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This past week interest rates held near the best levels in two months in response to bond-friendly news. Let's review what happened last week and look at what to watch for this coming week.

Inflation is Declining

Disinflation, or the rate of inflation declining, is in full bloom. The Consumer Price Index was reported on Tuesday and showed the rate of inflation continues to decline. This is great news. The Federal Reserve's dual mandate is to promote maximum employment and maintain price stability. They want to see unemployment start to rise and prices start to fall. On the former, the last jobs report did show the labor market showing signs of cracking. Now, we are seeing consumer prices start to drift lower.

The takeaway? It likely means the Federal Reserve has finished hiking rates. It also means the last rate hike was back in July. This is also important because when the Fed says, "higher for longer", we must remind ourselves that the clock starts ticking in July as to when we will see a rate cut. Fed Fund Futures are currently pricing in a small possibility as early as next March.

Don't Tell the Fed

Despite a rash of economic news, suggesting that the Federal Reserve should be finished hiking rates - don't tell the Federal Reserve that. Fed officials were out in full glory, suggesting that the Fed may not be done with hiking rates yet. Why would they say such a thing when the data suggests that economic conditions are moving in the right direction for the Federal Reserve to pause? Likely, they do not want to take a victory lap.

Inflation is coming down, the labor market is indeed starting to loosen, and the economy is slowing. This is what the Fed wants to see and the rally we have seen in both stocks and bonds supports the likelihood that the next Fed move will be a rate cut.

Shorts Get Scorched

Markets are made with people on both sides. There are those betting on higher prices, and the other side betting on lower prices.  Over the last several months, there has been rising short interest in the bond market. This means many people are betting on higher rates. Well, as you can imagine over the past couple of weeks with interest rates improving, folks betting on higher rates, really got hurt. What the rising short interest has also done, is exaggerate and quicken the pace at which interest rates have improved from the peaks of this year.  In the matter of just a couple of weeks, we watched the 10-year note move from 5% to under 4.50%.

What to watch for? Data or news that gives those betting on higher rates, a reason to celebrate. Any unfriendly bond news could quickly erode the nice rate relief we have experienced.

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.

This past week, interest rates held steady and near the best levels in over one month. Let's look at what happened last week and peek into the week ahead.

Treasury Selling More Debt

Last week, the Treasury Department sold over $100 billion worth of Treasuries, to fund the government. The increase in our deficit spending and subsequent debt downgrade during the summer was a reason for the spike higher in interest rates. So, every time there's an auction, markets are on edge as to what the appetite will be to purchase these bonds. If buyers do not have a strong appetite to purchase our debt at current interest rates, the Treasury Department must give higher yields or rates to entice buyers to purchase the bonds. And as treasury rates go higher, so do mortgage rates.

The auction results last week were OK, meaning the Treasury Department was able to sell all the new debt without increasing rates – however, the purchasing demand was less than stellar.

"If the rise in bond yields is sustained, the Fed will have to think about the tightening impact of those credit conditions on economic performance, and would there be dangers of overshooting" - Chicago Fed President Austan Goolsbee.

Fed Officials Soften Tone

A host of Federal Reserve officials were out and about last week. As always, they never speak in unison and say the same thing about monetary policy and economic conditions. However, a common undertone amongst the officials was that higher long-term interest rates have tightened financial conditions and are doing the job of the Fed. For example, with mortgage rates hitting 8% a few weeks ago, housing activity and thus economic activity slowed, thereby removing the need for the Fed to raise rates. As of this moment, the Fed Funds Futures, which prices the probability of Fed rate activity, are pricing in no further rate hikes. This is good news, as the last Fed rate hike was in July and as time passes, the chance of a Fed rate cut increases.

Lower Oil Equals Lower Rates

Oil has dropped to the lowest levels in months, falling beneath $80 per barrel. This, as China and other countries around the globe teeter on the brink of recession. Oil prices move on supply and demand. So as demand slows because economic activity slows, prices go lower. Lower oil prices help lower inflation expectations, which ultimately help long-term bonds like mortgages.

4.50%

The 10-yr Note yield, which ebbs and flows alongside home loan rates, has declined nicely from a recent peak of 5.00%. Watch 4.50% as a floor of yield support which is currently halting any further decline in rates. If the 10-yr Note moves beneath 4.50% that floor will become a ceiling which could help halt an increase in rates.

Bottom line: Long-term interest rates, like mortgages, have improved nicely from the highest levels in the century. The sideways trading action we witnessed this week is a good sign as the markets try to consolidate the fast gains. We may have very well seen the peak and long-term interest rates, but it will not be a straight move to lower rates ahead.

