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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.

This past week interest rates ticked up to the highest levels in over a month. Let's talk about the drivers for this move as we approach the big Fed meeting this week.

Good News is Bad News

For the last couple of weeks economic readings here in the U.S. have been positive. For instance, the recent initial jobless claims are near record lows, which means the unemployment line is at record short levels. Jobs buy homes, so that is a good thing.

It's clear that the consumer remains active, as recent Retail Sales figures came in above expectations. Seeing that consumer spending makes up nearly two-thirds of our economic growth, it's tough to see any near-term recession, which also means it's tough for the Fed to cut rates as aggressively as some were thinking as we entered 2024.

Gross Domestic Product (GDP) Not Gross

On Thursday, the first reading of 3rd Quarter GDP came in at a solid 3.3%, well above expectations of 2.00%. This reading is of course backward-looking, but it does highlight that the economy is nowhere near a recession; which is two quarters of negative growth.

Bye-Bye March Fed Rate Cut

Earlier this month there was nearly an 80% chance that the Federal Reserve was going to cut rates in March. In reaction to the recent round of positive economic news, that chance has slipped to below 50%. As a result, this has led to upward pressure on longer term rates like mortgages.

Debt Remains a Big Issue

This past week the Treasury Department needed to sell $160 Billion worth of bonds to fund our government. This is a lot of supply that puts downward pressure on prices and upward pressure on rates. As evidenced on Wednesday when the five-year note auction received a D minus rating. This means the buying appetite was not robust, and the Treasury had to issue higher interest rates for investors to buy the bonds. If Treasury yields climb, it's impossible for mortgage rates to improve.

Next week there is a huge announcement by the Treasury Department as to how much debt they will have to sell in the first quarter to fund the government. If the number is larger than expected, bonds and interest rates could continue to have problems.

4.15%

The 10-yr Note broke above a ceiling at 4.00% and has continued to hover above key levels in response to everything we shared above. For home loan rates to improve, we need to see the 10-yr move back beneath 4.00%. The forthcoming Fed meeting next week may determine this.

Bottom line: Interest rates are essentially at the same level for the last month; this is a good sign as we want to see stabilization. At the same time, the labor market remains tight and there is no chance of a recession. This is a solid backdrop for housing as we quickly approach the Spring market.

Financial markets continue their bumpy ride in 2024, as interest rates crept higher while stocks sell off. Once again, the Federal Reserve is front and center and a reason for the volatility. Let’s discuss what happened last week and preview the events to watch in the week ahead.

Waller Wallop

"When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully," Fed Governor Christopher Waller.

Mr. Waller offered multiple thoughts on the economy and interest rates. Like the quote above, none of which were bond friendly. He essentially said the Fed should move slowly on cutting rates, pouring cold water on the notion of a Fed rate cut in March. He also said the Fed should continue allowing mortgage-backed securities to run off their balance sheet; a move that has helped keep home loan rates elevated.

Wallers’ speech set off a sharp response in the bond market. The result sent interest rates spiking and immediately eroded the probability of a Fed rate cut in March from 80% to just 55%.

Global Inflation Still an Issue

The United Kingdom reported higher than expected inflation. Their central bankers also spoke tough while shunning the idea of cutting rates too soon. As you can imagine, the global bond markets didn’t like any of that, which also added to the upward rate pressure.

Retail Sales an Upside Surprise

Retail sales is a measure of consumer spending which makes up two-thirds of our economic growth. The good news? Retail sales came in better than expected, which lowers any recessionary fears. The bad news? The bond market hates good news and as a result, rates crept higher.

4% Plus

Unfortunately, the unfriendly bond news, coupled with the tough Fed talk, pushed the 10-yr Note yield above a key level of 4%. Why is it so important? If the 10-year yield can remain in the 4% range, it would be about as bad as rates can get. Now that it has edged above 4%, that level could be about as good as rates can get in the near term.

