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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.

This past week home loan rates ticked higher in a week filled with some negative surprises. Let's discuss what happened and look at the week ahead.

Another $1T Please

Earlier in the week, the Treasury Department surprised the financial markets when they stated they need $1T to fund the government from August to October. The problem? It was $275B more than what was expected just a few months ago when the Treasury last released their funding expectation needs.

How does the Treasury Department raise the $1T? By selling Treasury Bills, Notes and Bonds in auctions. The bond market hated the announcement and pushed rates higher in anticipation of even more bonds that must get sopped up at weekly Treasury auctions.

U.S. Debt Downgraded

The bond market was not the only thing that didn't like the Treasury Department's call for more money. Fitch Ratings downgraded US Debt one notch from AAA to AA+. They cited "fiscal deterioration" over the next three years as the driver behind the decision.

Our debt was downgraded back in August 2011, for many of the same reasons which were rising debt, political division, etc. But this time things are slightly different. Back in 2011, we had just $6T in government debt and today, we have over $32T in debt.

We do have some history on our side. Back in 2011, after the debt was downgraded, interest rates did improve in the months ahead. For the interest-rate sensitive housing sector, this would be a welcome development.

Japan Seeing Higher Rates

The Bank of Japan (BOJ) has started to loosen their Yield Curve Control (YCC) policy by allowing their 10-yr government bond to float from a cap of .50% to 1.00%. This is a big change from a government that had pinned rates at 0.0% for years. As the Japanese interest rates crept higher upon the announcement, it placed upward pressure on our rates as well.

4.09%

Last Thursday, the 10-yr Note was right at an important level of 4.09%, which has been serving as yield resistance, preventing rates from moving higher since November. If the 10-yr moves above this level, we could easily see home loan rates move another leg higher still.

Bottom line: The financial markets were unnerved by the double whammy of surprises with the Treasury's request for more money and the subsequent debt downgrade. Time will tell whether rates can reverse from key levels like it had since November or will we see yet another leg higher in rates.

Last week in Review: Fed Hikes Rates, Home Loan Rates Remain Steady

This past week home loan rates were unchanged, despite the Fed raising rates to the highest levels in 22 years. Let's discuss what happened and look at the week ahead.

Another Rate Hike

On Wednesday, the Federal Reserve raised the Fed Funds Rate to a range of 5.25 to 5.50% and this move was widely expected. Fed Chair Powell also shared that if the data comes in strong over the next two months, they will raise rates again in September. The opposite is true.

What data was the Fed talking about? Mr. Powell was specific and said there will be two jobs and CPI (inflation) reports, and one employment cost index which garners most of their attention before the Fed meets again in September when they decide what to do with interest rates.

One of the main reasons interest rates remain high and the Fed has continued to raise rates is the underlying resilience of the economy. Many economists, market watchers and central bankers were calling for a recession by the middle of this year. In fact, one reputable publication back in November said there was a 100% chance of a recession in 2023. Fortunately, or unfortunately, depending on how you're looking at it, the economy is currently growing near 2% and unemployment is at 3.6%, which are not conditions that lead to an economic recession.

Looking forward...watching the economic data will be important to determine whether the Fed increases rates further.  At the very least we should be prepared for the Fed to hold the Fed Funds Rate at current levels for quite a bit longer.

How much longer? The Federal Reserve wants to see inflation come down to 2%. The Fed's favorite gauge of inflation is currently running at 4.6% so, there is a lot of wood to chop for inflation to get near the Fed's target. In fact, the Fed's forecast calls for core inflation to reach its goal in the year 2025. So, when we hear higher for longer, that's what we mean.

For reference: In the last rate hiking cycle back in 2018, the Fed cut rates 7 months after the last hike. Meanwhile, during that same time, home loan rates steadily improved.

Bottom line: The Federal Reserve may very well be done hiking rates. However, long-term rates may likely edge lower slowly. Why? The economy is slowing. Slowly, unemployment is rising, slowly, and inflation is rising slowly.

Last week in Review:  The Calm Before Storm?

This past week interest rates were essentially unchanged from the previous week, and it was a relatively "quiet" week. Let's discuss what happened and look at the week ahead.

The Blackout Period

As we approach the next Federal Reserve meeting, there is a blackout period, where no Federal Reserve members hold any speeches or make comments on monetary policy. The speeches by Federal Reserve members can often move the financial markets and interest rates, often in a volatile fashion. So, the absence of Fed speakers this past week was a welcome break from the added volatility.

The blackout period will end Thursday, the day after the next Fed meeting. With a rate hike widely expected, there will be plenty to comment on once this quiet period ends.

