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Last week in Review: Markets Pleased As Inflation Eased

Last week interest rates improved significantly as the markets responded to the softest inflation reading in over two years. Let's discuss what happened and look at the week ahead.

Consumer Prices Are Falling

The Consumer Price Index (CPI) for June was reported on Wednesday and showed that consumer prices are falling, which is wonderful for the interest rate sensitive housing sector. The headline CPI for June, which includes food and energy, came in at 3% year-over-year; the slowest rate since March 2021. It was just last year we were reporting CPI readings of over 9%, so this was a welcome sign for all Americans.

Note: This sizable decline is mainly because oil prices were $70 in June...almost half of what they were last June. It also highlights how important it is to keep oil prices low.

Adding to the good vibes within the report Core CPI, which excludes food and energy, also declined further than market expectations. All this good news on inflation sparked the party in the bond market. The 10-yr Note yield dropped from multi-month highs of 4.09% to 3.83% very quickly.

Fed Members Changing Their Tune

In response to the surprisingly low inflation reading, some Fed members are already suggesting that inflation is approaching "normal levels", while others say we are nearing the end of rate hikes. This is a very different tone that was being shared a couple of weeks ago when Fed members were pounding the table for more hikes and higher rates for longer.

After the dust settled from the report, the markets are pricing in just one more rate hike at the end of July. As we've seen before, this story can and will likely change in the future.

Not Out Of The Woods

This past week's low inflation number was terrific to see, but we are not out of the woods with inflation just yet. In fact, in the next couple of months, we are very likely to see CPI move higher. Why? Because last July and August we had very low monthly inflation readings, which will likely be replaced with higher inflation readings this year, causing inflation to possibly tick higher.

In future months, we will also have to watch the price of oil. If it starts to edge higher from the recent lows, it will elevate inflation much like it did last Summer. We do have production cuts from OPEC and Saudi Arabia next month which may influence prices.

4.09%

Yield resistance is a level which halts or prevents rates from moving higher. Since early November, that level has been 4.09%. If the 10-yr yield moves above 4.09%, it will likely place additional upward pressure on Treasuries and thus mortgage rates. The good news? This past week, the 10-yr yield hit 4.09% a couple of times before edging lower.

Bottom line: Inflation is trending in the right direction which is lower and as this continues, we should expect rates to continue to move lower as well.

Last week in Review: Good Economic News is Bad News for Rates

Last week, interest rates spiked on good economic news as fears of a recession fade. Let's discuss the big news of the week and gear up for important events in the week ahead.

The June Fed Meeting Minutes Out

"Some participants indicated they favored or could have supported raising the Target Rate by 25 basis points" FOMC Minutes June 2023 Meeting.

Last Wednesday, the Minutes from the June Fed Meeting were released. Seeing that the Fed paused hiking at that Meeting, markets were looking to see what Fed officials felt about the pause. The quote above highlights the sentiment by some at the Fed that rate hikes must continue. Why? This quote below:

"Those favoring an increase noted very tight labor market, stronger-than-anticipated economic momentum, little evidence of inflation being on a path to return to 2% over time."

Recession Fears Ease

The last revision to 1st Quarter GDP showed a shocking upward revision to 2.00% from a previously reported 1.3%. The important takeaway is this has dramatically removed the fear of recession in the near-term at least for now. This has also elevated the chance of a Fed rate hike at the end of July to nearly 100%.

Going forward, the economic data will be important to track to see if the economy remains as strong as it was in the first Quarter. Part of the bump in consumer spending was in response to a 8.7% increase in social security benefits, which are adjusted for higher inflation.

ADP Highlights Tight Labor Market

The ADP Report, which shows private (non-government) job creation for June came in at a shockingly high 497,000; more than double the 220,000 expected. This report, on the heels of the GDP reading and Minutes, was enough to push interest rates to the highest levels of the year.

Bank of England Seeing Higher Rates

And if all the good news above was not enough to pressure rates higher, we also watch expectations for higher rates in England pressure our rates as well.