Unemployment Line

This past week 187,000 people filed for first time unemployment benefits. This was a historically low number. It remains to be seen if the frigid weather conditions kept people from filing. If future readings remain low, it will suggest the labor market remains tight which is terrific for housing.

Bottom line: Interest rates are essentially at the same level for the last month. That is to be expected after a historic improvement between November and December. The markets will have a clearer picture as to what the Fed will likely do this Spring and beyond at the next Fed Meeting on January 31st.

After a multi-month decline in interest rates, we are seeing positive momentum in housing emerge. Let's look at some of the numbers from last week and highlight events to watch for in the weeks ahead.

Spring in January?

Not quite, but we have seen an uptick in inventory and mortgage applications over the last couple of weeks. This should be no surprise as interest rates moved sharply lower between the months of November and December. Much like we saw last year, on any dip in rates housing activity picks up.

If rates remain near current levels or slightly improved, and the labor market remains tight, we should see far more purchase activity in 2024. As Lawrence Young, chief economist of the national Association of realtors stated, "life goes on". There is a lot of pent-up demand and housing could have a surprise year in activity.

4.00%

The 10-year Note has been hovering around the 4% mark for the past few weeks; a further sign of some stability in the bond market. There is still much debate and uncertainty surrounding how many Fed Rate cuts we will see this year. Currently, they are forecasting three rate cuts in 2024. The Fed Funds Futures which price in the probability of rate cuts, are suggesting the Fed will cut rates six or even seven times. Someone is going to be right, and someone is going to be wrong. If the Fed cuts rates more aggressively, interest rates will decline. And the opposite is true.

Jobs Report, Not so Rosy

The recent Jobs Report reading for December showed 216,000 jobs were created in the economy. The media and others were celebrating the strong headline number. However, interest rates, which hate good news, didn't rise in the days since the release. Why? A closer look under the hood of the report, showed that the economy lost 1.5M jobs in December as shown in the Household survey within the release. And we hit a record high of 8.5 million people working multiple jobs. So overall, the jobs report was not so good when you look at some of the internals. If future labor market readings show similar weakness, it would prompt the Fed to cut rates sooner than the middle of the year, which is their current forecast. Once again, the opposite is true.

Consumer Inflation Mixed

The December Consumer Price Index was reported on Thursday and overall, it was in line to slightly higher. Shelter remains the largest contributor to overall inflation, making up nearly two-thirds of the Core CPI (which removes food and energy prices).

Bottom line: The trend in inflation remains lower; the economy is slowing, and the labor market is loosening. All of this should help lower rates while also avoiding a deep recession or a recession at all. This is potentially wonderful news for housing.

Financial markets started off the new year on the wrong foot, and interest rates inched higher. Let's discuss what happened and look at next week's events.

Fed Minutes Released

On Wednesday, the minutes from the December Fed meeting from two weeks ago were released. Overall, the minutes amplified Fed Chair Jerome Powell's take, "The Fed" is likely done hiking rates and we'll begin cutting this year. And thankfully, the bond market liked it, which halted the spike higher in rates.

However, there was a line in the Minutes that did not grab a lot of attention in the media, but is worth following for us here in the mortgage and housing industry...

"Several participants suggested it would be appropriate to begin discussing technical factors about slowing balance sheet run-off well before such a decision was reached."

This is an important line as some Fed Members are "starting to talk about talking about" how to slow the shrinking of their balance sheet which is filled with Treasury and Mortgage Bonds. What does this mean for mortgage and housing? The Fed would slow the balance sheet run-off by reinvesting the proceeds from returned principal on bonds that have matured as well as refinance and purchase activity. If the Fed is buying bonds, it will attract other buyers. This could help spreads between Treasuries and Mortgage Bonds narrow, which would go a long way to help home loan rates decline further.

Leading Indicator on Labor Market Health

The JOLTS report is a leading indicator on the labor market. It shows how many "help wanted" signs are posted (jobs available) and how many people are quitting their job. In a case of bad news is good news, the readings show less jobs available and quitting at three-year lows. It's bad news economically, but it is exactly what the Fed wants to see to help lower inflation and slow demand - elevate unemployment.

