A Look into the Markets - August 2, 2024

Getting Closer

Last Wednesday, the Federal Reserve met and decided to keep rates unchanged once again. Note, the Federal Reserve last hiked one year ago in July 2023. Markets widely expected no cuts at this meeting, but we’re prepared for strong clues or words that a September rate cut was imminent.

Within the Fed’s monetary policy statement and subsequent press conference thereafter, Fed Chair Jerome Powell led the world to believe that conditions are getting ripe for a cut but more good readings on inflation are necessary. With the next Fed meeting 6 plus weeks away, the Fed will have multiple inflation readings and multiple jobs reports to validate whether a cut in September makes sense.

The financial markets are still betting that in September they will cut rates despite not outwardly saying so at last week’s meeting.

Good for Housing

It may seem odd, but the Fed not cutting rates may be good for mortgage rates. Why? Interest rate cuts are inflationary. The Federal Reserve saying they are not quite there yet means they are still fighting to lower inflation, which is ultimately good for long-term rates like mortgages.   
 
Powell also did reiterate that while they want to see inflation move sustainably towards 2% before cutting rates, if they see unexpected weakness in the labor market they will cut rates. 

4%

Here’s another reason to be very optimistic about interest rates and housing. Last year from April through October, mortgage rates steadily climbed from 6% to 8% making higher highs and higher lows overtime. This year interest rates have steadily improved since April making lower lows and lower highs over time. For instance, the 10-year Note peaked last October at 5% and then made a series of lower highs at 4.75 and 4.50, 4.35 and recently at 4:20%. If this trend continues, we should expect even lower rates ahead. 

Central Bank Cutting Rates

Also continuing to add pressure to the Federal Reserve to cut rates are central banks around the globe having already cut rates or preparing to cut rates as slower economic conditions, and lower inflation persist around the globe. The Bank of England was the most recent to cut rates, having done so on Thursday. 

Geopolitical Uncertainty

Bonds benefit from uncertainty and rising tensions around the globe.  Adding to the support of bonds and the decline and interest rates was word that Iranian supreme leader, Ali Khameneni called for retaliation against Israel, for killing of a Hamas leader.   

Bottom line: Interest rates continue to gradually improve as inflation declines, the economy slows down, and the unemployment rate rises. The trend for lower rates should continue if these trends continue.

`Looking Ahead

Mortgage 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.

If you look at the right side of the chart, you can see how prices have improved throughout July, matching the best levels since February. 

Chart: Fannie Mae 30-Year 6.0% Coupon (Friday, August 2, 2024)

Economic Calendar for the Week of August 5 - August 9

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