previous issues of Market Trends, 4% is a key level to track on the 10-year Note. Why? If rates stay above 4%, then 4% is about as good as rates can get. This means mortgage rates can't improve further. The opposite is true. There is some good news here as the 10-year Note dipped beneath 4% for the first time in several weeks in response to the Fed meeting. Remaining at or beneath current levels could very well lead to lower rates ahead, hence the renewed optimism amongst consumers.

Home Activity is Responding

Every time we have seen a downtick in interest rates, we see a flurry of activity in the housing market. This time is no different. With the Fed's next move being a rate cut and Spring quickly approaching, things may end up being better than expected for housing. Just a few short months ago in October rates were 8% and the housing market was frozen. That is not the case today.

Bottom line: Markets changed quickly back in October, and no one was expecting to see interest rates decline like they have in such a short period. We now know the Fed's next move will be a cut, and it's coming sooner rather than later. With life wanting to move on and pent-up demand in housing, we should expect better days in the months ahead.

This past week interest rates ticked up to the highest levels in over a month. Let's talk about the drivers for this move as we approach the big Fed meeting this week.

Good News is Bad News

For the last couple of weeks economic readings here in the U.S. have been positive. For instance, the recent initial jobless claims are near record lows, which means the unemployment line is at record short levels. Jobs buy homes, so that is a good thing.

It's clear that the consumer remains active, as recent Retail Sales figures came in above expectations. Seeing that consumer spending makes up nearly two-thirds of our economic growth, it's tough to see any near-term recession, which also means it's tough for the Fed to cut rates as aggressively as some were thinking as we entered 2024.

Gross Domestic Product (GDP) Not Gross

On Thursday, the first reading of 3rd Quarter GDP came in at a solid 3.3%, well above expectations of 2.00%. This reading is of course backward-looking, but it does highlight that the economy is nowhere near a recession; which is two quarters of negative growth.

Bye-Bye March Fed Rate Cut

Earlier this month there was nearly an 80% chance that the Federal Reserve was going to cut rates in March. In reaction to the recent round of positive economic news, that chance has slipped to below 50%. As a result, this has led to upward pressure on longer term rates like mortgages.

Debt Remains a Big Issue

This past week the Treasury Department needed to sell $160 Billion worth of bonds to fund our government. This is a lot of supply that puts downward pressure on prices and upward pressure on rates. As evidenced on Wednesday when the five-year note auction received a D minus rating. This means the buying appetite was not robust, and the Treasury had to issue higher interest rates for investors to buy the bonds. If Treasury yields climb, it's impossible for mortgage rates to improve.

Next week there is a huge announcement by the Treasury Department as to how much debt they will have to sell in the first quarter to fund the government. If the number is larger than expected, bonds and interest rates could continue to have problems.

4.15%

The 10-yr Note broke above a ceiling at 4.00% and has continued to hover above key levels in response to everything we shared above. For home loan rates to improve, we need to see the 10-yr move back beneath 4.00%. The forthcoming Fed meeting next week may determine this.

Bottom line: Interest rates are essentially at the same level for the last month; this is a good sign as we want to see stabilization. At the same time, the labor market remains tight and there is no chance of a recession. This is a solid backdrop for housing as we quickly approach the Spring market.

Financial markets continue their bumpy ride in 2024, as interest rates crept higher while stocks sell off. Once again, the Federal Reserve is front and center and a reason for the volatility. Let’s discuss what happened last week and preview the events to watch in the week ahead.

Waller Wallop

"When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully," Fed Governor Christopher Waller.

Mr. Waller offered multiple thoughts on the economy and interest rates. Like the quote above, none of which were bond friendly. He essentially said the Fed should move slowly on cutting rates, pouring cold water on the notion of a Fed rate cut in March. He also said the Fed should continue allowing mortgage-backed securities to run off their balance sheet; a move that has helped keep home loan rates elevated.

Wallers’ speech set off a sharp response in the bond market. The result sent interest rates spiking and immediately eroded the probability of a Fed rate cut in March from 80% to just 55%.

Global Inflation Still an Issue

The United Kingdom reported higher than expected inflation. Their central bankers also spoke tough while shunning the idea of cutting rates too soon. As you can imagine, the global bond markets didn’t like any of that, which also added to the upward rate pressure.

Retail Sales an Upside Surprise

Retail sales is a measure of consumer spending which makes up two-thirds of our economic growth. The good news? Retail sales came in better than expected, which lowers any recessionary fears. The bad news? The bond market hates good news and as a result, rates crept higher.

4% Plus

Unfortunately, the unfriendly bond news, coupled with the tough Fed talk, pushed the 10-yr Note yield above a key level of 4%. Why is it so important? If the 10-year yield can remain in the 4% range, it would be about as bad as rates can get. Now that it has edged above 4%, that level could be about as good as rates can get in the near term.

