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It was another wild week in the financial markets with interest rates backing away from the highest levels in decades. Let's discuss what happened and look at the news to watch for this coming week.

JOLTS Report Jolts the Markets

Last Tuesday, the JOLTS report, which shows how many jobs are available, ticked up much higher than expectations. As a result, the knee-jerk reaction caused interest rates to spike to the highest levels in 16 years. Why? Fear that the labor market remains too tight, and the Fed will have to continue to hike rates and hold them higher for longer.

The market reaction seemed overdone as a look into the details showed that the number of people quitting and the number of people hiring continue to slow, suggesting that the labor market is cooling down to the Fed's liking.

Hump Day Surprise

The negative vibe in interest rates quickly changed by last Wednesday morning when the ADP payroll report showed there were only 89,000 private job creations in September. This number was essentially half of expectations and the lowest reading in over 2 1/2 years. This report along with other weak economic data around the globe sent oil prices sharply lower. Oil goes lower on the perception of less demand from a global slowdown. This was all good news for bonds and rates which improved nicely on the bad economic news, and softer inflation fears which come with lower oil prices.

Fed Still Talking Tough

Despite recent weaker economic data of late and the run rate of inflation headed towards the Fed's target zone, Federal Reserve officials continue to talk about the need for more rate hikes and the idea of holding them higher for longer. With mortgage rates at multi-decade highs in response to rising Treasury yields, we are seeing a sharp slowdown in housing. But do not say that to Atlanta Fed President, Raphael Bostic who uttered this gem last week: "Rising long bond yields not having an excessive impact on the economy".

The financial markets are not buying all the tough Fed talk as the Fed Funds Futures market is currently pricing no more rate hikes.

Debt and Deficit Spending

Interest rates have ticked higher throughout the Summer as the U.S. Treasury Department demanded more money than previously expected to fund our government. This action led to a downgrade of our debt as Fitch Rating agency cited "fiscal deterioration."

It's not truly clear if interest rates are pricing in all this deficit spending or if rates will go higher still as our federal government requests more money to fund operations.

Bottom line: Bad news is good news as we've seen with ADP helping interest rates improve. On the other hand, our excessive debt is applying upward pressure on rates. With the Fed still talking tough and the trend of higher rates still intact, there's a lot to follow.

This past week interest rates touched the highest levels in decades. Let's discuss what happened and see what to watch for as the 4th Quarter begins.

Ouch

The U.S. bond market has been struggling since April, continuing a disturbing pattern of higher rates over time. Despite market expectations and even the Federal Reserve saying rate hikes are nearing the end, rates continue to tick higher. Why?

A big reason is oil. It is not a coincidence that interest rates and oil hit 2023 highs on the same day this past week. Higher oil leads to inflationary pressures and counters the Fed's efforts of lowering inflation to their 2% target. Oil hit $94 a barrel on Thursday, in response to lower-than-expected oil stockpiles in Cushing Oklahoma.

Another big reason for the continued rise in rates is debt. Back in July, the Treasury Department requested an additional $275 billion to fund the government between August and September. This action led to a downgrade of U.S. debt. This week, Moody's rating firm said that a government shutdown would likely lead to an additional credit downgrade. Like any consumer with high debt problems and the ability to repay being questioned, they pay a higher rate. We are seeing that play out in the U.S. Treasury market as the 10-yr Note yield hit 4.69%...the highest since 2007.

Housing Impact

Despite interest rates hitting the highest levels in decades, home prices remain elevated. This is largely due to a lack of available inventory. Should inventory increase, it would likely lead to home prices returning some of the frothy price appreciation achieved during the pandemic. New construction was filling some of the inventory void of late as home builders took advantage of an incredible opportunity to fill robust housing demand by offering incentives to offset the climb in interest rates. But with interest rates moving another leg higher, it has made it tough for homebuilders to come up with enough incentives to offset the uptick in interest rates.

Pending Home Sales for August declined sharply, and the National Association of Realtors Chief Economist had this to share: "Mortgage rates have been rising above 7% since August, which has diminished the pool of home buyers. Some would-be home buyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets."

Ironically, it is this sort of bad economic news that will lead to the Fed doing less and rates ultimately coming down.

Bottom line: Interest rates and oil touched 2023 highs at the same time. Housing will continue to struggle in the absence of rate relief, and it is this very struggle, which could lead to slower overall economic activity and thus lower rates.

This past week, the minutes from the July Fed Meeting were released. The news didn't help home loan rates, which ticked up to the peaks of last year. Let's look at what happened and talk about the headline risk for this week.

"Uncertainty of the U.S. economic outlook remains elevated"... FOMC minutes from the July Fed Meeting.

