A Look into the Markets
“Man, we live it up, down, up, down. We live it up down here” by Morgan Wallen
This 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.
On 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.
Looking Ahead
Next week expect the volatility to continue as the June Consumer Price Index and Producer Price Index are released. These inflation readings can have a big impact on rates. Expectations are for the Consumer Price Index to fall to 3.6%, well below the 9.00% seen last June.
Mortgage Market Guide Candlestick Chart
Mortgage-backed security (MBS) prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 6.0% coupon, where currently closed loans are being packaged. As prices go higher, rates move lower and vice versa.
You can see on the right side of the chart how prices opened beneath 100.20, which has kept rates from moving higher. If the Bond is unable to get back above the 100.20 and edge higher, rates will remain elevated. The incoming news can change this story for the better or worse and quickly.
Chart: Fannie Mae Mortgage Bond (Friday July 7, 2023)
Economic Calendar for the Week of July 10 – 14
