A Look into the Markets - October 11, 2024

by Geri And Tim Penner

This past week interest rates continued to move higher after the recent strong jobs report. Let's discuss what happened and look into the week ahead. Remember, the bond markets are closed on Monday, October 14th in observance of Columbus Day.

Upside down Boy, you turn me inside out. And, 'round and 'round... – Upside Down by Diana Ross

50/50

Just over three weeks ago, the Federal Reserve cut interest rates by .50% in an effort to prevent further cooling in the labor market. Ironically, since that moment, mortgage rates have ticked higher by as much as .50%.

Some of this increase in rates was attributable to a buy on the rumor cell on the news reaction. The other major portion of this increase happened because of the September Jobs Report, which shocked the financial markets

Fed Minutes Released

Last Wednesday the minutes to the September Fed meeting were released. The main headline showed that more Fed officials wanted to cut rates by just .25 basis points versus .50 basis points. Looking back, it appears more Federal reserve officials wanted to cut rates in a more measured approach to help the Fed continue to lower inflation without a material uptick in unemployment

The buying appetite for our debt was subpar this past week which also weighed on bonds and added to the upward pressure on interest rates. On Wednesday, our auction for 10-year Treasury notes drew poor buying demand and the Treasury department had to issue a higher interest rate to sell all the debt. It is important to follow our debt story because if buying demand continues to be tepid, it will limit any improvement we see in long-term rates like home loans.

The good news also breathes life into the idea that the economy can endure a soft landing where inflation moves towards the Fed's target of 2.00% while we avoid an economic recession. This story will change, but for now, the good news is putting a limit on how much better rates can improve in the near term.

Oil Volatility

In recent weeks, we have watched the price of oil move sharply higher in response to China's recent efforts to help their economy, the Mideast conflict, and our strong jobs report. While prices have retreated from there, recent high spikes have put upward pressure on interest rates. It is important to follow oil as it relates to interest rates because if oil prices move higher so do rates. The opposite is true.

Consumer Inflation

The Consumer Price Index (CPI) was reported in line with expectations, yet still above the Feds desired target for inflation. This was good news, but more work from the Federal Reserve is required, by way of higher rates to help lower inflation.

One part of inflation that the Federal Reserve may not be able to influence is housing, which makes up nearly 70% of the overall inflation rate.

Oil is also a key component to inflation. If it gushes and remains higher, it puts upward pressure on prices overall - so watch how oil moves

Bottom line: Home loans have inched higher since the Federal Reserve cut rates and the strong Jobs Report as the bond market continues to adjust to the recent surprisingly good news and notion that Fed rate cuts will be smaller going forward.

Looking Ahead

Next week brings the closely watched Retail Sales report for September to gauge consumer spending as we head into the crucial holiday shopping season. Consumer spending makes up about 70% of economic activity in the U.S. and generally remains a significant driver of overall economic growth.

Mortgage Market Guide Candlestick Chart

Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 5.0% 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 declined since the September 18th Fed rate cut and are now trying to form a bottom.

Chart: Fannie Mae 30-Year 5.0% Coupon (Friday, October 11, 2024)