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 next week.
“Bye Bye Miss American Pie” American Pie by Don McLean
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 evidence 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.
Looking Ahead
Next week is a big one. Besides the Fed Meeting on Wednesday and its multiple reactions, the Treasury Department will announce how much debt they will have to sell in the 1st quarter to fund the government.
Economic Calendar
Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 5.5% coupon, where currently closed loans are being packaged. As prices move higher, rates decline, and vice versa.
On the far-right side of the chart, you can see how prices have gone sideways to slightly lower; highlighting home loan rates moving sideways to slightly higher.
Chart: Fannie Mae Mortgage Bond (Friday January 26, 2024)
Economic Calendar for the Week of January 29 – February 2