Markets are now pricing the Bank of England to raise rates from the current 5.00% to 6.50% early next year. As rates go higher abroad, rates here in the US edge higher as well.

Bottom line: The "higher for longer" narrative from the Fed is now being supported by some of the data this week which has led to a spike in rates. In the coming weeks, we shall see if long-term rates are comfortable being elevated, or if they will come back down from these levels much like they did back in November.

Interest rates continued their sideways trend as we close the first half of 2023. Let's discuss what happened last week and look into the future.

The European Central Bank forum was the main event this week. Central bankers from across the globe, including our Fed Chair, Jerome Powell spoke about the state of their countries economy as well as monetary policy. A common theme was the need to continue to fight inflation, which is still persistently high and above central bank targets.

Here at home, the Federal Reserve's favored gauge of inflation, the Core Personal Consumption Expenditure Index (PCE), is still running in the mid 4.00% range, more than double the Fed's target of 2%. The Federal Reserve recently stated they see inflation coming down to their goal of 2% in 2025. This means we should expect short-term rates to stay higher for longer and a high possibility of no rate cuts this year.

A Breakout is Coming

Mortgage Bonds have been unable to break above 100. Until this happens, home loan rates simply can't get better. While in the Treasury market, the 10-year Note has a breakout coming. The 10-year yield, currently at 3.80%, sits at the top of a very tight range between 3.68% and 3.83%. Whichever way the yield breaks will likely determine the next directional move for home loan rates. So, this is a story worth following.

Bottom line: Long-term interest rates peaked back in October and have gradually inched lower, making a series of lower highs and lower lows overtime. Looking at the second half of the year, with inflation continuing to moderate and unemployment continuing to rise, we should expect a continued gradual decline in long-term interest rates. Coupled with robust housing demand which has set us up for a much better housing market in the back half of 2023.

Last week, interest rates held near the best levels in a month as Fed Chair Powell testified on Capitol Hill. Let's discuss the big news last week and gear up for important events in the week ahead.

Powell on the Hill

"Given how far we've come, it may make sense to move rates higher but to do so at a more moderate pace." Fed Chair Powell on Capitol Hill, 6.21.23

On Wednesday, Federal Reserve Chair Jerome Powell gave his semi-annual testimony to Congress regarding the state of the economy and interest rates. His prepared speech was very similar to the statement the FOMC released last week when they "paused" the string of 10 rate hikes. The quote above, from the question-and-answer portion was one of the highlights as it reminds the markets that Fed rate hikes are nearing an end.

The next Fed Meeting is at the end of July. If the incoming data continues to show inflation coming down and unemployment going higher, the Fed may very well not hike again next month. Currently, the markets are pricing in a 75% probability of a .25% rate hike next month. This will likely change as news comes in.

Homebuilders Feeling Good

As a sign of long-term confidence in the housing market, homebuilders put shovels in the ground at a rapid pace in May. Construction of single-family homes jumped 21.7% from April as builders try to meet soaring housing demand. Housing starts rose to a 1.63M annual pace in May, up sharply from 1.34M in April. There are many reasons for builders to be optimistic about the future. Below are just three:

1. Housing demand is high, and supply is low.
2. Labor market is tight; jobs buy homes.
3. The Fed is nearing the end of rate hikes.

Bank of England Raises Rates

In response to a higher-than-expected inflation report in the UK earlier this week, the Bank of England raised their rates by more than the expected .50%. The Bank also said more rate hikes are coming to help lower inflation. This is important to follow because their inflation is over 8% and next month our Consumer Price Index will be in the 3.00% range. So that central bank is behind the US on monetary policy and inflation and must catch up with more rate hikes. This could add to the uncertainty and volatility in the months ahead.

It's important to note that UK long-term interest rates improved on the rate hike as markets feel the Bank of England regained credibility in its fight versus inflation. This is another example where rate hikes help long-term rates.

Bottom line: The "higher for longer" narrative from the Fed and clear technical factors are limiting the improvement in rates. At the same time, we can look at home builder optimism as a sign that the worst is behind us as it relates to rates and inflation. There are many great opportunities to be had and more coming. Better days are ahead.