This past week, the Federal Reserve did not raise rates, and long-term rates, like mortgages, declined to the best levels in a month. Let's discuss what happened and discuss the big news items to watch for this coming week.

The Fed

On Wednesday, the Federal Reserve issued its monetary policy statement and decided to hold rates steady at 22-year highs. The main reason? Long-term rates have risen of late, which has caused financial conditions to tighten, thereby slowing the economy, and doing the job of the Fed.

The bond market loved the news and the lack of tough talk during Fed Chairman Jerome Powell's press conference, pushing rates lower.

But the good news for bonds and rates didn't stop there.

Treasury Borrowing Less

This week the Treasury Department announced slightly less borrowing needed to fund the government for the last quarter of the year. They also stated they are likely to issue fewer long-term bonds like the 10-year note and 30-year bond. This was also good news for the bond market as it meant less supply had to be sold which meant less pressure to provide higher interest rates or yield to attract buyers.

It wasn't all good news that helped bonds improve and push rates lower.

U.S. Manufacturing Continues To Contract

On Wednesday the Institute of Supply Management (ISM) Manufacturing Report showed the 12th consecutive month of contraction. This tells us manufacturing in our economy is not doing that well and any bad economic news is good for bonds and rates.

It wasn't just U.S. news here that helped interest rates improve.

Europe Sees Disinflation

Across the pond, many countries in Europe reported lower-than-expected inflationary numbers. Inflation is a major driver of long-term rates. As it goes up, so do rates. The opposite is true.

Additionally, the bond market is global. As yields in other parts of the globe decline, so do ours. And again, the opposite is true.

5.00% Is The Ceiling To Watch

A couple of weeks ago the 10-year note touched 5% a couple of times but did not close above that key level. It has since retraced lower to 4.69% on Wednesday. If the 10-year note can remain beneath 5%, long-term rates like mortgages have an opportunity to stabilize, and potentially improve further from here.

Bottom line: It was a welcome sight to see rates improve. For rates to improve further, we must continue seeing more headlines like this week. If economic data doesn't heat up again, the Fed may very well not hike rates again...which is terrific news.

This past week, home loan rates hovered near the highest levels in this century. Let's look at what moved the markets and look into the week ahead.

European Central Bank Pauses Rates Hikes

European Central Bank (ECB) President Christine Lagarde did not hike rates this past week, citing economic weakness. This action and statement from Lagarde helped bonds hold steady and improve from the worst levels. Markets sense our Fed will follow suit next week and beyond.

Blackout Period

One uncertainty was removed last week as Federal Reserve officials were in the blackout or "quiet" period heading into the Fed Meeting. This is where Fed members do not make any speeches or comments on monetary policy 10 days before the next Meeting. Unfortunately, the financial markets were not so quiet.

More Money, More Problems

One big problem for interest rates throughout the summer has been the increased government spending and the need for the Treasury Department to sell bonds to fund the government. This past week was more of the same, as the Treasury Department sold $140 billion worth of bonds and the appetite from investors was not so great. Meaning, that to entice investors to buy the enormous amount of bonds, they had to give higher interest rates. And as interest rates in the Treasury Market go higher, it puts upward pressure on mortgage rates as well.

New Home Sales Up In September

New home construction continues to be a bright spot in housing, despite high interest rates. Sales in September came in at an annual rate of 759,000; well above expectations and the best reading since February 2022. Price concessions and rate buy-downs were made by builders to help sell homes.

Shorts Are Back

After a week, where legendary hedge fund owner, Bill Ackman said this was not in the environment to bet against higher rates, his peers thought otherwise. The fast spike in interest rates that we witnessed in response to the poor Treasury auctions mentioned above, was amplified by traders placing large bets on higher rates in the future.

3rd Quarter GDP

The first reading of 3rd quarter GDP (economic growth) showed the economy grew at the fastest rate in 2 years which was fueled by consumer spending. This strong report may not influence the Fed's decision to hike rates again as the report is backward-looking and most economists expect the growth rate to slow sharply in the 4th Quarter. The good news? The economy is not close to a recession.

5.00%

The 10-yr Note is hovering near a ceiling of yield resistance at 5.00%. If the 10-year yield breaks above this ceiling, it will likely accompany another leg higher in interest rates and 5.00% could go from being about as bad rates could get to about as good as they could get. So, this is something to watch closely.

Bottom line: Home loan rates have hit the highest level of this century. However, as evidenced by New Home Sales, the demand to purchase new homes remains high. There are key levels to watch to avoid another spike higher in interest rates.