Unemployment Line

This past week 187,000 people filed for first time unemployment benefits. This was a historically low number. It remains to be seen if the frigid weather conditions kept people from filing. If future readings remain low, it will suggest the labor market remains tight which is terrific for housing.

Bottom line: Interest rates are essentially at the same level for the last month. That is to be expected after a historic improvement between November and December. The markets will have a clearer picture as to what the Fed will likely do this Spring and beyond at the next Fed Meeting on January 31st.

After a multi-month decline in interest rates, we are seeing positive momentum in housing emerge. Let's look at some of the numbers from last week and highlight events to watch for in the weeks ahead.

Spring in January?

Not quite, but we have seen an uptick in inventory and mortgage applications over the last couple of weeks. This should be no surprise as interest rates moved sharply lower between the months of November and December. Much like we saw last year, on any dip in rates housing activity picks up.

If rates remain near current levels or slightly improved, and the labor market remains tight, we should see far more purchase activity in 2024. As Lawrence Young, chief economist of the national Association of realtors stated, "life goes on". There is a lot of pent-up demand and housing could have a surprise year in activity.

4.00%

The 10-year Note has been hovering around the 4% mark for the past few weeks; a further sign of some stability in the bond market. There is still much debate and uncertainty surrounding how many Fed Rate cuts we will see this year. Currently, they are forecasting three rate cuts in 2024. The Fed Funds Futures which price in the probability of rate cuts, are suggesting the Fed will cut rates six or even seven times. Someone is going to be right, and someone is going to be wrong. If the Fed cuts rates more aggressively, interest rates will decline. And the opposite is true.

Jobs Report, Not so Rosy

The recent Jobs Report reading for December showed 216,000 jobs were created in the economy. The media and others were celebrating the strong headline number. However, interest rates, which hate good news, didn't rise in the days since the release. Why? A closer look under the hood of the report, showed that the economy lost 1.5M jobs in December as shown in the Household survey within the release. And we hit a record high of 8.5 million people working multiple jobs. So overall, the jobs report was not so good when you look at some of the internals. If future labor market readings show similar weakness, it would prompt the Fed to cut rates sooner than the middle of the year, which is their current forecast. Once again, the opposite is true.

Consumer Inflation Mixed

The December Consumer Price Index was reported on Thursday and overall, it was in line to slightly higher. Shelter remains the largest contributor to overall inflation, making up nearly two-thirds of the Core CPI (which removes food and energy prices).

Bottom line: The trend in inflation remains lower; the economy is slowing, and the labor market is loosening. All of this should help lower rates while also avoiding a deep recession or a recession at all. This is potentially wonderful news for housing.

Financial markets started off the new year on the wrong foot, and interest rates inched higher. Let's discuss what happened and look at next week's events.

Fed Minutes Released

On Wednesday, the minutes from the December Fed meeting from two weeks ago were released. Overall, the minutes amplified Fed Chair Jerome Powell's take, "The Fed" is likely done hiking rates and we'll begin cutting this year. And thankfully, the bond market liked it, which halted the spike higher in rates.

However, there was a line in the Minutes that did not grab a lot of attention in the media, but is worth following for us here in the mortgage and housing industry...

"Several participants suggested it would be appropriate to begin discussing technical factors about slowing balance sheet run-off well before such a decision was reached."

This is an important line as some Fed Members are "starting to talk about talking about" how to slow the shrinking of their balance sheet which is filled with Treasury and Mortgage Bonds. What does this mean for mortgage and housing? The Fed would slow the balance sheet run-off by reinvesting the proceeds from returned principal on bonds that have matured as well as refinance and purchase activity. If the Fed is buying bonds, it will attract other buyers. This could help spreads between Treasuries and Mortgage Bonds narrow, which would go a long way to help home loan rates decline further.

Leading Indicator on Labor Market Health

The JOLTS report is a leading indicator on the labor market. It shows how many "help wanted" signs are posted (jobs available) and how many people are quitting their job. In a case of bad news is good news, the readings show less jobs available and quitting at three-year lows. It's bad news economically, but it is exactly what the Fed wants to see to help lower inflation and slow demand - elevate unemployment.

Let's break it down further. People are less likely to quit if they can't find a job and if there are less help wanted signs or jobs available. The next shoe to drop is higher unemployment. Why? First, businesses stop hiring - check. Next, hours get cut and lastly if conditions do not improve, companies lay people off. The good news? Even if inflation ticks back above 4.00% which the Fed is forecasting, that would still be a historically low unemployment rate and great driver of housing.

Looking ahead

Next week the Treasury will auction off more bonds, which could generate market excitement. The main economic report is the December Consumer Price Index (CPI), a reading on consumer inflation. If this report meets or falls beneath expectations, it would ensure the rate hike back in July was indeed the last.