Published Date 5/3/2024
It was an action-packed week for the housing and mortgage
market. Wednesday's Fed announcement was the highlight, but we also got several
economic reports that caused rate volatility. Thankfully, it was mostly the
good kind.
The week got off to a slightly stronger start with Monday's only
major rate news being updated borrowing estimates from the Treasury
Department. Why would such a thing matter?
Treasuries largely dictate day to day interest rate momentum in
the U.S. because they are abundant, simple, and as close to risk-free as it
gets. As such, Treasuries are the universal yardstick for all other debt
in the U.S., including MBS, the mortgage-backed securities that have the most
direct impact on mortgage rates. This is why Treasury yields and mortgage
rates correlate so well over time.
Treasuries can take cues from several sources. One of the
biggest is the change in the outright level of supply. In other words,
how much more debt is the U.S. government issuing in the upcoming
quarter? If that number is higher than expected, it puts upward pressure
on rates. Monday's news from Treasury was fairly palatable and roughly in line
with market expectations, which allowed rates to stay steady.
Things changed on Tuesday when the Employment Cost Index (ECI)
data came out. This is one of several reports that the Fed has mentioned
as being important to the rate outlook recently. Higher numbers mean
higher rates, all other things being equal. This week's installment
showed Q1 costs at 1.2, up from 0.9 in Q4 and well above the market consensus
of 1.0. Rates hit the highest levels of the week as a result, both in
terms of Treasury yields and mortgage rates.
Things changed on Wednesday. The morning economic data did no
harm, but didn't necessarily deserve much credit for turning things
around. Those honors went to the Fed Announcement in the
afternoon--specifically: Fed Chair Powell's press conference.
Markets already knew the Fed wouldn't change rates at this
meeting, so the focus was likely to be on Powell anyway. Expectations
were more varied as to how he might address the recent inflation data, but we
knew he'd have to be less convinced than last time when it comes to 2024 rate
cut prospects.
Unsurprisingly, Powell acknowledged that what had looked like
one month of noise earlier in the year was now an undeniable and unwelcome
shift in progress toward lower inflation. Nonetheless, he expects
progress to get back on track in the coming months and for the Fed's next move
to be a cut instead of a hike.
Markets also appreciated his clarification on political matters.
Many analysts have suggested the Fed won't be able to cut rates until December
because it risks looking like a political move if it happens before November's
election. But Powell was clear in saying the Fed would take whatever
monetary policy action it deemed appropriate whenever the data suggested
it. In other words, if inflation were to begin falling in a more
meaningful way in the next several months and if the economy began to falter,
we would not have to wait several more months for the Fed to deliver some rate
relief.
With that, momentum had shifted in favor of lower rates for the
week. There was some follow-through on Thursday, but even better gains on
Friday after the latest monthly jobs report came out weaker than expected. Job
creation fell to its lowest level since October, and that's in line with the
lowest since covid lockdowns. It was also well below the forecast
consensus (175k versus 243k).
Historically, 175k is a solid number, but everything's
relative. Rates typically fall when the job count undershoots the
forecast by that much and Friday was no exception. 10yr Treasury yields
and mortgage rates ended the week at the lowest levels since April 9th. Traders
further lowered their outlook for the end-of-year Fed Funds Rate, once again
pricing in at least one full cut this year.
On the housing data front, the week's most notable releases were
the two leading national price indices from FHFA and Case Shiller. Both
were much higher than forecast for the month of February, showing annual growth
of 7.0% and 7.3% respectively.
From here, the calendar is
comparatively much more quiet until the biggest economic report of the month on
April 15: the Consumer Price Index (CPI). This is the broad inflation
index that has been at the scene of many crimes against the world of interest
rates. Reactions have been big enough that it's not uncommon to see rate
momentum fizzle sideways as traders wait for the next inflationary shoe to drop
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