This past week home loan rates touched the highest levels in this century. Let's talk about the recent headwinds for interest rates and other big events as we march toward the next Fed meeting on November 1st.

Headwind #1 - QT

Back in 2020, to stabilize the U.S. bond markets, the Federal Reserve began a process called quantitative easing (QE). This involved the Federal Reserve purchasing Treasuries and mortgage-backed securities and adding them as assets on their balance sheet. This process helped stabilize the bond market during the pandemic and lowered rates beneath 3.00%.

Today, to fight inflation and slow demand, the Federal Reserve is doing the opposite, in a process called quantitative tightening (QT) or balance sheet reduction. This is where the Fed allows matured Treasuries and refinanced mortgage bonds to roll off their balance sheet. This process has put upward pressure on long-term rates, with 30-yr Fixed rates hitting 8.00% this week.

In the absence of the Federal Reserve stopping or slowing the quantitative tightening process, we should expect the trend of higher interest rates to continue.

Headwind #2 – Debt

The U.S. has amassed a record $33T in debt with no signs of the deficit spending coming to end. This means our government will have to issue more Treasuries to collect the money needed to run the country. Every couple of weeks, the Treasury sells these bonds, however the buying appetite has been weak, so the Treasury Department has to pay more yield to attract the buyers.

Headwind #3 China And Japan Are Sellers

Japan and China are the largest foreign countries in the world holding U.S. debt, with close to $1.5T between them. Both countries have been sellers of our bonds as opposed to purchasers of our debt. Why? Inflation. The U.S. dollar has been strengthening mightily throughout the year, causing foreign currencies to decline in value and making commodities and imports more expensive. China and Japan have been selling some of their vast holdings while using the proceeds to purchase their own currencies to limit the effects of inflation.

Headwind #4 Short Sellers Betting On Higher Rates

In the financial markets, one can bet on prices going up or prices going down. Short-sellers or people who are betting on Treasury prices, and mortgage bond prices going down and rates going up realize that the Federal Reserve is shrinking their balance sheet, growing our debt while Asia and other countries around the globe are selling U.S. debt. This short selling is adding to the volatility and sharp move higher in rates.

These are just four of the headwinds long-term bonds are facing now, as there are more. How does this trend of spiking long-term rates end? One way to quickly stop this rise, is for the Federal Reserve to announce a slowing or outright stopping of quantitative tightening or balance sheet reduction. This would put a buyer in the market, push back the sellers and take pressure off Asia to sell their U.S. bonds. This is not currently in the cards but is a story that could change very quickly.

Housing, which is interest rate sensitive, and a main driver for the economy has slowed significantly with mortgage applications at the lowest levels since 1995. There is a moment coming where the Federal Reserve may be forced to pivot and change direction as the current trend is unsustainable.

Bottom line: Home loan rates have hit the highest level of this century with housing activity slowing and leaders in mortgage and housing sounding the alarm for help…each day is closer to a shift in policy.

It was another wild week in the financial markets with interest rates backing away from the highest levels in decades. Let's discuss what happened and look at the news to watch for this coming week.

JOLTS Report Jolts the Markets

Last Tuesday, the JOLTS report, which shows how many jobs are available, ticked up much higher than expectations. As a result, the knee-jerk reaction caused interest rates to spike to the highest levels in 16 years. Why? Fear that the labor market remains too tight, and the Fed will have to continue to hike rates and hold them higher for longer.

The market reaction seemed overdone as a look into the details showed that the number of people quitting and the number of people hiring continue to slow, suggesting that the labor market is cooling down to the Fed's liking.

Hump Day Surprise

The negative vibe in interest rates quickly changed by last Wednesday morning when the ADP payroll report showed there were only 89,000 private job creations in September. This number was essentially half of expectations and the lowest reading in over 2 1/2 years. This report along with other weak economic data around the globe sent oil prices sharply lower. Oil goes lower on the perception of less demand from a global slowdown. This was all good news for bonds and rates which improved nicely on the bad economic news, and softer inflation fears which come with lower oil prices.

Fed Still Talking Tough

Despite recent weaker economic data of late and the run rate of inflation headed towards the Fed's target zone, Federal Reserve officials continue to talk about the need for more rate hikes and the idea of holding them higher for longer. With mortgage rates at multi-decade highs in response to rising Treasury yields, we are seeing a sharp slowdown in housing. But do not say that to Atlanta Fed President, Raphael Bostic who uttered this gem last week: "Rising long bond yields not having an excessive impact on the economy".

