All the financial markets moved sharply this week in response to election day. Let’s break down what happened and look ahead to next week.
“Let’s go Crazy, Let’s Get Nuts” Let’s Go Crazy – Prince and the Revolution.
The Results
This past week, Donald Trump was elected as the 47th President of the United States. In terms of the power balance, Republicans have locked down the Senate, while control of the House of Representatives remains uncertain. This unexpected clean sweep sent shockwaves rippling through the financial markets on Wednesday.
The Reaction
Interest rates had already been on a rough ride through October, with home loan rates jumping by 0.75%. Many were crossing their fingers that the rate surge would cool off once election day wrapped up. Instead, things took another wild turn.
Come Wednesday morning, interest rates surged again, with the 10-year Note jumping nearly 20 basis points to just below 4.50%. Traders pointed to several reasons for the spike, from expectations of stronger economic growth and inflation threats to concerns about fewer Federal Reserve rate cuts and ballooning Federal deficits due to proposed tax cuts.
It’s worth noting that this reaction isn’t entirely out of the blue but ties back to a rising interest-rate trend that began in mid-September. On the flip side, stocks were partying: The Dow Jones closed nearly 1,500 points higher, hitting a record high, while Bitcoin soared to an all-time high of $75,000. The U.S. dollar also flexed some muscle, fueled by optimism for a stronger economy and reduced Fed cuts.
Debt Is Still a Problem
A thorn in the bond market’s side—now and for the foreseeable future—is the mounting national debt. At last count, we’re creeping toward a staggering $36 trillion. This year alone, we’re running a nearly $2 trillion deficit, trailing only the Great Recession and the pandemic.
Last Monday provided a textbook example of what that kind of debt can do. The Treasury Department had to offer higher rates to entice buyers for $50+ billion in three-year notes. When bond auctions flop like that and higher rates are needed to sell off the debt, it can trigger a spike in interest rates worldwide—and that’s exactly what happened.
4.50% Resistance
Currently, yield resistance for the 10-year Note sits at 4.50%. Ideally, this level holds and keeps rates in check. If it breaks, we could see rates climbing again to retest this year’s peak of 4.70%.
Bottom line: The financial markets are still trying to predict where the economy, inflation, and labor market are headed next year—and what moves the Fed will make in response.
Looking Ahead
Next week, Fed officials are back in the spotlight, commenting on the economy and monetary policy. It’ll be the first time they’re speaking post-release of the October Jobs report on November 1st. In August, the Fed made it clear that any cooling in the labor market would be “unwelcome,” so it’s fair to assume they might not be thrilled with recent numbers. We’ll also get key updates on inflation, including the Consumer Price Index—an important reading that ticked above expectations last month.
Economic Calendar
Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 5.0% coupon, where currently closed loans are being packaged. As prices move higher, rates decline, and vice versa.
If you look at the right side of the chart, you can see the trend of lower prices and higher rates remains intact.
Chart: Fannie Mae Mortgage Bond (Friday November 8, 2024)
Economic Calendar for the Week of November 11 – 15
