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The Case for a Fed Rate Cut Grows

This past week interest rates have reached the lowest levels in over a month. Let's discuss what happened and what news to watch next week.

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Last Wednesday, the highly anticipated Consumer Price Index was released. Back on April 10th, the previous CPI reading was reported hotter than expected and pushed interest rates to the highest levels of the year. As a result, the market was on edge heading into this report.

The good news? The report met expectations, as the headline inflation figure came in at 3.4% year-over-year. With the markets fearful of an even hotter number, the in-line reading gave the financial markets a sigh of relief. Why? If inflation were to re-accelerate, it would further push out a Fed rate cut.

We are not out of the woods yet as it relates to inflation, but this report did offer comfort that the next move from the Fed will indeed be a rate cut at some point. After this reading the chances of a Fed rate cut in September grew larger.

Consumer Slowing Down

Consumer spending makes up nearly two-thirds of our economy. This is important to know when following reports on the health of the consumer as it relates to inflation, Federal Reserve policy, and interest rates.

Retail sales for April were reported and the reading was poor. Essentially, the consumer spent money on gas and groceries and little else. Moreover, when adjusting retail sales for inflation, the readings were negative, meaning the consumer is not buying more goods, but simply paying more.

Weak economic readings like this are bond-friendly and a big reason why rates improved last week.

Seeing real Retail Sales, or inflation adjusted Retail Sales turn lower has been a precursor to a recession in the past, so this is a report worth following moving forward.

Global Yields Lower

Also helping our interest rates are Central Banks around the globe telling the world that they will be cutting rates. It now appears the European Central Bank and Swiss National Bank are going to cut rates before the United States. This news prompted a decline in rates around the world and when that happens it puts pressure to push rates lower here in the U.S.

Bottom line: The case for a Fed rate cut sooner has grown, however further rate improvement may only come upon more reports showing inflation is indeed moving lower.

Rates Consolidate

This past week, interest rates held steady or moved sideways after the nice decline we experienced a couple of weeks ago. Let's discuss what happened and look at the news items in the week ahead.

Fed Speakers Toeing the Line

"Eventually we'll have rate cuts, but for now monetary policy is in a very good place," New York President, John Wiliams.

A couple of weeks ago Fed Chair Jerome Powell told the world that there will not be a rate hike nor will there be a cut. This past week, several Fed officials (including Williams quote above) reiterated the notion that a Fed rate cut is not imminent and that they will keep rates higher for longer if needed.

The Fed Funds Futures, which prices in the probability of Fed rate hikes and cuts, is now pricing in a rate cut for September. Just two weeks ago, the chance of an initial rate cut was in November. This highlights how fast markets can change.

Debt Remains a Headwind

Last week, our Treasury Department needed to sell bonds to fund our government. The longer-dated bond auctions like the 10-year Note carry added significance because long-term bonds are subject to inflation risk and opportunity cost.

On Wednesday, the Treasury Department sold a record number of 10-year Notes and the buying appetite was not that great. This means there were not a lot of bids to purchase the bonds at current rates, so rates did not improve. However, it could be viewed as a victory. Remember...the previous 10-yr auction on April 10th was very bad and pushed the 10-year Note yield sharply higher and mortgage-backed securities prices sharply lower.

As the U.S. continues to run federal deficits, it needs to sell bonds to run the government. These bonds must be purchased by the investment community and if the appetite going forward remains tepid, it will put a limit to rate improvement.

Initial Claims Rise

In another sign that the labor market is cooling off, Initial Claims for the past week rose well above expectations. This forward-looking index on labor market health shows more people filing for first-time unemployment benefits. If this trend continues and elevates the unemployment rate, it will strengthen the case for a Fed rate cut sooner.

4.50

The 10-year Note, which ebbs and flows with 30-year mortgage rates, has declined from the highs of the year and is residing near 4.50%. For rates to improve further, we want to see the 10-yr move beneath 4.50% and then 4.35%. Look at the chart section below to see similar technical headwinds for mortgage-backed securities and mortgage rates.

Bottom line: We must remember the Fed is not hiking rates and they are not cutting rates, so further improvement will be in response to the data. Next week, things heat up.

The Federal Reserve Spoke, Markets Listened

The Federal Reserve met this past week and held rates steady for the 6th consecutive meeting. Let's discuss what was said and how the market reacted going into next week.

"I think it's unlikely that the next policy rate move will be a hike."

Fed Chair Jerome Powell.

The Fed Meeting

Last Wednesday, the highly anticipated Fed Meeting took place and with inflation potentially reaccelerating, there were fears the Fed might have to hike rates again.

The good news, as evidenced by the quote above, Mr. Powell led the financial markets to believe that there will be no more rate hikes and the next move will indeed be a rate cut.

This was soothing to the markets that were worried that Powell would signal a potential rate hike.

"In recent months, there has been a lack of further progress toward the Committee's 2 percent inflation objective." FOMC Statement May 1, 2024.

While the Fed said a rate hike is not likely, he also shared that a rate cut is not likely to happen in the near-term either. Until the Fed sees inflation move sustainably towards 2.00%, we should not expect a rate cut in the near-term. The bond market was OK with this, and rates improved. Why would rates improve if the Fed signaled no cut just yet?

The markets see the Fed is serious about bringing inflation back down to its goal of 2.00%. This is good for protecting the value of long-term bonds, like mortgages as inflation erodes its value. If inflation continues to moderate, it will help long-term rates moderate as well.

"Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion." FOMC Statement May 1, 2024.

This announcement was also embraced by the markets as the slower pace of supply of bonds coming into the market can help put downward pressure on interest rates.

