A Look Into The Markets - Aug 9, 2024
This past week interest rates briefly reached the best levels of the year. Let's discuss what happened as we enter yet another big news week.
“Baby come back, yeah, you can blame it all on me. Cause I was wrong, and I just can't live without you” – Baby Come Back by Player
Last Monday, on the heels of the weak July jobs report, interest rates declined sharply on heightened recession fears, and an overall global economic slowdown. The 10-year Note, which ebbs and flows along with home loan rates, touched 3.66%, an enormous decline since the beginning of July when the 10-yr was 4.30%.
Good News Is Bad News
However, several economic reports came in slightly better than expected throughout the week. These reports triggered immense volatility and helped push bonds sharply in the other direction, leading to a quick spike in rates.
On Thursday, moments after a slightly better Initial Claims number was reported, the 10-year Note was back up near 4%.
Debt Remains a Problem
If volatility and recession fears were not enough to watch, we must follow the regular Treasury auctions, where the U.S. Government sells debt to fund our country. This past week, the appetite to purchase our debt after the recent decline in yields was not good. To sell all the debt to the market, the Treasury Department had to offer higher interest rates. This led to a selloff in U.S. bonds and a spike in yields from the 2024 lows seen on Monday.
Recession Fears Elevated
Despite some of the OK economic data this past week, many on Wall Street are elevating their odds on a forthcoming recession.
The 2/10 yield curve inversion has been an extremely accurate predictor of economic recessions going back several decades. Each time the yield curve dis-inverts or the 2-yr yield moves beneath the 10-yr Note, a recession comes within several months. This past Monday, the yield curve dis-inverted for a moment when the 2-yr Note dipped beneath the 10-year Note for the first time in 2 years.
The dis-inversion was short-lived as recession fears eased in response to some of the better economic data. Looking ahead and once we see a solid inversion when the two-year yield goes beneath the 10-year Note yield, we may start hearing more and more recession talk as history has shown.
Fed Rate Cut Outlook
At the recent Fed meeting just a little over one week ago, Fed Chair Powell opened the door to a rate cut in September. At that time, markets were pricing in as many as three rate cuts. After the jobs report and the elevated fears of recession, now financial markets are pricing in as much as four rates cuts by year-end, meaning one cut would be .50%.
Refi Demand Up Sharply
This past week with home loan rates, touching the best levels of the year refinance activity Was up 16%, highlighting the need for lower rates in housing and the overall economy.
Bottom line: Volatility is back and in a big way. We must now watch for the threat of an economic recession. Bad economic data will fuel these fears and help lower interest rates. The opposite is true.
Looking Ahead
And just when you thought the volatility was over, next week brings the important Consumer Price Index (CPI) inflation reading. The markets are expecting the headline number to come in at 3% over year a reading hotter than expected could pose a problem for interest rates.
Mortgage Market Guide Candlestick ChartMortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 6.0% coupon, where currently closed loans are being packaged. As prices move higher, rates decline, and vice versa. Chart: Fannie Mae 30-Year 6.0% Coupon (Friday, August 9, 2024)
Economic Calendar for the Week of August 12 - 16
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