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The bond market and interest rates had a rough week, especially on Wednesday when a high inflation print sent interest rates to the highest levels of the year. Let's discuss what happened and look at the fallout ahead.

Consumer Prices Climbing

On Wednesday, the Consumer Price Index (CPI) was reported, and all measures came in higher than expectations. This means that the headline number which includes food and energy was higher, the core reading which is inflation without food and energy was higher and the month-over-month readings and the year-over-year readings were higher. How high? The headline number came in at 3.5% year over, which is up from 3.2% from February. CPI bottomed last June at 3.00%.

This is a very important story to follow as inflation is a main driver of long-term interest rates. So, this higher-than-expected reading was very unwelcome and unnerved the markets to start the day.

Adding to the uncertainty and volatility, was recent speculation that the disinflation process or slowing rate of inflation was well at hand. The CPI reading coupled with last month's higher numbers has removed that comfort. With oil prices also at 2024 highs, we have rising fears that inflation will go higher still, which would likely mean higher rates.

Bye-Bye June Rate Cut

The renewed inflation fears have the markets pricing in no chance of a Fed rate cut in June. Right now, the markets are seeing the strongest possibility of a cut in November. This is a major change from when we started the year, as the financial markets were thinking the Fed would cut rates six or seven times, and the Fed said three. Now we could very well not see a rate cut in 2024.

The Fallout

On Wednesday, just hours after the CPI reading, the Treasury Department had to sell $39B worth of 10-year Notes. How would this auction go after a high inflation reading, fears of more inflation, and continued deficit spending? Well, the auction was awful. The Treasury had to issue higher interest rates to attract investors, due to tepid demand. This added to the pressure on rates and pushed the 10-year Note and thus mortgage rates to the highest levels of 2024.

The Fed Minutes

Two weeks after every Fed meeting, the Fed releases their Minutes, which are bullets of what was discussed among members. These are released to give financial markets a peek at what they are saying behind the scenes. Note, these Minutes are carefully packaged to help guide markets. We will not see the full Minutes from these meetings for five years.

The Minutes were about as bad for the mortgage industry as they could possibly be.

Half of the bullets released talked about fear of inflation, persistent inflation, and uncertainty that it will come down. This was not part of the Fed meeting two weeks ago where the Fed Chair Powell led the markets to believe that three cuts were still coming and that inflation was trending in the right direction.

They also said that they want to start slowing the balance sheet reduction, but only in Treasuries and not mortgage-backed securities. This was also unwelcome as the spread between mortgage securities and Treasuries is historically wide and could narrow considerably if mortgage-backed security balance sheet reduction was slowed.

4.50%

This is an important level to watch in the 10-yr Note. For mortgage rates to find their footing and see improvement from this past week, we need to see the 10-yr Note move back beneath 4.50%.

Bottom line:This past Wednesday, changed the landscape for interest rates as we head into the home buying season. With inflation fears elevated, the Fed backing away from a June rate cut, and Treasury auctions not performing well. It is tough to see where the relief in interest rates would come from in the near term. We will need to listen carefully to incoming data on signs that the inflation rate is cooling.

This past week interest rates moved higher with the 10-year Note yield briefly touching the highest levels of the year. Let's discuss what has happened the past couple of weeks and look ahead.

The Fed and Rate Cuts

A little more than two weeks ago, Federal Reserve Chair Powell, led the world to believe the Fed will be cutting rates three times in 2024. The Fed's dot plot, which is a rate forecast of the Fed members themselves, also confirmed three cuts before year-end.

Now, just days later, and thanks to a hotter-than-expected inflation report, and various Fed speakers, the idea of three cuts, or even one cut is very much at risk.

Two Fridays ago, the Fed's favorite gauge of inflation, the Core PCE, was released. The number came in at 2.8% year-over-year, which matched expectations. What's the problem? One - It did not come down from the previous month and remains sticky. Two - The previous month's reading was revised higher to 0.5% for the month! The 0.5% annualized means inflation would be 6%; THREE times the Fed's target of 2.00%. This completely spooked the bond market and has since put Fed members on their heels in response.

For instance, Atlanta Fed President Raphael Bostic shared that he only sees one rate cut in 2024 and that it would be coming in the fourth quarter. Other Fed members have shared similar sentiments. Where were these predictions just two weeks ago when the Fed issued its dot plot?

After the spike in rates this week, Fed Chair Powell attempted to soothe the markets by suggesting three cuts could still happen this year.