Last week the Federal Reserve decided to pause their string of rate hikes for the first time in 15 months, yet long term rates moved higher. Let's discuss what happened and look at the events to watch for this week.

Higher For Longer Still

On Wednesday, the Federal Reserve made a decision to not hike the Fed Funds Rate, breaking a string of 10 consecutive hikes, leaving the rate in a range of 5 to 5 1/4.

This move was widely expected by the financial markets. However, the markets were delivered a surprise when The Fed announced its members believe there will be two more rate hikes this year. Heading into the meeting, it was speculated that the Fed may raise rates one more time in July. This additional hike caused a lot of volatility with a spike in short term and near term rates here and abroad.

The Fed Outlook

Every three months, the Federal Reserve releases a Summary of Economic Projections which gives the markets a sense of what Fed members are seeing regarding economic growth, inflation, unemployment, and where interest rates are headed. The forecast shows economic growth coming in slightly stronger than previously expected, but still at a historically slow 1%. Core inflation, which strips out food and energy, is expected to be higher than previously forecasted. Unemployment is forecasted to come in lower than originally expected. Lastly, many Fed members believe interest rates will need to go higher to cool off the labor market to reach the Fed's inflation target of 2.00%

The Press Conference

After the Fed statement was delivered, Fed Chair Jerome Powell held a press conference, where he took questions and tried to give more color as to what Fed members have been thinking. Within the press conference the Fed Chair did say they have not talked about the July rate hike, and the next meeting will be a "live meeting" where they will respond to the economic data in advance of that report. This means, if inflation continues to come down as it has and the unemployment rate edges up like it did last month, the Fed may very well pause rate hikes again at the July Fed meeting. As of this moment, the chance of a Fed hike in July stands at 75% probability.

What It All Means

After all the smoke cleared from the Fed Meeting, we are left with more of the same...uncertainty and volatility around how far the Fed will go with interest rates and where the economy is headed.

Rate Hikes Around the Globe

Last week other Central Banks increased their rates, including the Bank of Canada's surprise rate hike. And this past Thursday on the heels of our Fed rate hike, the European Central Bank (ECB) raised their rates to the highest level in two decades.  As rates around the globe go higher, it puts upward pressure on our rates. The opposite is true.

Bottom line: It may be tough to see long-term interest rates improve much in the near term as the markets digest the notion that the Fed will potentially raise rates two more times, with no rate cuts this year. Be sure to watch the data and work with your experienced loan officer who follows this closely.

This past week interest rates ticked higher in response to a surprise rate hike from above our Northern border. Let's discuss what happened and talk about the big week ahead.

Oh Canada

As the saying goes, "Where there's smoke there's fire". A big news story this past week was the Canadian wildfires raging and sending smoke, affecting nearly 100,000,000 American citizens. But that was not the only big news coming out of Canada.

On Wednesday, in a surprise move, the Bank of Canada raised interest rates by .25%. This lifted their benchmark rate to the highest level in 20 years. In response, interest rates around the globe crept higher. The main concern? This surprise rate hike came after two consecutive meetings where the bank of Canada did not raise rates. There was immediate market fear that our Federal Reserve might do the same.

In recent weeks, the Fed has signaled they are going to pause and not raise rates this week. The Fed has also said there could be a "skip", where they do not raise rates in June, but they come back and raise rates in July, if needed. The markets have ignored the idea of a skip, until Wednesday, when the Bank of Canada raised their rates.

As of this moment, there is a slim chance the Fed lifts rates next week. But come July there is a 66% chance the Fed raises rates once again. There will be a lot of important data that will be reported and can affect whether the Fed raises rates or not.

Treasury Refunding

With the debt ceiling now officially lifted, the Treasury Department needs to refund the Treasury General Account, which was depleted during the past several months. The Treasury Department does this by selling bonds to raise money. It has been said that the Treasury needs to sell as much as $1 trillion worth of bonds, bills and notes over the next six months to keep the money moving. There are negative headlines in the media suggesting this will be a big problem and will cause rates to move higher. Keep in mind that in the past, the treasury department sold much more than this, and in a shorter time frame, so history is repeating itself.