Global Inflation Easing

Interest rates and financial markets are influenced by economic conditions around the globe. This past week several countries, including the UK, and the Eurozone reported a larger-than-expected decline in inflation. As inflation eases around the globe, it lowers expectations of further central bank rate hikes and lowers rates. The opposite is true, so seeing inflation recede, especially in Europe, was a welcome sign and it added to some of the relief in rates here at home.

To Hike or Not to Hike

This Wednesday at 2:00 pm ET, the Federal Reserve will release its monetary policy statement and interest rate decision. The markets are now fully pricing in a .25% rate hike to the Fed Funds Rate. Remember, the Fed rate hike affects short-term loans like credit cards, automobiles, and home equity lines of credit.

Despite some of the softening inflation news here at home, the markets are getting a sense that this rate hike next Wednesday will be the last. It is too early to tell if that is the case. Next Friday's release of the Core Personal Consumption Expenditure (PCE), the Fed's favorite inflation gauge, may very well determine if this is the last rate hike. Should the reading come in lower than expected, the Fed may indeed take a break from hiking rates. Once again, the opposite is true.

3.70%

Over the past couple of weeks, interest rates have improved, with the 10-year yield moving from 4.09% down to 3.75%. For rates to improve further, the 10-year needs to move beneath 3.70%, a layer of yield support. Yield support prevents interest rates from improving. What will determine if the 10-year can move beneath 3.7%? Next week's huge dose of news which will be the Fed meeting, GDP and the inflation reading.

Bottom line: As stated above, this week is a big one for interest rates, and the financial markets overall. The Fed, which has already hiked interest rates 500 basis points over the last 18 months, may finally come to an end. The Fed meeting typically generates multiple market responses. The first of which happens upon the release of the actual statement at 2:00 pm ET on Wednesday. The next takes place at the press conference where Fed Chair Powell will answer questions that can lead to some off-script or contradictory remarks, and the final reaction will be Thursday when markets get to sleep on what they all heard.

Last week in Review: Markets Pleased As Inflation Eased

Last week interest rates improved significantly as the markets responded to the softest inflation reading in over two years. Let's discuss what happened and look at the week ahead.

Consumer Prices Are Falling

The Consumer Price Index (CPI) for June was reported on Wednesday and showed that consumer prices are falling, which is wonderful for the interest rate sensitive housing sector. The headline CPI for June, which includes food and energy, came in at 3% year-over-year; the slowest rate since March 2021. It was just last year we were reporting CPI readings of over 9%, so this was a welcome sign for all Americans.

Note: This sizable decline is mainly because oil prices were $70 in June...almost half of what they were last June. It also highlights how important it is to keep oil prices low.

Adding to the good vibes within the report Core CPI, which excludes food and energy, also declined further than market expectations. All this good news on inflation sparked the party in the bond market. The 10-yr Note yield dropped from multi-month highs of 4.09% to 3.83% very quickly.

Fed Members Changing Their Tune

In response to the surprisingly low inflation reading, some Fed members are already suggesting that inflation is approaching "normal levels", while others say we are nearing the end of rate hikes. This is a very different tone that was being shared a couple of weeks ago when Fed members were pounding the table for more hikes and higher rates for longer.

After the dust settled from the report, the markets are pricing in just one more rate hike at the end of July. As we've seen before, this story can and will likely change in the future.

Not Out Of The Woods

This past week's low inflation number was terrific to see, but we are not out of the woods with inflation just yet. In fact, in the next couple of months, we are very likely to see CPI move higher. Why? Because last July and August we had very low monthly inflation readings, which will likely be replaced with higher inflation readings this year, causing inflation to possibly tick higher.

In future months, we will also have to watch the price of oil. If it starts to edge higher from the recent lows, it will elevate inflation much like it did last Summer. We do have production cuts from OPEC and Saudi Arabia next month which may influence prices.

4.09%

Yield resistance is a level which halts or prevents rates from moving higher. Since early November, that level has been 4.09%. If the 10-yr yield moves above 4.09%, it will likely place additional upward pressure on Treasuries and thus mortgage rates. The good news? This past week, the 10-yr yield hit 4.09% a couple of times before edging lower.

Bottom line: Inflation is trending in the right direction which is lower and as this continues, we should expect rates to continue to move lower as well.

Last week in Review: Good Economic News is Bad News for Rates

Last week, interest rates spiked on good economic news as fears of a recession fade. Let's discuss the big news of the week and gear up for important events in the week ahead.

The June Fed Meeting Minutes Out

"Some participants indicated they favored or could have supported raising the Target Rate by 25 basis points" FOMC Minutes June 2023 Meeting.

Last Wednesday, the Minutes from the June Fed Meeting were released. Seeing that the Fed paused hiking at that Meeting, markets were looking to see what Fed officials felt about the pause. The quote above highlights the sentiment by some at the Fed that rate hikes must continue. Why? This quote below:

"Those favoring an increase noted very tight labor market, stronger-than-anticipated economic momentum, little evidence of inflation being on a path to return to 2% over time."