It's this lack of consensus, uncertainty, and land of confusion that is helping keep interest rates elevated.

Rate Cuts Abroad

While the U.S. tries to figure out when to cut rates, many other parts of the globe have begun or are beginning to cut rates. The latest this week was the EU, which shared that inflation has moved unexpectedly lower and June might be the right time to cut interest rates. The good news here? As economies around the globe struggle and their interest rates are lowered, that puts downward pressure on our interest rates. So, while this past week has been very unnerving about rates going significantly higher, there are many factors to consider besides inflation and the Fed.

Bottom line: We joke about the land of confusion, but that has essentially been the mortgage and housing world for over 2 1/2 years. Questions on "Where is inflation going?" "How is the economy doing?" and "What is the Fed going to do?" remain unanswered. We do know the old saying "The cure for higher rates is higher rates"; meaning as rates edge higher, it attracts investors who buy bonds… which stabilizes rates. Finally, the next move from the Fed will be a cut and it will probably come sooner rather than later. Better days ahead.

Mortgage rates improved slightly in this holiday-shortened week. Let's discuss what happened as the first quarter of 2024 comes to an end and we brace for a surprise on Monday, April Fool's Day.

Fed Members Not Aligned

At the most recent Fed Meeting, Fed Chair Jerome Powell led the markets to believe there will be three rate cuts in 2024. The Federal Reserve's dot plot, which is a forecast of interest rates amongst the members, also suggested three rate cuts.

Yet to start the week, Atlanta Fed President Rafael Bostic, said he only sees one rate cut in 2024. This lack of unity, amongst the Fed members, creates volatility and uncertainty, which we continue to see in the financial markets.

The Global Slowdown

Interest rates are like bad economic news here and abroad. Over the last couple of weeks, we have seen numerous warning signals from major countries as they either have entered a recession or are threatening to do so. At the same time, there have already been surprise rate cuts by other central banks around the globe, like Switzerland, to stave off a slowing economy. This is important because if rates around the globe move lower in anticipation of a local recession, it puts downward pressure on our interest rates here at home.

Big Friday News, Markets Closed

On Friday, the financial markets are closed in observance of Good Friday. Yet, there are a couple of huge headline risk events taking place. First, the Fed's favored gauge of inflation, the Core Personal Consumption Expenditure index (PCE) will be reported. The Fed wants to see this number move sustainably towards 2%. Expectations are for it to come in at 2.8% year-over-year. If the number is reported hotter bonds may not like it, the opposite is true.

At lunchtime on Friday, Fed Chair Powell will speak and offer thoughts on the economy. You never know what can be said, and how it might move the market.

With financial markets closed on Friday, we will need to wait until Fool's Day Monday, April 1st to see the reaction. Let's hope the markets don't make a fool of us.

Key Levels

Both the Treasury and the mortgage-backed security market are trading right at key levels, placing no large bets in advance of Friday's headline risk. This coming week may determine whether interest rates improve further or get turned away higher.

Springtime Is Here

We are seeing housing inventory perk up across the country for the Spring home-buying season. Many people are finding opportunities with rates stabilizing off the highs of last Fall. Pent-up demand is being released as people finally say life goes on.

Bottom line: The Spring home-buying season may pose a terrific opportunity for those looking to make a move. Interest rates are not expected to decline sharply in the absence of a surprise recession signal. So, it may be wise to take advantage while others may sit on the sidelines.

The Federal Reserve met this week and reaffirmed rate cuts are coming but, how many and why? Let's discuss what happened and look into the week ahead.

Mixed Fed Messages

On Wednesday, the Federal Reserve met and decided to once again pause and not cut rates. This was widely expected, as inflation has been reported higher than expected of late. It wasn't the lack of action which moved the markets, but the forecast The Fed provided in their statement which helped both stocks and rates improve.

Fed's Forecast

Every three months, the Federal Reserve issues their economic forecasts. This is where they adjust their outlook on the economy, unemployment, inflation, and the path for interest rates. So, what is the Fed thinking?

The Fed now sees economic growth stronger than expected, which is a good thing, and it removes the near-term threat of a recession. They also believe unemployment will come in lower than previously forecasted and inflation will also come in higher than forecasted.

The head scratcher in all of this is that despite the Fed seeing stronger growth, less unemployment, and more inflation, they held their forecast to cut rates three times this year.