Let's break it down further. People are less likely to quit if they can't find a job and if there are less help wanted signs or jobs available. The next shoe to drop is higher unemployment. Why? First, businesses stop hiring - check. Next, hours get cut and lastly if conditions do not improve, companies lay people off. The good news? Even if inflation ticks back above 4.00% which the Fed is forecasting, that would still be a historically low unemployment rate and great driver of housing.

Looking ahead

Next week the Treasury will auction off more bonds, which could generate market excitement. The main economic report is the December Consumer Price Index (CPI), a reading on consumer inflation. If this report meets or falls beneath expectations, it would ensure the rate hike back in July was indeed the last.

Home loan rates have improved once again finishing the year at the best levels since May. Let’s look at what happened in the final trading week of the year and discuss what to watch as the new year begins.

3.83%

The 10-year Note continues to hover near 3.83%, exactly where 2023 began. But as we all know, this is an enormous improvement in rates. In just the last nine weeks, the 10-year note declined from 5.11% to current levels.

The two-month decline in Treasury yields is the largest since 2008, when the Federal Reserve was aggressively cutting rates.

This decline in Treasury rates have helped mortgage rates immensely. In late October, 30-year mortgage rates went from 8% to something in the 6’s. That is amazing relief!

Why the Improvement and Rates?

Rates around the globe are declining. Countries like Germany and the UK are watching their government bond rates slide lower as their economies are in poor shape. The German 10-year bund is at the lowest yields since late 2022. As rates around the globe move lower, so do rates here in the States.

Yet, our rates have not improved as much as others around the globe. Why? Our economy, while slowing, is performing far better than others around the globe. Additionally, our unprecedented amount of deficit spending is applying upward pressure on interest rates, so yes, rates have improved, but not as much as other countries around the globe.

Fed Rate Cuts in 2024

Entering 2023 interest rates were in a similar position, but in 2023 the Fed hiked rates multiple times through July. In 2024, it is widely expected that the Fed will start cutting rates. There is a difference of opinion, as to how many rate cuts we will see. The Fed, who is a very bad forecaster on the economy, inflation and interest rates, is suggesting they will only cut rates three times. However, the Fed Funds Futures market which prices in the probability of Fed hikes/cuts is currently pricing in as many as six rate cuts.

This is a big difference between what the Federal reserve is thinking and what the markets are thinking. Incoming data will decide when and how much the Fed cuts rates. It is an election year and history has shown the Fed is more likely to cut rates sooner rather than later. Again, if history is any gauge, the first rate cut comes about eight months after the last hike setting us up for a cut by April.

Looking ahead

The Big news may not come from the economic calendar, but from the turning of the calendar itself. Every year we see a lot of volatility in stocks and bonds as institutions and traders take positions and place bets. Last year we watched the 10-year Note go from 3.83% to 3:20% in January. Who knows what will happen this year, but we should expect a sharp move one way or the other.

The "Santa Claus Rally" in stocks is an often-discussed phenomena in the markets, but it was the bond market that has displayed some holiday cheer this year. Let's discuss what happened last week and look into the final trading days of the year.

Crazy 8's

In late October 30-yr mortgage rates hit 8%; the highest in this century. Since that time, the bond market has been on a tear with rates declining for 8 consecutive weeks.

Reasons for the sharp decline:

1. Inflation moving lower.

2. Anticipating the Fed is done hiking rates.

3. Labor market is loosening up.

4. Oil prices have declined sharply.

5. Fears of recession are throughout the globe.

3rd Quarter GDP in the Books

U.S. Gross Domestic Product (GDP), like many economic reports, issues multiple readings before submitting a final report. In the case of GDP there are three reports. Last Thursday, the final reading for 3rd quarter GDP was released and it came in at a strong 4.9% clip. The market took the good news in stride. Why? Because of the 3rd quarter which ended in September. This means the markets are not paying much attention to the backward-looking reasons and are more focused on where the economy is headed. The Atlanta Fed GDPNow, which had been accurately forecasting the strong GDP reading for the 3rd quarter, is currently forecasting 4th quarter GDP to come in at 2.7% or roughly half the pace of the 3rd quarter. So the economy is indeed slowing and is a reason why the Fed's next move is to cut rates.

