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Winds Shift for Interest Rates

June 10, 2024

Interest rates dropped to the lowest levels in the last two months. Let's discuss why and what's next.

Economic Deceleration

In the past couple of weeks, there have been many economic readings revealing that the economy is slowing. Our gross domestic product (GDP) for the first quarter was revised lower to 1.3%. Coming on the heels of 4.9% and 3.5% for both the third and fourth quarters of 2023, this highlights an economic slowdown. There was also growing sentiment that the second quarter would rebound sharply from the 1.3% reading. However, the Atlanta Fed poured cold water on that idea. They significantly lowered their forecast for the second quarter from over 4% to 1.8%. This downward revision caught the financial markets by surprise, and interest rates declined sharply in response.

Manufacturing Not Manufacturing

Another sour reading on the economy was the Institute of Supply Management (ISM) Manufacturing Index. This report indicates a contraction or absence of manufacturing. This means that people are losing jobs in this sector, which is never a good thing. Bonds like bad news, and this bad news helped bonds last week.

Help Wanted Signs Disappear

The JOLTS report showed that help-wanted signs continue to disappear, meaning there are fewer jobs available and highlighting the loosening in our labor market. Currently, there are just over 8 million jobs available, the lowest reading in three years and well off the high of 11 million seen a few years ago.

This is an important figure to watch because if there are fewer jobs available, people are less likely to quit and are not in any position to demand higher wages, which feeds inflation. This is another case where bad news helps bonds because it fuels the idea that a Fed rate cut could come sooner rather than later.

Unexpected Weakness

Interest rates still have the overhang of debt and inflation pressures, which hurt rates. However, Fed Chair Powell said at the previous Fed meeting that they will not have an appetite to cut rates unless they see "unexpected weakness" in the labor market. We may very well be seeing that unexpected weakness happening now. A Fed cut may be on the near-term horizon if labor market prints continue to show weakening signals.

4.29%

The 10-year Note, which ebbs and flows with mortgage rates, declined to 4.29% last week, the lowest level since early April. Moreover, the yield pushed beneath its important 200-day Moving Average. If the 10-year Note can get comfortable under its 200-day Moving Average, it could lead to stable to lower rates ahead.

Oil is Lower

Another metric to watch in determining where rates are headed is the price of oil. Oil prices have declined sharply in the last couple of weeks, in tandem with interest rates. This is on the perceived notion of an economic slowdown here and abroad.

Bottom line: The winds have changed in bonds' favor over the past two weeks as a slew of bad economic news has hit the market. It also appears that "bad news is finally bad news," meaning that it supports lower rates.

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