The financial markets are not buying all the tough Fed talk as the Fed Funds Futures market is currently pricing no more rate hikes.

Debt and Deficit Spending

Interest rates have ticked higher throughout the Summer as the U.S. Treasury Department demanded more money than previously expected to fund our government. This action led to a downgrade of our debt as Fitch Rating agency cited "fiscal deterioration."

It's not truly clear if interest rates are pricing in all this deficit spending or if rates will go higher still as our federal government requests more money to fund operations.

Bottom line: Bad news is good news as we've seen with ADP helping interest rates improve. On the other hand, our excessive debt is applying upward pressure on rates. With the Fed still talking tough and the trend of higher rates still intact, there's a lot to follow.

This past week interest rates touched the highest levels in decades. Let's discuss what happened and see what to watch for as the 4th Quarter begins.

Ouch

The U.S. bond market has been struggling since April, continuing a disturbing pattern of higher rates over time. Despite market expectations and even the Federal Reserve saying rate hikes are nearing the end, rates continue to tick higher. Why?

A big reason is oil. It is not a coincidence that interest rates and oil hit 2023 highs on the same day this past week. Higher oil leads to inflationary pressures and counters the Fed's efforts of lowering inflation to their 2% target. Oil hit $94 a barrel on Thursday, in response to lower-than-expected oil stockpiles in Cushing Oklahoma.

Another big reason for the continued rise in rates is debt. Back in July, the Treasury Department requested an additional $275 billion to fund the government between August and September. This action led to a downgrade of U.S. debt. This week, Moody's rating firm said that a government shutdown would likely lead to an additional credit downgrade. Like any consumer with high debt problems and the ability to repay being questioned, they pay a higher rate. We are seeing that play out in the U.S. Treasury market as the 10-yr Note yield hit 4.69%...the highest since 2007.

Housing Impact

Despite interest rates hitting the highest levels in decades, home prices remain elevated. This is largely due to a lack of available inventory. Should inventory increase, it would likely lead to home prices returning some of the frothy price appreciation achieved during the pandemic. New construction was filling some of the inventory void of late as home builders took advantage of an incredible opportunity to fill robust housing demand by offering incentives to offset the climb in interest rates. But with interest rates moving another leg higher, it has made it tough for homebuilders to come up with enough incentives to offset the uptick in interest rates.

Pending Home Sales for August declined sharply, and the National Association of Realtors Chief Economist had this to share: "Mortgage rates have been rising above 7% since August, which has diminished the pool of home buyers. Some would-be home buyers are taking a pause and readjusting their expectations about the location and type of home to better fit their budgets."

Ironically, it is this sort of bad economic news that will lead to the Fed doing less and rates ultimately coming down.

Bottom line: Interest rates and oil touched 2023 highs at the same time. Housing will continue to struggle in the absence of rate relief, and it is this very struggle, which could lead to slower overall economic activity and thus lower rates.

This past week, the minutes from the July Fed Meeting were released. The news didn't help home loan rates, which ticked up to the peaks of last year. Let's look at what happened and talk about the headline risk for this week.

"Uncertainty of the U.S. economic outlook remains elevated"... FOMC minutes from the July Fed Meeting.

The Fed Minutes kicked off with this statement, which sums up the last 18 months. It remains unclear if inflation will continue to come down, if the Fed will continue to hike rates and if the economy can avoid a recession. And for all of these reasons, interest rates have been volatile with no clear signs of stability.

"Most participants (Fed Members) saw continued significant upside inflation risks "

This line was like kryptonite to Superman as bond/interest rates hate inflation. The fact that we are still enduring significant upside risk was enough for bonds to sell off and push rates higher.

"Participants still saw below-trend growth, softer labor market as necessary to restoring economic balance."

Here the Fed is reminding the markets that they want to keep rates higher for longer until unemployment rises further, and the economy potentially slows further. Looking into the months ahead we should expect continued slower economic growth and price highs but continuing to come down slowly. For this reason, we should expect home loan rates to also retreat lower and slowly.

The good news? After all this uncertainty and tough talk on inflation, the markets are currently pricing the probability of a Fed rate hike in September at just 11%. However, more data will come in which could change things. But as of now, the Fed is not going to hike rates.

Bottom line: Rates have ticked higher on the heels of our recent debt downgrade and uncertainty around inflation and no recession. Maybe next week things change...read on.

Inflation perked up, yet interest rates improved from key levels. Let's walk through the big financial news of last week as we approach this Wednesday's Fed Meeting.

