Rates Up or Down? Market Update with Mark Sprague

By Mark Sprague, State Director of Information Capital

Yes, inflation is coming down somewhat, increasing hope that interest rate hikes will pause and go down. Yes, the FDIC-driven sales of mortgage-backed securities prompted by the bank failures earlier this year are wrapping up /slowing down. But mortgage rates haven’t slid down yet. Let’s dive into why.

Lots of data, but humor me.

Last week’s economic data was focused on inflation, which remains well above the Fed’s preferred 2% target. Consumer prices rose during July at both the headline and core levels, although these gains were widely forecasted. While core inflation was 4.7% over the prior twelve months, the last three months’ annualized gain slowed to 3.1%, an encouraging sign that the annual inflation rate will continue to fall. It is also encouraging to see inflation continue to ease without a significant contraction in the overall economy, increasing optimism that the Fed may achieve its desired soft landing. Also, realize that this is the quickest slowdown historically for the fed, more or less in 1 year. While costs for shelter and services continue to put pressure on overall inflation upwards, the price of goods has been contracting. Core goods declined 0.3% in July, the most significant monthly drop since March 2022. Costs for more expensive items where consumers typically rely on financing, such as cars and household furniture, contributed to the price decline. Additionally, the percentage of small businesses reporting the need to increase prices fell to 25% in July, the lowest percentage since February 2021. (Possible reason to lower or stabilize interest rates …)

Mortgage and Treasury rates, however, rose after the release of a hotter-than-expected Producer Price Index (PPI) report for July on Friday. The report showed headline and “core” PPI (not considering food and energy) PPI were a touch on the high side at 0.3 percent (expected was 0.2 percent). Core PPI accelerated to 0.8 percent year-over-year from 0.2 percent in June, representing the first sequential increase in 13 months. (Definite reason to raise interest rates…..)

To sum things up, the much-anticipated consumer inflation report last Thursday showed that the headline and core consumer price index was unchanged from June, bolstering bets among market participants that the Federal Reserve would hold off on further rate hikes. But hotter-than-anticipated producer inflation data on Friday played spoilsport, with both the headline and core producer price index for July rising from the previous month. Still, the overall picture points to a slowdown in inflation and has even led to hopes of disinflation. There is a rising consensus among traders that the Federal Reserve will be able to deliver a so-called “soft landing.” (Six months ago, this was not a reasonable hope.)

This week? The U.S. Census Bureau will issue the July Retail Sales Report, which is expected to show a slight acceleration from the pace seen in June. Traders will also be watching the Federal Open Market Committee Minutes release from the Fed’s July meeting for more clues on the direction of interest rates after the July Consumer Price Index print calmed some nerves. Throw in some regional Fed surveys, business inventories, housing market data, industrial production/capacity utilization, and other leading indicators, and that’s the week. Scheduled Fedspeak is currently light, though the minutes from the July 25/26 meeting will be released on Wednesday, August 16. Pertinent to mortgages, Mortgage Backed Securities Class B and C 48-hours are on Tuesday and Thursday. The week gets off to a quiet start with no scheduled economic releases of note today, and we begin the week with Agency MBS prices roughly unchanged from Friday night and the 10-year yielding 4.15 after closing last week at 4.17 percent. (Back in October, the 10-year hit 4.34.)

So, what does this mean? There are ongoing conflicting indicators. Given the hawkishness of the Federal Reserve Board of Governors, they will likely keep rates stable for now. I believe the federal reserve will maintain higher rates through the end of the year and into 2024. How long is anyone’s guess presently.

Those waiting for rates to lower before buying will be losing appreciation and possibly higher concessions that the new and resale market are showing presently. Lending standards will get harsher.

So yes, the answer is, why wait? Values/rates will continue to rise with little to no reason for them to slide lower anytime soon.  

Have I been right all the time….? It depends on who you talk to…….(no talking to my wife or family concerning that question……)

Stay tuned!