Bottom line: Interest rates remain elevated and near important technical levels as we enter a week full of market moving news.

This past week interest rates moved lower on optimism the debt ceiling will be lifted and on surprisingly low inflation out of Europe. Let’s discuss what happened and investigate the week ahead.

Debt Ceiling Fix Coming 

As of this writing, the House of Representatives passed a bill to suspend the U.S. debt limit through the 2024 election. Included in the bill are non-defense spending caps, expansion of work requirements for some food stamp recipients as well as a clawing back of unused COVID-19 relief funds.

This bill now goes to the Senate where it will need to be approved and then sent to President Biden’s desk for signing before the June 5th deadline, where it is believed the U.S. would no longer have funds to pay its debt.

In response to the optimism, short-term treasury yields like one-month bills moved sharply lower as the fear of default is removed. This decline in yields spread across the entire bond market, with the 10-year note yield moving from 3.80% to 3.60% in the matter of days.

Fed Pause in June

A couple of key Federal Reserve officials spoke this week and suggested the central bank should not raise rates at the next Federal Open Market Committee on June 14th. Why? They are citing the policy lag effect and its uncertain impact. Essentially, the Fed has already raised interest rates from 0.0% to 5.00% in a little over a year, most of which has yet to seep into the economy. With inflation declining, the economy slowing and the banking crisis lingering, it is probably a good time for the Fed to pause.

On Thursday, the inflation reading unit labor costs, within Q1 Productivity, came in well below expectations. This means it is costing less for businesses to produce, which is disinflationary and another reason for the Fed to take a break from rate hikes.

Low Inflation Surprises in Europe

This past week, Germany, Spain, and other countries reported inflation was well below market expectations. As a result, yields in Europe declined, and that helped U.S. yields to move lower as well. If the trend of lower inflation continues here in the states, and in Europe, we should expect rates to continue to decline.

Bottom line: With some of the uncertainty surrounding the debt limit deal lifted and with inflation data cooling, the mortgage market could see a continued ease in borrowing costs.

Memorial Day was declared a federal holiday in 1971 and commemorated on the last Monday in May. Enjoy the unofficial kick-off of Summer and remember those who perished serving our country.

Debt Ceiling Debate

Failure to reach a deal..."Would be a negative signal of the broader governance and willingness of the U.S. to honor its obligations in a timely fashion and would be unlikely to be consistent with a "AAA" rating" – Fitch rating agency.

As of this press time, there has been no resolution to the debt ceiling negotiations. This event has caused major disruptions in the financial markets, including a spike in interest rates over the last few weeks.

Adding to the uncertainty, the bond rating firm Fitch has put our debt on a negative rating watch. This is a direct threat that if we do not resolve the debt ceiling, a credit downgrade would result.

History Might Be On Our Side

Back in April 2011, our debt was put on negative watch by credit agencies and on August 5th, 2011, our debt was downgraded. What happened at that time? Rates improved.

After a week plus of rates edging higher, maybe this event will start the process of stabilization. If you look at the chart section below, you can see MBS prices were able to remain above support, which means rates stopped increasing.

The lack of resolution on the debt ceiling may be a reason why the Fed may very well pause on hiking rates in June.

Bottom line: As the debt ceiling debate continues unresolved, we should not expect much if any improvement in interest rates.

This past week interest rates ticked higher in response to the still unresolved debt ceiling debate. Let's look at what happened last week and discuss events to watch for this week.

Debt Ceiling Fallout

As of this writing, there has been no resolution to the debt ceiling debate, where Congress and the White House agree on a plan to lift our spending limit. In the absence of lifting our debt ceiling, there is a risk of debt default and/or a credit downgrade. Any of those scenarios would be very disruptive to the financial markets and our overall economy.

We are already seeing upward pressure on rates due to the lack of a resolution. The one-month Treasury bill spiked to 5.60%, up from 4% just a few weeks ago. This dramatic spike has also placed upward pressure on the 10-year yield and mortgage rates. The former hit two-month highs last Thursday.