The Fed Minutes kicked off with this statement, which sums up the last 18 months. It remains unclear if inflation will continue to come down, if the Fed will continue to hike rates and if the economy can avoid a recession. And for all of these reasons, interest rates have been volatile with no clear signs of stability.

"Most participants (Fed Members) saw continued significant upside inflation risks "

This line was like kryptonite to Superman as bond/interest rates hate inflation. The fact that we are still enduring significant upside risk was enough for bonds to sell off and push rates higher.

"Participants still saw below-trend growth, softer labor market as necessary to restoring economic balance."

Here the Fed is reminding the markets that they want to keep rates higher for longer until unemployment rises further, and the economy potentially slows further. Looking into the months ahead we should expect continued slower economic growth and price highs but continuing to come down slowly. For this reason, we should expect home loan rates to also retreat lower and slowly.

The good news? After all this uncertainty and tough talk on inflation, the markets are currently pricing the probability of a Fed rate hike in September at just 11%. However, more data will come in which could change things. But as of now, the Fed is not going to hike rates.

Bottom line: Rates have ticked higher on the heels of our recent debt downgrade and uncertainty around inflation and no recession. Maybe next week things change...read on.

Inflation perked up, yet interest rates improved from key levels. Let's walk through the big financial news of last week as we approach this Wednesday's Fed Meeting.

Tale Of Two Inflations

Last Wednesday, the Consumer Price Index (CPI) for August increased by 0.6% for the month, lifting the annual rate to 3.7%, both of which were higher than expected. The month-over-month rise was the highest this year. The main culprit? Energy. Oil soared by nearly 11% for the month as a barrel has gone from $65 to $89 between June and September.

The Core CPI, which excludes food and energy and is more closely watched by the Federal Reserve, did decline to 4.3% from 4.7% year-over-year and appears to be trending in the right direction...lower.

The bond market and interest rates must have liked the decline in Core CPI as the post-news reaction watched the 10-year Note yield decline from 4.35% down to 4.25%.

Oil Hits 2023 Highs

As mentioned, oil prices were the main reason for inflation rising in August. Prices have continued their rise this month with a barrel hitting 2023 highs last week. Should it continue, we should expect the September CPI to also show headline inflation remaining high and confirm that inflation bottomed this June.

The Blackout Period Continues

With the Fed Meeting approaching this coming week, Federal Reserve officials do not make any speeches or comments on monetary policy. This quiet or calm before the storm helped lower interest rate volatility and kept rates from moving above 2023 peaks. All this will change next week.

As of this moment, Fed Fund Futures, which price the probability of interest rate moves are showing a nearly 100% chance of no rate hike at this Meeting.

Japan Interest Rates Climbing Too

Interest rates around the globe have moved higher and now Japan has joined the club. With inflation in the region hitting 40-year highs, their Central Bank has allowed their 10-year government bond to touch .70%, the highest level since 2014. It appears their central bank could allow this interest rate to rise further. If it does, it could apply upward pressure on all global yields, including our 10-year Note.

Bottom line: Interest rates remain near the highest levels of the year and there is a threat of headline inflation reaccelerating, due to energy prices. This will be important to watch in the months ahead because if inflation moves higher, it may force the Fed to hike rates further.

September has been a rough month so far for bonds and rates. Let's discuss the big headlines last week in the financial markets.

Oil Gushing Higher

The price of oil has been on the rise, hitting 10-month highs, due to lower supply levels and production cuts from Saudi Arabia and Russia. This rise has also led to a spike in both jet fuel and diesel. The latter is a concern because we learned last summer how higher diesel prices elevated food inflation as it is everywhere within the food supply chain. Diesel is used in mills, factories, and shipping so if diesel goes higher, food costs are going higher.

Bonds loathe inflation so any news showing that it may be on the rise is bad for rates. And bad it was, the 10-year note yield rose to 4.30%, after touching 4.05% on September 1st.

This news may very well confirm that inflation bottomed out in June at 3% and is creeping higher. The Cleveland Fed is now expecting inflation to rise closer to 4% in September, and their forecast does not include this recent rise in oil, which will undoubtedly make inflation higher still.

There are two ways to lower oil prices. One, global demand slows thereby creating more supply. And two, the U.S. creates more supply. Seeing that the U.S. is not ramping up energy production, we have hope that demand slows to lower prices. The problem? Russia and Saudi Arabia just extended their oil production cuts for another 3 months, which means any demand slowdown could be offset by less supply, hence elevated prices and inflationary pressure.

U.S. Dollar Is Strong

The dollar has been strengthening over the past couple of weeks, as the U.S. once again outperforms virtually all other global economies. Europe appears like it's heading into a recession in the second half of this year. China and other countries throughout Asia are also struggling. This leads to dollar strength. Typically, a strong dollar would help oil prices to some degree, but the production cuts and an already lower supply are keeping oil prices high.

