Rates jumped back up above 7% on the week.
Welp, March inflation report week didn’t go well for us.
CPI (consumer inflation) did some damage on Tuesday.
But the PPI report (producer inflation) is what really spooked bond investors because it added insult to the already injured hopes of bond investors.
Rates jumped back up above 7% on the week. Here’s what that looks like in a handy graph from MortgageNewsDaily.com
And here’s what that same chart looks like for this year so far:
Unfortunately, I think we still have higher to go before we see reprieve again.
The Fed meets this week for another rate policy meeting, and what they SHOULD do is scare the markets with VERY hawkish (higher for longer) sentiments. Or, if they stay the course on their future rate cut narrative, they should announce an acceleration in the reduction of their balance sheet.
Either option would bring about higher rates in the short term but would ultimately lead to an environment where lower rates make some sense.
Whether they will or not is yet to be seen. The pressure they are getting on the political front wants the opposite.
The loose financial conditions (bubbling asset prices, resurgence in inflation) we’re currently experiencing can be directly traced back to the narrative pivot they made (too early IMO) in December.
They paved the way for bets to be made on lower rates in the future. Those bets have fueled new spending and new investments.
I’m still convinced the economy is on the path to “feel” pain, which is how we get to lower rates.
How much pain, and how far out that reality has a lot to do with the Fed policy decisions and narrative around those decisions.
Ultimately, the longer this rally goes, the bigger and longer the “reset” (aka pain) will be.
As is par for the course, we’re just kicking the can down the road right now.
How’s Brian feeling about mortgage rates?
Not as optimistic anymore… 🧐 (no changes from last week)
- 3-month outlook (May 2024) – The Fed narrative pivot has added fuel to the economy. The stock market is evidence of that. The new inflation numbers are as well. The 7% range (give or take) will likely be our home for a while.
- 6-month outlook (August 2024) – I still expect the job market to show some cracks in Q1/Q2 – we’re seeing an increase in layoffs being announced. People experience layoffs are having a harder time finding new jobs, as evidenced by the rising continuing jobless claims numbers. We saw retail sales and consumer spending fall a little already – I expect that trend will continue, BUT if the job market remains strong that could be a pipe dream. Housing costs (the biggest contributor to inflation right now) will stay flat or fall with more apartment units coming online which will help inflation concerns and rates can come back down to the mid to high 6% range.
- ***12-month outlook (February 2024) – Barring any major distress in the banking world (very possible with the commercial lending situation), it’s now hard to see a path below 6% in the next 12 months. The mid-6% range seems most likely at the moment.
***The wildcard is the US government. If they don’t do some massive budget cuts to get spending under control soon I could see the demand for US Treasury debt falling off a cliff and that could drive all rates higher. Or maybe the 30-year fixed mortgage will be seen as a safer bet and the yield between the two will no longer correlate as it has in the past? 🤷♂️
Other Relevant Macro News
- The Biden administration wants to help the home affordability issue with tax credits.
- Home builder confidence rises to highest level since last July. (NOTE – the survey results were taken BEFORE last week’s inflation reports so I have a feeling that this is very short-lived).
The Week Ahead
- It’s all about the Fed meeting this week. No one is expecting a change in the Fed’s key rate, but everyone will be paying close attention to how the Fed reacts to last week’s inflation data and another month of stronger-than-expected employment numbers. We’ll get all the drama on Wednesday when Fed Chair Powell holds his presser at 2:30 pm EST.