With just 6 Fed meetings remaining in 2024, it means rate cuts are coming soon. How soon? The financial markets are pricing the first rate cut in June with a current probability of near 75%. This will of course change as economic readings are reported.

Slowing the QT

In a measure that may help interest rates improve down the road, the Federal Reserve said they are going to start slowing their balance sheet reduction, quantitative tightening (QT), very soon. Part of the upward pressure on long-term interest rates the past couple of years has been QT. So, less QT, could be a good thing.

The Market Reaction

Interest rates improved modestly, and stocks hit all-time highs once again. You can see the chart of mortgage-backed securities below which highlights the nice price gains and rate declines this week.

4.35%

The 10-year Note moves up and down with mortgage rates and it is easy to follow. Watch 4.35%. If rates move above this level, they will be going higher still. The good news? As of press time, rates remain beneath that level.

Bottom line: Rates have improved this week and after the Fed's call for cuts, therefore we should expect lower rates ahead.

A good week for rates as they ticked to the best levels in a month. Let's discuss where they are headed, why and what's next.

Fed Says Higher for Longer – Mortgage Rates Improve

There was nothing stopping rates from improving this past week, not even Fed Chair Powell on Capitol Hill reiterating they are not cutting rates just yet.

The Fed "does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent." Jerome Powell, 3/6/24.

This quote highlighted the Fed's position that they are in no rush to cut rates until they are confident inflation is headed towards 2.00%.

Mortgage Purchase Applications up 11% on the Week

This positive headline from the Mortgage Bankers Association is good news but needs to be taken with a grain of salt as application volume is low and any move creates large percentage swings. Nonetheless, this number also didn't take into effect the full decline in rates from week to week. If you consider the "lag effect" or delay as to when consumers learn about the improvement in rates, it feels like even better days might be ahead for housing.

Labor Market Loosening

There were a couple of signs the labor market continues to loosen. First, the ADP Report, which shows private jobs created (versus government jobs) came in below expectations. Also, the JOLTS report, which shows how many "help wanted “signs or jobs that are available, came in below expectations.

The decline in jobs available is a welcome sign to the Fed, because if there are less jobs available, it lessens the need to pay more and thereby fuel inflation. Further loosening of the labor market will help pull forward Fed rate cuts.

Market Fed Cut Expectations

The Fed Funds Futures, which prices in the probability of rate cut/hike activity, is now pricing in the first rate cut in June at about 68%. It is important to note that the Fed Funds Futures have been very inaccurate in forecasting rate hike/cut activity. The only accurate source for Fed hikes has been the Fed and if they say they are coming later with the hike, that may very well happen. As the saying goes, "Don't fight the Fed".

Bottom line: Rates improved nicely this past week on the weaker labor market data and confirmation that the Fed will be cutting rates at some point. What's next? Read on…

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.

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.

This past week interest rates ticked up to the highest level of the year, as the Minutes from the Fed's last meeting were released. Let's discuss what happened and look at the week ahead.

Fed Meeting Minutes Released

Last week's main event was the release of the Minutes from the January Fed meeting. Fed Chair Powell made it clear that a rate cut in March was not their "base case". Upon the Minutes being released, it became clear it was the same sentiment amongst most Fed members.

Most Fed members agreed they need to proceed carefully on cutting rates and not do it too soon as inflation remains above their intended 2% target.

Yet, at the same time, some Fed officials expressed concern about keeping rates too high for too long. This lack of consensus and mixed messaging highlights the uncertainty surrounding where inflation and the economy are headed, and when rate cuts are coming.

As always, the Fed reiterated they will be data-dependent and will rely on incoming inflation and economic readings to determine if and when to cut rates. The market is currently pricing in a rate cut this June, which is a lot different from a March cut priced in just one month ago.

So overall the Fed confirmed what we knew back in January - rate cuts are off the table for now and they need to see more disinflation for the Fed to move rates lower. But there was one note that could help long-term rates like mortgages in the future.

"Noting reductions in overnight reverse repo usage many officials said it would be appropriate to start in depth balance sheet reductions at next meeting." FOMC Minutes Feb 21 2024.

The Fed's balance sheet reduction is another form of tightening monetary policy, and it is a reason why long-term rates, especially mortgages, are higher. If the Fed starts to slow balance sheet reduction, it could lead to stabilization and possibly improvement in long-term rates.

