This past week, interest rates held steady amidst a slew of market-moving events. Let’s discuss what happened and see what lies in the week ahead.
“I gotta go back, back, back to school again” – Back to School Again, The Four Tops
Fed Has Been Right
Over the past couple of months, the bond market has adjusted to the idea that the Fed will only be cutting rates three or four times this year. The first of which is likely to happen in June. This is the main reason why the 10-year Note yield has climbed from 3.85% to 4.30% and 30-year fixed mortgage rates are back above 7%.
The Fed’s Favored Gauge of Inflation
On Thursday, the Core Personal Consumption Expenditure (PCE) Index was reported and met expectations at 2.8% year-over-year. The bond market breathed a sigh of relief upon this report as there were fears of a hotter than expected reading heading into the release.
The Fed wants the 2.8% to move significantly towards 2% before cutting rates. Eighteen months ago, this reading was twice as high, so it does appear like inflation continues to moderate despite the recent fears of re-acceleration.
If this reading continues to decline, we should expect the Fed to cut rates, which should ease pressure on long-term rates.
Debt Remains an Issue
Early last week the Treasury Department unloaded a record amount of two-and five-year notes, a total of $127 billion sold within a couple of hours and the bond market didn’t like it. The overwhelming amount of new bonds or supply that is being sold due to our deficit spending, has added weight on bond prices and has limited any further rate improvement. Longer-term, with deficits as far as the eye can see, Treasury auctions and the bond market appetite will be an ongoing story to follow for us in mortgage and housing.
Durable Goods Orders was Not Good
A sign that the consumer may be feeling the pinch, Durable Goods Orders, purchases of items intended to last multiple years, like dishwashers and ovens, came in well below expectations. Why is this important? The consumer makes up two-thirds of our economic growth. If the consumer contracts or spends less, the economy slows and the threat of a recession rises.
4.32% Still Standing
In addition to all the news we must watch key levels, and the key level in the Treasury market is 4.32% on the 10-year Note yield. We have not seen the 10-year yield close significantly above this level in 2024. If the 10-year moves above this level rates are going higher. The opposite is true.
Fed Speak Stirring Commotion
If watching the news and numbers were not enough, the markets must navigate Fed speak. This past week it was clear that the Fed was not only noncommittal as to when rate cuts could begin, but it’s unclear as to what economic signals will prompt the Fed to cut rates.
“Should the incoming data continue to indicate that inflation is moving sustainably toward our 2% goal, it will eventually become appropriate to gradually lower our policy rate to prevent monetary policy from becoming overly restrictive. In my view, we are not yet at that point.” Fed Governor Michelle Bowman.
Well, as we just shared above, inflation is well into the 2’s after being twice as high 18 months ago. The question the market is asking is: Has inflation moved “sustainably toward” the Fed’s 2.00% target?
Bottom line: Rates are moving sideways the past couple of weeks and the bond market was able to leap a few big hurdles such as debt, inflation and uncertain Fed speak. The next move for the Fed will be a cut and continued progress on lowering inflation will ensure that it comes sooner rather than later.
Looking Ahead
Next week it is about Jobs. We are scheduled to see multiple readings on labor market health, including ADP, JOLTS, Initial Claims, and the all-important Jobs Report on Friday. Currently, expectations are for the unemployment rate to remain steady at 3.7%, while 188,000 jobs are to be created in February. If this number is strong, it emboldens the Fed’s case to hold off cutting rates. The opposite is true.
Economic Calendar
Mortgage bond 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 move higher, rates decline, and vice versa.
If you look at the right side of the chart, you can see how prices have stepped lower on a staircase and moved sideways on a step for the past couple of weeks. We shall soon find out if prices walk off this down escalator which would mean rate improvement or will prices “step” another leg lower, meaning higher rates ahead.
Chart: Fannie Mae Mortgage Bond (Friday March 1, 2024)
Economic Calendar for the Week of March 4 – 8
