MMG Weekly | February 19, 2024

A Look Into the Markets

This past week interest rates spiked to the highest levels since November. Let’s review what happened and what to watch for in the week ahead.

Higher inflation, Higher rates

The high-impact Consumer Price Index (CPI), a closely watched gauge of consumer inflation, was reported higher than expectations. The headline reading, which includes food and energy, was expected to come in at 2.9% year-over-year, but instead came in hotter at 3.1%.

The all-important core reading, which excludes food and energy, came in at 3.9% year-over-year, still well above the Fed’s target of 2%. Bonds and rates loathe inflation, and they didn’t like this number. In response to the reading, the 10-year yield spiked from 4.18% to 4.31% in the matter of moments. And mortgage-backed securities, which drive mortgage interest rate pricing, fell to their lowest levels since November.

What caused the high reading of inflation? Shelter. The shelter component of Core CPI made up nearly 70% of the 3.9% climb in prices. There has been a lot of speculation that rents are declining, and it takes time for it to seep into the consumer price index. We haven’t seen that happen just yet.

Fed’s Next Move

This hot inflation number certainly creates an issue for the Fed. Back in 2022, the Fed said there would be “pain” and that higher rates were needed to slow economic growth and elevate unemployment so that it could tamp down demand and lower prices. Here we are seven months after the 11th rate hike and unemployment remains below 4% and inflation is near 4%. Yes, prices have come down from much higher levels, but did the Fed rate hikes make that happen? Looking through this lens, one would ask, how does the Fed cut rates? They will certainly not cut in March and right now the Fed Funds Futures have already removed two of their six forecasted rate cuts this year from the table.

This uncertainty and volatility surrounding economic readings and the Fed’s next move is what has increased instability in the bond market and interest rates.

Japan Enters Recession

Last Thursday, Japan, the world’s third largest economy, reported it entered a recession. This is happening just as China is mired in an awful deflationary slump and property crisis. Recessions generally lead to low economic activity and lower inflation. So, if the globe slows down and prices decrease, we import lower prices which could help limit how high rates increase.

Price Discovery Mode

Last week, the 10-year yield broke out of a range, and above 4.18%, which led to a spike in yields. The market is in price discovery mode, trying to assess what bonds and interest rates are worth with inflation threatening to move higher. Soft economic data will allow rates to come back down. The opposite is true.

Bottom Line: Interest rates broke above key levels and are now waiting for the next high-impact reading to determine whether this spike and yield is justified or not.

Looking Ahead: Next week is light on economic readings, but we have the Minutes from the last Fed Meeting. At that Fed Meeting, Chairman Powell suggested no rate cuts in March and inflation was still too high. Based on the inflation news since the Fed Meeting, the markets now agree.

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 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 prices are at the lowest levels of the year, which means the highest rates of the year.

Chart: Fannie Mae Mortgage Bond (Friday February 16, 2024)


Economic Calendar for the Week of February 19 – 23

John Higgins

NMLS #136061

The material contained in this newsletter has been prepared by an independent third-party provider. The content is provided for use by real estate, financial services and other professionals only and is not intended for consumer distribution. The material provided is for informational and educational purposes only and should not be construed as investment and/or mortgage advice. Although the material is deemed to be accurate and reliable, there is no guarantee it is without errors.

As your mortgage professional, I am sending you the MMG WEEKLY because I am committed to keeping you updated on the economic events that impact interest rates and how they may affect you.


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