Debt Everywhere

As mortgage and housing professionals, we must watch events around the globe. On Wednesday, during a day with not much news here outside the Fed Minutes, a German bond auction went off poorly and caused rates around the globe to rise.

Shortly thereafter, our Treasury Department sold $16 billion worth of 20-year bonds, and that auction also went off poorly… meaning investors needed to be compensated with more yield to buy the bonds. As those rates move higher, it causes mortgage rates to move higher as well.

LEI is BAD

The Conference Board's Leading Economic Indicator report showed the U.S. slowed quickly between December and January, highlighting the uncertainty around the strength of the economy. On one hand, we have strong labor market data, and on the other, we see numbers that suggest recession threats rising.

4.32%

The 10-year Note has a yield existence at 4.32%, which held yields from going higher the last week or so. If that level holds, it will keep long-term rates from moving higher. The opposite is true.

Bottom line: Uncertainty exists in the financial markets as to the strength of the economy and when the Fed will be able to cut rates. This means in the near term, any improvement in long-term rates may be short-lived. Upon clear data and direction, we will see further stabilization in interest rates.

This past week interest rates spiked to the highest levels since November. Let's review what happened and what to watch for in the week ahead.

Higher inflation, Higher rates

The high-impact Consumer Price Index (CPI), a closely watched gauge of consumer inflation, was reported higher than expectations. The headline reading, which includes food and energy, was expected to come in at 2.9% year-over-year, but instead came in hotter at 3.1%.

The all-important core reading, which excludes food and energy, came in at 3.9% year-over-year, still well above the Fed's target of 2%. Bonds and rates loathe inflation, and they didn't like this number. In response to the reading, the 10-year yield spiked from 4.18% to 4.31% in the matter of moments. And mortgage-backed securities, which drive mortgage interest rate pricing, fell to their lowest levels since November.

What caused the high reading of inflation? Shelter. The shelter component of Core CPI made up nearly 70% of the 3.9% climb in prices. There has been a lot of speculation that rents are declining, and it takes time for it to seep into the consumer price index. We haven't seen that happen just yet.

Fed's Next Move

This hot inflation number certainly creates an issue for the Fed. Back in 2022, the Fed said there would be "pain" and that higher rates were needed to slow economic growth and elevate unemployment so that it could tamp down demand and lower prices. Here we are seven months after the 11th rate hike and unemployment remains below 4% and inflation is near 4%. Yes, prices have come down from much higher levels, but did the Fed rate hikes make that happen? Looking through this lens, one would ask, how does the Fed cut rates? They will certainly not cut in March and right now the Fed Funds Futures have already removed two of their six forecasted rate cuts this year from the table.

This uncertainty and volatility surrounding economic readings and the Fed's next move is what has increased instability in the bond market and interest rates.

Japan Enters Recession

Last Thursday, Japan, the world's third largest economy, reported it entered a recession. This is happening just as China is mired in an awful deflationary slump and property crisis. Recessions generally lead to low economic activity and lower inflation. So, if the globe slows down and prices decrease, we import lower prices which could help limit how high rates increase.

Price Discovery Mode

Last week, the 10-year yield broke out of a range, and above 4.18%, which led to a spike in yields. The market is in price discovery mode, trying to assess what bonds and interest rates are worth with inflation threatening to move higher. Soft economic data will allow rates to come back down. The opposite is true.

Bottom line: Interest rates broke above key levels and are now waiting for the next high-impact reading to determine whether this spike and yield is justified or not.

This past week there were only a few economic reports for markets to digest. As a result, rates remain stuck near key levels. Let's talk about what happened and look at this week's calendar as things heat up.

Volatility Continues

Interest rates have moved all over the place since the beginning of the year. The 10-year Note yield, as a proxy for mortgages, started 2024 at 3.85% and climbed to 4.18% in mid-January. Then we watched it decline sharply back to 3.85%, only to spike up to 4.18% in the last several days.

Volatility has mimicked the economic readings, which has shown a lot of good news and bad news. On top of that, the chance of a Fed rate cut in March has disappeared, eroding some of the optimism for lower rates coming sooner. This range that bonds are stuck in will be broken by a high impact news item, and last week didn't offer enough big news to drive bonds out of this range.

