Interest rates recently dropped to the lowest levels we’ve seen in the last two months. Let’s discuss why this happened and what might come next.

“The future’s in the air, I can feel it everywhere. Blowing with the wind of change” Winds of Change – The Scorpions.

Economic Deceleration

A big driver of interest rates is the state of the economy. When the economy is booming, interest rates tend to rise because both unemployment and inflation creep higher. The opposite is true when the economy slows down.

In the past couple of weeks, we’ve seen several economic indicators revealing that our economy is slowing down. For instance, our GDP for the first quarter was revised lower to 1.3%, down from 4.9% and 3.5% in the third and fourth quarters of 2023. Initially, there was optimism that the second quarter would rebound sharply, but the Atlanta Fed significantly lowered their forecast from over 4% to 1.8%. This downward revision surprised the financial markets, leading to a sharp decline in interest rates.

Manufacturing Struggles

Another key indicator is the ISM Manufacturing Index, which continues to show a contraction in manufacturing. This contraction means job losses in the sector, which isn’t good news. However, bonds tend to benefit from bad economic news, and this helped bonds last week.

Job Market Softening

The JOLTS report showed that help-wanted signs are disappearing, indicating fewer available jobs and a loosening labor market. Currently, there are just over 8 million job openings, the lowest in three years and significantly down from the peak of 11 million. With fewer jobs available, people are less likely to quit and demand higher wages, which helps control inflation. This bad news is good for bonds because it suggests that a Fed rate cut could happen sooner than expected.

Signs of Unexpected Weakness

Despite the ongoing pressures from debt and inflation, Fed Chair Powell mentioned that rate cuts would only come with “unexpected weakness” in the labor market. We might be seeing that weakness now, which could prompt a Fed cut in the near future if labor market data continues to weaken.

Interest Rates and the 10-Year Note

Last week, the 10-year Note, which closely tracks mortgage rates, declined to 4.29%, the lowest level since early April. It also fell below its crucial 200-day Moving Average. If the 10-year Note stays below this average, we could see stable to lower rates ahead. The upcoming economic news will play a big role in this.

Oil Prices Decline

Another factor influencing rates is oil prices, which have dropped sharply in recent weeks due to concerns about an economic slowdown both here and abroad.

Bottom Line

The past two weeks have seen a shift in favor of bonds due to a slew of bad economic news. This “bad news” has supported lower rates. However, next week brings important inflation data and Treasury auctions, which could change things quickly. If inflation is higher than expected or the Treasury auctions don’t go well, the recent rate relief might be short-lived.

Economic Calendar

Mortgage bond prices play a crucial role in determining home loan rates. The chart below shows a one-year view of the Fannie Mae 30-year 6.0% coupon, where currently closed loans are being packaged. When bond prices go up, home loan rates go down, and when bond prices fall, rates rise.

If you take a look at the right side of the chart, you’ll notice a sharp increase in prices, which has provided some much-needed rate relief.

Chart: Fannie Mae Mortgage Bond (Friday, June 7, 2024)

Economic Calendar for the Week of June 10 – 14