Treasury to Sell Less Debt in Q2

Possibly having a bigger impact on rates than the Fed, was the Treasury's announcement that they will not need to sell many more bonds in the 2nd quarter to help fund the government.

This was good news for bonds and rates. Why? Bonds hate more bonds. When the Treasury must sell more and more bonds to fund the government it puts downward pressure on prices and upward pressure on yields. So, this was good news for bonds.

4.70%

As the week was drawing to a close, the 10-yr Note remained beneath 4.70%, which has been a ceiling preventing yields from moving higher. Seeing the 10-yr remain beneath this ceiling after the Fed Meeting was a good sign and could start signaling a peak in rates for 2024.

Bottom line: Interest rates are trying to find a peak and getting past the Fed and this Treasury announcement was a nice hurdle as we move deeper into Spring. While we don't expect much more of an uptick in rates, we should also not expect much improvement either.

The Quiet Before the Storm

This past week interest rates held steady as the markets brace for the Fed meeting this coming Wednesday. Let's discuss what happened and look at the big news events ahead.

The Quiet Period

A lot of the big market moves and volatility in the financial markets have been sparked by Federal Reserve members speaking about monetary policy. The good news this week? It was the blackout or quiet period for the Federal Reserve, where Fed members have no speeches or make no comments on monetary policy for 10 days leading into The Fed meeting.

Bottom line...Fed members did not speak, and markets didn't have to react, and that was good news.

Global Rate Cuts Coming

Economies around the globe are seeing slower economic growth and lower inflation. For this reason, other countries have either cut rates or will begin cutting rates as soon as June. This is going "against the grain" with what the U.S. is doing as we do not expect to be cutting rates until later this year because our inflation remains a bit higher and more persistent.

New Home Sales Jump

In March, New home sales jumped to the highest levels in six months. This leading indicator highlights the pent-up demand for housing as new home sales are counted at the signing of a contract.

Since this report, mortgage rates hit the highest levels of 2024, so it remains to be seen if the strong buying demand will continue.

Demand for U.S. Short-Term Debt

Last Tuesday, the Treasury Department sold a record $69 billion worth of two-year notes. The good news? The buying demand was solid and the yield on the 2-year Note remained beneath 5%.

This is important to follow because if the 2-year Note can remain beneath 5%, it could limit how high long-term rates, like mortgages, rise.

The Buck is Strong

In response to our relatively strong economy and the Federal Reserve not cutting rates in the near term, the U.S. dollar is very strong relative to other countries. One benefit is some downward pressure on oil prices which are priced in dollars. If oil prices go down, that brings less inflationary fears, and this is good for bonds and interest rates.

A strong U.S. dollar also makes imports less expensive, which is good for inflation.

4.60%

The 10-year Note has traded in a range between 4.60% and 4.70%. For long-term interest rates, like mortgages to improve, we need to see the 10-year Note move beneath 4.60%. A move above 4.70% would be bad and likely bring another spike higher in interest rates.

Bottom line: Interest rates are trying to find a peak and next week's Fed Meeting and Treasury Refunding announcement may determine if the peak is here.

Rate Spike Attracts Buyers

This past week interest rates ticked up to the highest level since November on continued inflation fears. Let's discuss what happened and look at the important news in the week ahead.

Lack of Confidence

Federal Reserve Chairman Jerome Powell shared this on Tuesday:

"We've said at the FOMC that we'll need greater confidence that inflation is moving sustainably toward 2% before it would be appropriate to ease policy. The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence. Right now, given the strength of the labor market and progress on inflation so far, it's appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us. If higher inflation does persist, we can maintain the current level of interest rates for as long as needed."

Essentially, Powell is saying recent inflation numbers are elevated, it's not clear that inflation is moving towards their goal, and they are going to keep rates higher for longer.

The bond market reacted poorly to this quote, with the 10-year Note spiking to 4.70%...the highest level of 2024.

The financial markets may also be losing "confidence" that the Federal Reserve can get inflation back down towards 2%, without the U.S. economy slipping into a recession because of "higher for longer" rates.

"Sell in May and go Away" Coming early?

Stocks did not like the spike in interest rates and endured a sharp selloff, sending indices to the worst levels since February. There is a saying in the financial markets, "Sell in May and go Away", where investors sell stocks during May to avoid the Summer months and repurchase stocks in the Fall. Maybe investors took this spike in rates and growing uncertainty as an effort to kick off this phenomenon a few weeks early. We shall see.

The Cure for Higher Rates

When interest rates spike like they have over the past week, at some point the higher yields attract investors thereby eliminating the increase in rates. We saw some of this as the 10-year Note hit 4.70% on Tuesday before falling to 4.57% by Thursday.

On Wednesday, in another sign that higher rates attract the buyers, the Treasury Department sold billions of dollars in 20-year bonds, and the buying demand was strong.

Oil Declining

We all know high oil prices are inflationary, and bonds hate inflation. Oil which recently hit $90 a barrel, declined down to $82 on Thursday. Lower oil prices were welcomed by the bond market and was another reason for some of the rate relief from 2024 highs.

Housing Impact

Housing Starts and Building Permits for the month of March came in well below expectations. With a market in need of housing inventory, this was an unwelcome weak signal as we enter the Spring housing market. With rates higher still in April, we may see home builders also express their "lack of confidence" that rates will come down.

Bottom line: With inflation fears elevated and the Fed backing away from a June rate cut, 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.

 

Bonds Rocked on Inflation Fears

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.

Land of Confusion

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.

First Quarter of 2024 is Ending

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.

Fed Rate Cuts Coming…So They Say

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.

Good Week for Rates and Housing

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…

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