Recession Fears Ease

The last revision to 1st Quarter GDP showed a shocking upward revision to 2.00% from a previously reported 1.3%. The important takeaway is this has dramatically removed the fear of recession in the near-term at least for now. This has also elevated the chance of a Fed rate hike at the end of July to nearly 100%.

Going forward, the economic data will be important to track to see if the economy remains as strong as it was in the first Quarter. Part of the bump in consumer spending was in response to a 8.7% increase in social security benefits, which are adjusted for higher inflation.

ADP Highlights Tight Labor Market

The ADP Report, which shows private (non-government) job creation for June came in at a shockingly high 497,000; more than double the 220,000 expected. This report, on the heels of the GDP reading and Minutes, was enough to push interest rates to the highest levels of the year.

Bank of England Seeing Higher Rates

And if all the good news above was not enough to pressure rates higher, we also watch expectations for higher rates in England pressure our rates as well.

Markets are now pricing the Bank of England to raise rates from the current 5.00% to 6.50% early next year. As rates go higher abroad, rates here in the US edge higher as well.

Bottom line: The "higher for longer" narrative from the Fed is now being supported by some of the data this week which has led to a spike in rates. In the coming weeks, we shall see if long-term rates are comfortable being elevated, or if they will come back down from these levels much like they did back in November.

Interest rates continued their sideways trend as we close the first half of 2023. Let's discuss what happened last week and look into the future.

The European Central Bank forum was the main event this week. Central bankers from across the globe, including our Fed Chair, Jerome Powell spoke about the state of their countries economy as well as monetary policy. A common theme was the need to continue to fight inflation, which is still persistently high and above central bank targets.

Here at home, the Federal Reserve's favored gauge of inflation, the Core Personal Consumption Expenditure Index (PCE), is still running in the mid 4.00% range, more than double the Fed's target of 2%. The Federal Reserve recently stated they see inflation coming down to their goal of 2% in 2025. This means we should expect short-term rates to stay higher for longer and a high possibility of no rate cuts this year.

A Breakout is Coming

Mortgage Bonds have been unable to break above 100. Until this happens, home loan rates simply can't get better. While in the Treasury market, the 10-year Note has a breakout coming. The 10-year yield, currently at 3.80%, sits at the top of a very tight range between 3.68% and 3.83%. Whichever way the yield breaks will likely determine the next directional move for home loan rates. So, this is a story worth following.

Bottom line: Long-term interest rates peaked back in October and have gradually inched lower, making a series of lower highs and lower lows overtime. Looking at the second half of the year, with inflation continuing to moderate and unemployment continuing to rise, we should expect a continued gradual decline in long-term interest rates. Coupled with robust housing demand which has set us up for a much better housing market in the back half of 2023.

Last week, interest rates held near the best levels in a month as Fed Chair Powell testified on Capitol Hill. Let's discuss the big news last week and gear up for important events in the week ahead.

Powell on the Hill

"Given how far we've come, it may make sense to move rates higher but to do so at a more moderate pace." Fed Chair Powell on Capitol Hill, 6.21.23

On Wednesday, Federal Reserve Chair Jerome Powell gave his semi-annual testimony to Congress regarding the state of the economy and interest rates. His prepared speech was very similar to the statement the FOMC released last week when they "paused" the string of 10 rate hikes. The quote above, from the question-and-answer portion was one of the highlights as it reminds the markets that Fed rate hikes are nearing an end.

The next Fed Meeting is at the end of July. If the incoming data continues to show inflation coming down and unemployment going higher, the Fed may very well not hike again next month. Currently, the markets are pricing in a 75% probability of a .25% rate hike next month. This will likely change as news comes in.

Homebuilders Feeling Good

As a sign of long-term confidence in the housing market, homebuilders put shovels in the ground at a rapid pace in May. Construction of single-family homes jumped 21.7% from April as builders try to meet soaring housing demand. Housing starts rose to a 1.63M annual pace in May, up sharply from 1.34M in April. There are many reasons for builders to be optimistic about the future. Below are just three:

1. Housing demand is high, and supply is low.
2. Labor market is tight; jobs buy homes.
3. The Fed is nearing the end of rate hikes.

Bank of England Raises Rates

In response to a higher-than-expected inflation report in the UK earlier this week, the Bank of England raised their rates by more than the expected .50%. The Bank also said more rate hikes are coming to help lower inflation. This is important to follow because their inflation is over 8% and next month our Consumer Price Index will be in the 3.00% range. So that central bank is behind the US on monetary policy and inflation and must catch up with more rate hikes. This could add to the uncertainty and volatility in the months ahead.