Tale Of Two Inflations

Last Wednesday, the Consumer Price Index (CPI) for August increased by 0.6% for the month, lifting the annual rate to 3.7%, both of which were higher than expected. The month-over-month rise was the highest this year. The main culprit? Energy. Oil soared by nearly 11% for the month as a barrel has gone from $65 to $89 between June and September.

The Core CPI, which excludes food and energy and is more closely watched by the Federal Reserve, did decline to 4.3% from 4.7% year-over-year and appears to be trending in the right direction...lower.

The bond market and interest rates must have liked the decline in Core CPI as the post-news reaction watched the 10-year Note yield decline from 4.35% down to 4.25%.

Oil Hits 2023 Highs

As mentioned, oil prices were the main reason for inflation rising in August. Prices have continued their rise this month with a barrel hitting 2023 highs last week. Should it continue, we should expect the September CPI to also show headline inflation remaining high and confirm that inflation bottomed this June.

The Blackout Period Continues

With the Fed Meeting approaching this coming week, Federal Reserve officials do not make any speeches or comments on monetary policy. This quiet or calm before the storm helped lower interest rate volatility and kept rates from moving above 2023 peaks. All this will change next week.

As of this moment, Fed Fund Futures, which price the probability of interest rate moves are showing a nearly 100% chance of no rate hike at this Meeting.

Japan Interest Rates Climbing Too

Interest rates around the globe have moved higher and now Japan has joined the club. With inflation in the region hitting 40-year highs, their Central Bank has allowed their 10-year government bond to touch .70%, the highest level since 2014. It appears their central bank could allow this interest rate to rise further. If it does, it could apply upward pressure on all global yields, including our 10-year Note.

Bottom line: Interest rates remain near the highest levels of the year and there is a threat of headline inflation reaccelerating, due to energy prices. This will be important to watch in the months ahead because if inflation moves higher, it may force the Fed to hike rates further.

September has been a rough month so far for bonds and rates. Let's discuss the big headlines last week in the financial markets.

Oil Gushing Higher

The price of oil has been on the rise, hitting 10-month highs, due to lower supply levels and production cuts from Saudi Arabia and Russia. This rise has also led to a spike in both jet fuel and diesel. The latter is a concern because we learned last summer how higher diesel prices elevated food inflation as it is everywhere within the food supply chain. Diesel is used in mills, factories, and shipping so if diesel goes higher, food costs are going higher.

Bonds loathe inflation so any news showing that it may be on the rise is bad for rates. And bad it was, the 10-year note yield rose to 4.30%, after touching 4.05% on September 1st.

This news may very well confirm that inflation bottomed out in June at 3% and is creeping higher. The Cleveland Fed is now expecting inflation to rise closer to 4% in September, and their forecast does not include this recent rise in oil, which will undoubtedly make inflation higher still.

There are two ways to lower oil prices. One, global demand slows thereby creating more supply. And two, the U.S. creates more supply. Seeing that the U.S. is not ramping up energy production, we have hope that demand slows to lower prices. The problem? Russia and Saudi Arabia just extended their oil production cuts for another 3 months, which means any demand slowdown could be offset by less supply, hence elevated prices and inflationary pressure.

U.S. Dollar Is Strong

The dollar has been strengthening over the past couple of weeks, as the U.S. once again outperforms virtually all other global economies. Europe appears like it's heading into a recession in the second half of this year. China and other countries throughout Asia are also struggling. This leads to dollar strength. Typically, a strong dollar would help oil prices to some degree, but the production cuts and an already lower supply are keeping oil prices high.

A strong dollar has also created another problem. The yen in Japan, and the yuan in China have weakened sharply against the dollar making imports more expensive. Both countries have spoken out about the need to keep their currency strong. How would they do this? Well, the two countries combined own close to $2 trillion worth of Treasuries. What they have been doing of late and what they could threaten to do is sell Treasuries to purchase their own currency to prop it up against our strengthening dollar. Should this come to pass it could put further upward pressure on rates.

Fed Rate Hike Chances

As of this moment, the chance of a rate hike in September is very small. But the chance of a rate hike in November is about 50% or a coin toss. Should oil rise further it will put pressure on the Fed to raise rates once again. Yes, this is a bad setup as we move into the Fall.

Bottom line: In the absence of a surprise shock to the markets, any relief in rates in the near-term will be minimal and fleeting, much like we've seen over the past several months. Watch 4% on the 10-year note as a pivot point. If the 10-year note yield moves beneath 4%, we will likely see sustained rate relief. The opposite is true.