Financial markets continue their bumpy ride in 2024, as interest rates crept higher while stocks sell off. Once again, the Federal Reserve is front and center and a reason for the volatility. Let’s discuss what happened last week and preview the events to watch in the week ahead.
“Thunderstruck, you’ve been thunderstruck” Thunderstruck by AC/DC.
Waller Wallop
“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” Fed Governor Christopher Waller.
Mr. Waller offered multiple thoughts on the economy and interest rates. Like the quote above, none of which were bond friendly. He essentially said the Fed should move slowly on cutting rates, pouring cold water on the notion of a Fed rate cut in March. He also said the Fed should continue allowing mortgage-backed securities to run off their balance sheet; a move that has helped keep home loan rates elevated.
Wallers’ speech set off a sharp response in the bond market. The result sent interest rates spiking and immediately eroded the probability of a Fed rate cut in March from 80% to just 55%.
Global Inflation Still an Issue
The United Kingdom reported higher than expected inflation. Their central bankers also spoke tough while shunning the idea of cutting rates too soon. As you can imagine, the global bond markets didn’t like any of that, which also added to the upward rate pressure.
Retail Sales an Upside Surprise
Retail sales is a measure of consumer spending which makes up two-thirds of our economic growth. The good news? Retail sales came in better than expected, which lowers any recessionary fears. The bad news? The bond market hates good news and as a result, rates crept higher.
4% Plus
Unfortunately, the unfriendly bond news, coupled with the tough Fed talk, pushed the 10-yr Note yield above a key level of 4%. Why is it so important? If the 10-year yield can remain in the 4% range, it would be about as bad as rates can get. Now that it has edged above 4%, that level could be about as good as rates can get in the near term.
Unemployment Line
This past week 187,000 people filed for first time unemployment benefits. This was a historically low number. It remains to be seen if the frigid weather conditions kept people from filing. If future readings remain low, it will suggest the labor market remains tight which is terrific for housing.
Bottom line: Interest rates are essentially at the same level for the last month. That is to be expected after a historic improvement between November and December. The markets will have a clearer picture as to what the Fed will likely do this Spring and beyond at the next Fed Meeting on January 31st.
Looking Ahead
Next week brings plenty of headline risk once again. We will have important readings on inflation and economic growth with the Treasury Department selling a load of new debt. The good news will be the blackout or quiet period for the Fed as they do not offer speeches or comments until Thursday, February 1st.
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 19, 2024)
Economic Calendar for the Week of January 22 – 26