It's important to note that UK long-term interest rates improved on the rate hike as markets feel the Bank of England regained credibility in its fight versus inflation. This is another example where rate hikes help long-term rates.

Bottom line: The "higher for longer" narrative from the Fed and clear technical factors are limiting the improvement in rates. At the same time, we can look at home builder optimism as a sign that the worst is behind us as it relates to rates and inflation. There are many great opportunities to be had and more coming. Better days are ahead.

Last week the Federal Reserve decided to pause their string of rate hikes for the first time in 15 months, yet long term rates moved higher. Let's discuss what happened and look at the events to watch for this week.

Higher For Longer Still

On Wednesday, the Federal Reserve made a decision to not hike the Fed Funds Rate, breaking a string of 10 consecutive hikes, leaving the rate in a range of 5 to 5 1/4.

This move was widely expected by the financial markets. However, the markets were delivered a surprise when The Fed announced its members believe there will be two more rate hikes this year. Heading into the meeting, it was speculated that the Fed may raise rates one more time in July. This additional hike caused a lot of volatility with a spike in short term and near term rates here and abroad.

The Fed Outlook

Every three months, the Federal Reserve releases a Summary of Economic Projections which gives the markets a sense of what Fed members are seeing regarding economic growth, inflation, unemployment, and where interest rates are headed. The forecast shows economic growth coming in slightly stronger than previously expected, but still at a historically slow 1%. Core inflation, which strips out food and energy, is expected to be higher than previously forecasted. Unemployment is forecasted to come in lower than originally expected. Lastly, many Fed members believe interest rates will need to go higher to cool off the labor market to reach the Fed's inflation target of 2.00%

The Press Conference

After the Fed statement was delivered, Fed Chair Jerome Powell held a press conference, where he took questions and tried to give more color as to what Fed members have been thinking. Within the press conference the Fed Chair did say they have not talked about the July rate hike, and the next meeting will be a "live meeting" where they will respond to the economic data in advance of that report. This means, if inflation continues to come down as it has and the unemployment rate edges up like it did last month, the Fed may very well pause rate hikes again at the July Fed meeting. As of this moment, the chance of a Fed hike in July stands at 75% probability.

What It All Means

After all the smoke cleared from the Fed Meeting, we are left with more of the same...uncertainty and volatility around how far the Fed will go with interest rates and where the economy is headed.

Rate Hikes Around the Globe

Last week other Central Banks increased their rates, including the Bank of Canada's surprise rate hike. And this past Thursday on the heels of our Fed rate hike, the European Central Bank (ECB) raised their rates to the highest level in two decades.  As rates around the globe go higher, it puts upward pressure on our rates. The opposite is true.

Bottom line: It may be tough to see long-term interest rates improve much in the near term as the markets digest the notion that the Fed will potentially raise rates two more times, with no rate cuts this year. Be sure to watch the data and work with your experienced loan officer who follows this closely.

This past week interest rates ticked higher in response to a surprise rate hike from above our Northern border. Let's discuss what happened and talk about the big week ahead.

Oh Canada

As the saying goes, "Where there's smoke there's fire". A big news story this past week was the Canadian wildfires raging and sending smoke, affecting nearly 100,000,000 American citizens. But that was not the only big news coming out of Canada.

On Wednesday, in a surprise move, the Bank of Canada raised interest rates by .25%. This lifted their benchmark rate to the highest level in 20 years. In response, interest rates around the globe crept higher. The main concern? This surprise rate hike came after two consecutive meetings where the bank of Canada did not raise rates. There was immediate market fear that our Federal Reserve might do the same.

In recent weeks, the Fed has signaled they are going to pause and not raise rates this week. The Fed has also said there could be a "skip", where they do not raise rates in June, but they come back and raise rates in July, if needed. The markets have ignored the idea of a skip, until Wednesday, when the Bank of Canada raised their rates.

As of this moment, there is a slim chance the Fed lifts rates next week. But come July there is a 66% chance the Fed raises rates once again. There will be a lot of important data that will be reported and can affect whether the Fed raises rates or not.

Treasury Refunding

With the debt ceiling now officially lifted, the Treasury Department needs to refund the Treasury General Account, which was depleted during the past several months. The Treasury Department does this by selling bonds to raise money. It has been said that the Treasury needs to sell as much as $1 trillion worth of bonds, bills and notes over the next six months to keep the money moving. There are negative headlines in the media suggesting this will be a big problem and will cause rates to move higher. Keep in mind that in the past, the treasury department sold much more than this, and in a shorter time frame, so history is repeating itself.

Bottom line: Interest rates remain elevated and near important technical levels as we enter a week full of market moving news.