3.84%

If the 10-yr Note yield finishes the year beneath 3.84%. Rates will be lower on the year, which is a crazy thought after the historic spike late summer.

Bottom line: The bond market is finishing off the year in fine fashion and interest rates will be right where the year began. Except, unlike this year where the Fed hiked rates, they will be cutting in 2024.

This past week the good vibes in the financial markets continued. Interest rates hit their best levels since the Summer and continued their historic run lower. Let's discuss what happened and look at the week ahead.

Winning Streak Extends to Six

Through late October, we were experiencing one of the worst bond market/interest rate trends in our lifetime. But a culmination of weak inflation data, weak labor market news and rising expectations of an economic slowdown has prompted one of the sharpest rate improvements in decades.

How good has it been? Home loan rates have improved for six straight weeks after touching 8.00% in October. So, like the old hit show was titled "Eight is Enough".

Fed is Done

Part of the reason for the rate improvement is the idea the Fed has finished hiking rates. We will likely find out for sure over the next week as there is a ton of important data and a Fed Meeting. As of this moment, the Fed Funds Futures market is pricing in no more hikes and a reasonable chance of a rate cut by March.

History is on our side. If you look back at the previous four rate hiking cycles over the last 30 years, on average the first rate cut comes 8.6 months after the last hike. In this cycle, the Fed last hiked rates in July, which means, by historical standards we could see a rate cut by April.

Markets are forward looking, so the improvement in rates we have seen is the bond market expecting the Fed to be done.

Help Wanted Signs Disappearing

October showed the number of jobs available declined by 617,000 to 8.7 million. This number was less than expected and highlights the slowdown in the labor market. This is what the Federal Reserve wants to see as it slows demand and tamps down inflation. It is also yet another data point to support the Fed's next move being a rate cut as they want to be very careful not to push the economy into a recession with excessively higher rates.

The Quote of the Week

"Persistently high interest rates would present a "somewhat greater challenge" for the government." Treasury Secretary Janet Yellen

Quotes like these remind the world that higher rates are a problem and seeing this decline continue is both likely and welcome.

4.00%

The 10-year Note yield has declined from 5.00% to just above 4.00% in the past six weeks, highlighting the rapid rate improvement we discussed above. The 4.00% level is worth following closely. It may take even more bond-friendly news to push yields into the 3's, which virtually no one was forecasting six weeks ago.

Bottom line: Interest rates have improved at a record pace the last six weeks. Now our eyes are set on yet another huge news week, which may very well define whether rates can improve another level or not.

Home loan rates have enjoyed the sixth consecutive weekly decline as bond friendly news continues to hit the wires. Let's review what is happening in the financial markets, the economy and prepare for a big news week ahead.

Winning Streak Extends to Six

Through late October, we were experiencing one of the worst bond market/interest rate trends in our lifetime. But a culmination of weak inflation data, weak labor market news and rising expectations of an economic slowdown has prompted one of the sharpest rate improvements in decades.

How good has it been? Home loan rates have improved for six straight weeks after touching 8.00% in October. So, like the old hit show was titled "Eight is Enough".

Fed is Done

Part of the reason for the rate improvement is the idea the Fed has finished hiking rates. We will likely find out for sure over the next week as there is a ton of important data and a Fed Meeting. As of this moment, the Fed Funds Futures market is pricing in no more hikes and a reasonable chance of a rate cut by March.

History is on our side. If you look back at the previous four rate hiking cycles over the last 30 years, on average the first rate cut comes 8.6 months after the last hike. In this cycle, the Fed last hiked rates in July, which means, by historical standards we could see a rate cut by April.