A strong dollar has also created another problem. The yen in Japan, and the yuan in China have weakened sharply against the dollar making imports more expensive. Both countries have spoken out about the need to keep their currency strong. How would they do this? Well, the two countries combined own close to $2 trillion worth of Treasuries. What they have been doing of late and what they could threaten to do is sell Treasuries to purchase their own currency to prop it up against our strengthening dollar. Should this come to pass it could put further upward pressure on rates.

Fed Rate Hike Chances

As of this moment, the chance of a rate hike in September is very small. But the chance of a rate hike in November is about 50% or a coin toss. Should oil rise further it will put pressure on the Fed to raise rates once again. Yes, this is a bad setup as we move into the Fall.

Bottom line: In the absence of a surprise shock to the markets, any relief in rates in the near-term will be minimal and fleeting, much like we've seen over the past several months. Watch 4% on the 10-year note as a pivot point. If the 10-year note yield moves beneath 4%, we will likely see sustained rate relief. The opposite is true.

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Reach out to your account executive or relationship manager with questions.

Interest rates improved amidst a huge week of economic news last week. Let's look at what happened and take a peek into the week ahead.

Bad News Is Good News

Bonds and interest rates like bad economic news as it lowers the threat of more Federal Reserve rate hikes. Last week, we did see some worse-than-expected leading indicators on the health of the labor market and it sparked a rally in bonds, which resulted in a nice decline in rates.

Less Is More

The JOLTS report was released last Tuesday and showed the amount of help wanted signs shrunk to the lowest levels since March 2021. Why is this important? The Fed wants to see the hot labor market show signs of slowing and this could be that sign. Which means maybe the Fed can stop hiking rates.

If we think about the labor market and business...first, companies stop hiring, then they might cut hours or reshuffle employees, and then, if necessary, companies start reducing staff and cutting jobs.

Adding to the bond-friendly news in the report was seeing fewer people quitting. This is also good for rates and the Fed because it means available jobs are less plentiful and people will not be able to easily jump for more pay like they have in the past. If there is less pressure on businesses to pay people more to retain or attract employees, there's less upward pressure on inflation which is also good news.

Consumer Losing Confidence

In August, Consumer Confidence declined as those surveyed stated jobs were less available (which the Fed wants to see) and the current family financial conditions showed growing pessimism about their present financial situation. This sour tone on how consumers felt in August was good news for bonds and rates.

Core Inflation Remains Elevated

The Fed's favored gauge of inflation, the Core PCE index, was reported meeting economists' expectations but did edge higher from June to July. Like the CPI inflation recently reported, inflation may have bottomed in June/July and there is a fear it could reaccelerate this Fall.

Bottom line: Home loan rates made a nice improvement in the last week and a half. For rates to improve further, we likely need to see more economic data as we live in a world where bad news is good news. The downtick in rates was quickly felt in housing as a sharp uptick in activity and locking loans took place.

As summer nears the end, home loan rates took a pause on their recent uptick. Let's discuss what happened and look at the important week ahead.

Mortgage Rates At 21 Year Highs

The big news in mortgage and housing has been the recent and rapid rise in home loan rates. Early in the week, they reached 7.50%, to levels last seen in 2002.

What has been causing rates to climb in recent weeks?

1. The big increase started when the Treasury Department requested an additional $275B in late July to fund the government between August and October.
2. The increase in spending prompted Fitch Ratings to downgrade U.S. debt, citing "fiscal deterioration".
3. Fears of a recession have evaporated.
4. The Fed is close to finishing rate hikes, yet inflation remains high.
5. Oil has climbed which is elevating inflation fears.
6. Japan and China selling their holdings of Treasuries.

The good news? Last Wednesday, interest rates declined sharply, helping rates improve from these multi-year highs.

So, what created the pause in the rise in rates last week?

1. Bad news is good news. Global economies are slowing rapidly leading to a decline in global bond yields.
2. A sharp decline in oil, back under $80 a barrel, lowering inflation fears.
3. Anticipation of next week's action-packed economic report calendar. Markets are not placing any large bets.
4. Mortgage Bonds hit exactly at the October price lows and bounced higher. Look at the chart below.

Oil

Oil prices moved lower on lower demand fears and a stronger U.S. Dollar. This is an important story because if Oil moves above $84, there is a real threat of $90+ oil and quickly. Seeing Oil retrace back to $78 is good news for inflation and interest rates.