There is optimism a deal will get done, but until that happens, we should expect continued upward pressure on rates along with a lot of volatility.

Regional Banks Faring Better

Some good news in the banking sector. A couple of banks, which were feared to have problems, reported larger than expected deposits over the first quarter. This gave a sense that the worst of the banking crisis may be behind us. It may still be too early to tell, but stocks blasted off on Wednesday from this optimism.

If we do indeed see the banking sector stabilize, it would likely embolden the Federal Reserve to continue talking about holding rates higher for longer.

Fed Speak Continues

Federal Reserve officials were out offering their thoughts on rates and inflation and generally spoke tough about the need to keep rates higher for longer. Some, like Fed Governor Phillip Jefferson, offered hope for a June pause on hikes saying this, "History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates."

33% For .25%

Despite high uncertainty around the debt ceiling debate and banking sector, the chance of a .25% rate hike in June is now at 33%. Remember, Fed rate hikes have no direct impact on home loan rates, but this will affect credit cards, auto loans and home equity lines of credit.

Mixed Messages

Home Depot reported poor earnings, casting a dark shadow on the markets. But then the very next day, Wal-Mart reported fantastic earnings, which was highlighted by broad purchases from their consumers. These conflicting signals on the health of the consumer have added to the uncertainty in the financial markets and thus what the Fed should do next.

Retail Sales for April came in less than expectations when factoring in inflation. Meaning, because of higher prices, consumers purchased less. Reports like this elevate fears of more rate hikes ahead.

Bottom line: As the debt ceiling debate continues unresolved, we should not expect much, if any, improvement in interest rates.

This past week, mortgage rates held near the best levels of the last several months in response to the lowest inflation reading in two years. Let's discuss what happened and have a look at this week.

Inflation Moving Lower

The Consumer Price Index (CPI) for April, a closely watched reading on consumer inflation, was reported at 4.9% year over year. This was lower than what was expected and the lowest reading since April 2021.

Last year the CPI was running above 9%, so seeing annual readings under 5% is a welcome sign.

There is a reason to be optimistic about lower inflation ahead. Shelter, which includes rent, makes up a sizable portion of CPI. That figure, which is lagging as declines in rent take time to hit the CPI report, are finally appearing in the report. We should expect the shelter component to continue lowering inflation later this year and into 2024. This will help keep long-term rates (like mortgage rates) all beneath current levels.

1.5%

The softening inflation reading is adding to the idea that the Fed should pause on rate hikes in June.  As of right now, the financial markets are pricing in just a 1.5% probability that the Fed will hike rates at their next meeting in June.

After the fastest rate hiking cycle in 40 years, this would be welcome news. Despite Fed officials saying otherwise, the financial markets are also pricing in a high probability of multiple Fed rate cuts in the second half of this year. If inflation cools further and unemployment starts to rise, this may come to pass.

Debt Ceiling Debacle

Add one more uncertain event to our economy, and it is the debt ceiling debate taking place in Congress. Essentially, we will reach the limit to what our government could spend as early as next month. This means Congress has to agree to raise the limit regarding what we could spend, or we risk a potential debt default and credit downgrade like we watched in 2011.

Most everyone believes that aside from the political grandstanding and bickering back and forth, a deal will get done to ensure the U.S. doesn't default on its debt. However, in the near term it could cause increased volatility, and potentially an uptick in rates, including mortgage rates, as the threat of a downgrade rises.

Sell In May

After a rough 2022, stocks have enjoyed a couple of strong quarters of gains. Now we enter the summer months and the old adage "sell in May and go away" is gathering steam. Essentially, the idea is to sell stocks in May and re-enter the market later in the year. Why is this important? If stocks move lower amidst uncertainty, bonds and interest rates will likely be the beneficiary.

Bottom line: This is an important moment for rates. There is a pending breakout that could cause yet another fast improvement in rates. Follow this closely and be prepared to strike at any opportunity!