China Deflation

China, the world's second largest economy is having a rough go. Aside from real estate woes, and an overall economic malaise, they are now dealing with deflation…an outright decline in prices. On Thursday, it was reported that prices declined year-over-year by 0.8%. That sounds great right? Prices are moving lower. As the saying goes "Be careful what you wish for". Deflation is very harmful to an economy. It makes cash worth more and prices of real assets decline. For housing, it is awful, as people wait on the sidelines for prices to drop further before buying. Let's hope any whiffs of deflation that we may import from China doesn't grow into a larger issue.

Debt Remains a Headwind

Last week, the Treasury department sold over $100 billion worth of Treasuries, $42 Billion of which was in 10-year Notes, the largest auction size in the history of our country for that security. This is a story to follow, as longer-term debt like 10-year Notes and 30-year bonds, carry more risk because of the time premium. We have seen investors demand higher interest rates to take the risk of purchasing longer term debt. If this story continues throughout the year as we continue to run deficits, it will be difficult for rates to meaningfully improve.

Fed Speak in Full Bloom

On the heels of last week's Fed meeting, Fed officials were out and about pouring cold water on the notion that the Fed will cut rates in March. In fact, most towed the same line and shared that a cut might not happen until the summer. This is yet another reason why long-term interest rates are stuck in a range. We entered 2024 with the Fed telling us they were going to cut rates three times, and the Fed Funds Futures pricing in as many as six or seven. Now it's clear that the Fed is only going to cut a few times based on some of the stronger than expected economic news of late.

Bottom line: In the short term, any improvement in interest rates may be fleeting as we look for clear signals in the next direction. If the 10-year Note yield moves above 4.20%, rates are heading higher. And if the 10-year yield moves beneath 3.85%, rates are going to move nicely lower.

This past week the Federal Reserve paused a hike of rates for the fourth consecutive time. Interest rates ticked down to the best levels in nearly a month. Let's discuss what happened and look at the events to watch this week.

Sustainably Toward 2%

As mentioned above, the Federal Reserve did not hike rates. In fact, they removed any reference to future hikes in their Policy Statement. So, the good news is that the next move will indeed be a rate cut, the bad news is when.

Fed Chair Powell said he wants to have greater confidence that inflation is moving "sustainably towards 2%". He repeated this phrase several times in his press conference. What was unclear to the market is the measure the Fed is looking at to determine if inflation is moving sustainably towards 2%.

A couple of weeks ago the Fed's "favored gauge" of inflation, the Core Personal Consumption Expenditure (PCE) Index came in at 2.9%, the lowest level in years. Powell made it clear, he needs to see more data and confirmation that inflation is still moving lower before the Fed considers rate cuts.

March Rate Cut Off Table

After the Fed's statement and press conference the chance of a rate cut in March went from a probability of 60% to just 30%. Even Fed Chair Powell said a chance of a rate cut in March is not his base case. So now we must look to the April/May meeting for a potential rate cut, unless of course surprising data comes in to support one sooner.

 Good News is Bad News 

In addition to the Fed Meeting, which helped lower rates, there was a slew of bad economic news which also helped support bond prices and push rates lower.

Additionally, the ADP Report which shows the number of private payrolls created in the economy, came in at just over 100,000 job creations for the month of December. This was well below expectations and a downright weak print. Adding to the inflation story was the employment cost index, another gauge the Fed likes to watch, which showed inflation is indeed moving lower.

Consumer Remains Confident

Despite the elevated rates, and some of the bad news in the labor market, the consumer remains confident. Consumer Confidence came out last Tuesday and was reported to be the highest level in three years highlighting that consumers feel there may be better days ahead...lower inflation and lower rates.

4%

As we discussed in previous issues of Market Trends, 4% is a key level to track on the 10-year Note. Why? If rates stay above 4%, then 4% is about as good as rates can get. This means mortgage rates can't improve further. The opposite is true. There is some good news here as the 10-year Note dipped beneath 4% for the first time in several weeks in response to the Fed meeting. Remaining at or beneath current levels could very well lead to lower rates ahead, hence the renewed optimism amongst consumers.

Home Activity is Responding

Every time we have seen a downtick in interest rates, we see a flurry of activity in the housing market. This time is no different. With the Fed's next move being a rate cut and Spring quickly approaching, things may end up being better than expected for housing. Just a few short months ago in October rates were 8% and the housing market was frozen. That is not the case today.

Bottom line: Markets changed quickly back in October, and no one was expecting to see interest rates decline like they have in such a short period. We now know the Fed's next move will be a cut, and it's coming sooner rather than later. With life wanting to move on and pent-up demand in housing, we should expect better days in the months ahead.