Fed Rate Hike Chances

Right now, the chance of a Fed rate hike in September is just 15%. But, the chance of a Fed rate hike in November is 40%. Whether the Fed hikes now or in November, the markets are looking forward and sensing the Fed is finished hiking and moving to a position of "how long" they can keep rates high until inflation falls back down to 2%. This uncertain story will remain with us for the foreseeable future but it is worth a reminder that mortgage rates are not controlled by Fed rate hikes as evidenced by the lists above.

Housing, A Tale Of Two Markets

The spike in home loan rates has put a damper on the housing market, but it is affecting existing and new home sales differently. The spike in rates clearly makes it a challenge for someone with a far lower mortgage rate to list their home for sale. This has created an inventory problem as well as keeping prices high.

But in a housing bright spot, builders are having their way as demand for housing remains robust, material costs have normalized, and builders can get creative with programs to get homebuyers into properties.

Bottom line: Home loan rates paused their rise and next week we may find out if the retreat in rates is sustainable. Housing remains in a long-term bull market and upon any meaningful decline in rates, we should expect housing to also step off the pause button, with activity quickly resuming.

This past week, the minutes from the July Fed Meeting were released. The news didn't help home loan rates, which ticked up to the peaks of last year. Let's look at what happened and talk about the headline risk in the week ahead.

"Uncertainty of the U.S. economic outlook remains elevated"... FOMC minutes from the July Fed Meeting.

The Fed Minutes kicked off with this statement, which sums up the last 18 months. It remains unclear if inflation will continue to come down, if the Fed will continue to hike rates and if the economy can avoid a recession. And for all of these reasons, interest rates have been volatile with no clear signs of stability.

"Most participants (Fed Members) saw continued significant upside inflation risks "

This line was like kryptonite to Superman as bond/interest rates hate inflation. The fact that we are still enduring significant upside risk was enough for bonds to sell off and push rates higher.

"Participants still saw below-trend growth, softer labor market as necessary to restoring economic balance."

Here the Fed is reminding the markets that they want to keep rates higher for longer until unemployment rises further, and the economy potentially slows further. Looking into the months ahead we should expect continued slower economic growth and price highs but continuing to come down slowly. For this reason, we should expect home loan rates to also retreat lower and slowly.

The good news? After all this uncertainty and tough talk on inflation, the markets are currently pricing the probability of a Fed rate hike in September at just 11%. However, more data will come in which could change things. But as of now, the Fed is not going to hike rates.

Bottom line: Rates have ticked higher on the heels of our recent debt downgrade and uncertainty around inflation and no recession. Maybe next week things change...read on.

This past week home loan rates remain elevated despite consumer inflation being reported slightly lower than expected. Let's discuss what happened and look at the week ahead.

Inflation Hits 3.2%

Last Thursday, the Bureau of Labor Statistics reported the Consumer Price Index (CPI) for July at 3.2% year-over-year which was slightly lower than the 3.3% expected. What was also positive is the back-to-back 0.2% increase on a month-to-month basis. This is the slowest pace of inflation in two years.

The upcoming CPI report is one of the five reports the Fed said to watch before the next Fed Meeting in September as they decide whether to hike rates again. So, seeing this inflation reading come in slightly light may add to the notion of a Fed pause in September, especially when coupled with the recent soft Jobs Report.

There is concern inflation is going to increase in the months ahead. Why? Oil was sharply higher with the bulk of the rise in late July, where those numbers were not reflected in the CPI reading. Additionally, higher oil prices seep into food prices, which would also be on the rise.

Currently, inflation is running at a low pace and while most expect prices to come down further, oil and energy prices could be a wild card as we move into the Fall.

Moody's Downgrades Some Banks

Rating agency Moody's downgraded the credit ratings of 10 banks last Monday, citing higher funding costs, slower loan growth and profit pressures. This is an important story to follow for mortgage and housing as it could lead to tighter credit standards for banks looking to be more conservative on lending and loan growth.

This story is yet another reason for the Fed to stop hiking rates. Tighter lending conditions are akin to Fed rate hikes and hiking rates further would only make the banking issues described above worse.

Rising Oil Prices

Oil prices are $84 and one month ago, they were just $68. This is inflationary and should the rise continue, it could be a problem. Last summer we found out how painful high energy prices are. Let's hope we do not go back to those levels.

Fed Rate Hikes Futures

After the past couple of weeks with a soft jobs report, soft inflation reading and the downgrade to US debt, the markets are now pricing the probability of a Fed rate hike at just 9.5%. Moreover, now the markets are also pricing in 5 rate cuts in 2024, with the Fed Funds rate coming back down to 4.00%. For this to happen, we will need inflation to come down further and we may have to experience a recession in early 2024. This story will change over time, and we will be tracking it.

Bottom line: It would be ideal to see the 10-year Note yield move nicely back beneath 4.00%, where it is right now. If that comes to pass, we should see a resumption in the decline in mortgage rates. The opposite is true.