What was supposed to be a quiet week with no chatter from the Fed turned out to be anything but! Let’s break down the market-moving events from this past week as we gear up for the big Fed meeting next week.

“Bang your Head” – Metal Health by Quiet Riot

The Quiet Period Gets Voice Bombed

In the 12 days before a Fed meeting, there’s this thing called the “quiet period” where Fed members aren’t supposed to talk about monetary policy. With the Fed meeting coming up next Wednesday, last week was supposed to be free of Fed chatter. But that didn’t really happen.

Former New York Fed president, Bill Dudley, wrote an opinion piece for Bloomberg titled “I Changed my Mind, The Fed Needs To Cut Now”. He explained that changing facts have shifted his outlook on the economy and interest rates, saying that waiting too long to cut rates could heighten recession risks.

That’s all the bond market needed to hear! Interest rates moved, with the 2-year Note dropping sharply to its lowest levels since February. It looks like a Fed rate cut might be on the horizon.

Will the Fed Cut Rates Next Week?

Probably not, but as of now, the Fed Funds Futures are pricing in .75% of Fed rate cuts by the end of the year. This suggests rate cuts in September, November, and December, bringing the Fed Funds Rate down to a range of 4.50% to 4.75%.

Bad News Is Finally Bad News

Aside from the first look at 2nd Quarter GDP, which came in better than expected, the economic news was pretty disappointing. Existing home sales were the worst for June since 1999, thanks to high interest rates and limited but growing housing inventory.

Durable Orders (purchases of big-ticket items) were also a big miss, indicating that people are slowing their spending.

Problems Abroad As Well

Germany and France also reported disappointing economic news, with Germany showing a surprise contraction in economic activity. Bad news from other parts of the world pushes global interest rates lower, leading to sustained buying of US Bonds.

China Surprise Rate Cut

On Thursday morning, China surprised everyone by lowering their mortgage rates to stimulate their sagging economy and slumping housing market. They’re dealing with deflation in housing—prices keep falling because there’s no demand. This is the opposite of what’s happening here in the US, and let’s hope we don’t see any deflation in our economy.

4.20%

The 10-year Note has been stuck above 4.20%, limiting improvement in mortgage bonds and rates.

Bottom line: The economic story here in the US is shifting quickly with disappointing news putting pressure on short-term rates and greatly increasing the chances of a Fed rate cut. Just a few weeks ago, Fed Chair Powell said they planned to cut rates just once. Now, with voices like Dudley’s, there’s a push for the Fed to act sooner and more aggressively to lower the risk of a recession.

Looking Ahead

Next week’s Fed Meeting is a big deal. Fed officials will have to address the slowing economic news and the calls from former officials and market thinkers to cut rates sooner and more often. It’s also Jobs week, with an important Jobs Report next Friday. If the unemployment rate ticks higher, the calls for rate cuts will grow louder. Stay tuned!

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, how prices have been stuck near a ceiling dating back to March, which has limited any further rate improvement.

Chart: Fannie Mae Mortgage Bond (Friday July 26, 2024)

Economic Calendar for the Week of July 29 – August 2