Markets are forward looking, so the improvement in rates we have seen is the bond market expecting the Fed to be done.

Help Wanted Signs Disappearing

October showed the number of jobs available declined by 617,000 to 8.7 million. This number was less than expected and highlights the slowdown in the labor market. This is what the Federal Reserve wants to see as it slows demand and tamps down inflation. It is also yet another data point to support the Fed's next move being a rate cut as they want to be very careful not to push the economy into a recession with excessively higher rates.

The Quote of the Week

"Persistently high interest rates would present a "somewhat greater challenge" for the government." Treasury Secretary Janet Yellen

Quotes like these remind the world that higher rates are a problem and seeing this decline continue is both likely and welcome.

4.00%

The 10-year Note yield has declined from 5.00% to just above 4.00% in the past six weeks, highlighting the rapid rate improvement we discussed above. The 4.00% level is worth following closely. It may take even more bond-friendly news to push yields into the 3's, which virtually no one was forecasting six weeks ago.

Bottom line: Interest rates have improved at a record pace the last six weeks. Now our eyes are set on yet another huge news week, which may very well define whether rates can improve another level or not.

Home loan rates continued their decline which started at the beginning of November. Let's look at what happened this past week and prepare for the big news ahead.

Bonds Enjoy the Best Month in Forty Years

So how good has the bond market been in November? According to Bloomberg's widely followed U.S. Aggregate Bond Index, the 4.3% gain in November was the largest since 1985. During the month, we have watched the 10-yr Note, which ebbs and flows with mortgage rates, move from 5.00% down to 4.25%.

Sensing the Fed is Finished

If the decline in inflation continues "for several more months ... three months, four months, five months ... we could start lowering the policy rate just because inflation is lower," Fed Governor Christopher Waller.

Likely the biggest driver of interest rates over the past couple of weeks is the idea that the Federal Reserve has finished hiking rates. Fed Governor Waller, quoted above, is one of several Fed officials suggesting the Fed's next move could indeed be a rate cut.

Bill Ackman, CEO of Pershing Square, who shook the markets in late October when he said he covered his bet against higher rates, recently suggested that the federal reserve may need to cut rates aggressively in the first quarter of 2024 to avoid a hard economic landing. It is worth noting that he is alone on that consensus, but he was also alone last month when he said Treasuries yielding 5% is too high in this risky world.

If the Fed is indeed done hiking rates, it means the last rate hike was in July and, that is when the clock starts as it relates to when a rate cut would happen. For reference, over the last four rate hiking cycles in the past 30 years, the Fed cut rates on average of 8.65 months after the last hike. So, if history is any guide, the Fed would cut rates by their April 30th /May 1st, 2024 meeting.

GDP Was Not Gross, Markets Move On

The second reading of our 3rd Quarter gross domestic product (GDP) was reported at a robust 5.2% from a previous reading of 4.9%. Normally, such a strong reading would mean higher rates, and possibly more Fed Rate hike activity. But the markets are forward looking, and it is widely expected that the fourth-quarter GDP will reside somewhere near 2%, a sizable decline from the current rate. Moreover, the GDP number was bloated because of excess government spending, which is unsustainable. Bottom line, the economy is growing, but it is not overheating, and does not require more Fed hikes.

Inflation Continues to Decline

The Fed's favored gauge of inflation, the Core Personal Consumption Expenditure (PCE) index, came in at 3.5% year-over-year, the lowest level in a couple of years. It remains well above the Fed's target of 2%, but it is headed in the right direction which is lower. This is yet another data point to allow the Fed to pause hiking rates and let the series of hikes over the last couple of years further set into the economy.

Bottom line: It appears that the Federal Reserve has finished hiking rates, and the peak in long-term rates is in. If you or someone you know is interested in buying a home now would be an incredible time, because if rates continue to drift lower it is going to attract more buyers and increase competition.