09/20/2024
Market Update | September 20
Market Overview
There were no material economic reports today and MBS prices are about seven basis points better than yesterday, just due to normal daily trading patterns, and are not due to any specific new market data.
The top news this week was the 50 basis point Fed rate cut on Tuesday and the questions coming in, from realtors and borrowers, on why mortgage rates did not drop lower this week? The quick answer is that the Fed’s decision to cut 50 basis points did create downward pressure on mortgage rates for a few minutes, but the subsequent live press conference, with Fed chair Jerome Powell and the release of the updated “dot plot” survey of the Fed members, were viewed by the markets to be more “hawkish” then expected. So, within 30 minutes of the Fed’s announcement, the markets did a U-turn as they viewed Powell’s comments as indicating the Fed will not be doing future rate cuts as deep, and as fast, as the markets had hoped for.
A more detailed explanation of why rates have not dropped this week is described in the Market Details section below.
The yield on the 10-year Treasury is presently 3.758% which is near its high for the week. The graph below shows the yield this week and I have put a green dot at the 2:00 ET time on Wednesday when the Fed’s 50 basis point cut was announced. You can see how the yield quickly dropped, but 35 minutes later at 2:35 ET as shown by the red dot, Powell began speaking and he conveyed a more “hawkish” tone, meaning smaller and slower future rate cuts. We can see that the yield quickly spiked back up 35 minutes after the Fed’s announcement and has been higher the rest of the week.
Market Details
Why did mortgage interest rates not drop this week after the Fed’s 50 basis point announcement?
Below are the top four reasons on why mortgage rates did not drop this week:
1. Short term vs. Long term rates. The Fed’s cut was only to short term, 1-day loans made between Fed member banks. Cuts to this rate have a direct impact on other short-term rates, such as the Prime Rate index, but have a more diluted impact on longer term rates. Mortgage rates move in correlation with MBS prices, not in correlation with the Fed Funds rate.
2. It was already priced in. The MBS markets strive to have today’s MBS price reflect all expected future events. Accordingly, MBS prices have been rallying in the weeks leading up to this week’s expected Fed rate cut as the markets became more confident of at least a 25 basis point cut and a good chance of a 50. As MBS prices rally, this pushes down mortgage interest rates, so mortgage rates had already improved in anticipation of this week’s cuts.
3. The power of the Fed’s actions and their words. Comments from Fed members can have as much impact on the market prices of stocks and bonds as do the official decisions by the Fed to cut or raise interest rates. This week was a perfect example.
The markets expected the Fed would cut at least 25 basis points and the markets were almost evenly divided on whether they would cut as deep as 50 basis points. When the news of a 50 basis point cut was announced on Wednesday at 2:00 ET, this was on the good news side of the market divide, so this created market enthusiasm and upward pressure on MBS prices and at the same time the 10-year Treasury yield dropped.
However, when Fed chair Jerome Powell began the Fed’s live press conference shortly after 2:30 his remarks were viewed to be more “hawkish” than the markets expected. Hawkish is defined as wanting to keep rates higher for longer or doing fewer rate cuts much more slowly. “Dovish” is the opposite. Powell’s hawkish comments were a surprise to the markets, so this is why the bond markets did an immediate U-turn and at about 2:35 ET we can see the yield on the 10-year Treasury started to go up and more than erased all of its decline in the prior 30 minutes.
4. A Hawkish Dot Plot Map. Every quarter the Fed releases a survey of the 19 Fed members which shows their anonymous predictions of where future Fed Funds rates will be. After the markets heard Powell’s hawkish comments in his press conference, they then see the newest Dot Plot map release, which shows that most all of the 19 Fed members also have a hawkish view on future rate cuts, meaning rates will not drop as much and as quickly as the markets had estimated. This was like a one-two punch to the markets, and this created more downward pressure on bond prices, pushing up the yield on the 10-year and pushing mortgage rates higher.
The Dot Plot Map and the Fed Futures Market Divide. Below is the new Dot Plat map released this week. Each dot on the map is the predicted future level of Fed Funds rates from one of the 19 Fed members.
If we look at the dots under the 2025 column, we see that most Fed members are forecasting a Fed Funds rate of about 3.25% and this will drop under 3% by the end of 2026.
The Fed Futures Market. Market investors can buy or sell Fed Futures contracts, effectively making a bet on which way Fed Funds rates will go. The price of these contracts changes daily, and these prices create the market’s implied future Fed Funds rates. Below are these implied rates as of this morning:
If we look at the middle column on this graph, it shows that the markets think the rate on Fed Funds will be 2.855% as soon as October, and the Fed members in their Dot Plot projections are saying it will only be about 3.25% with about half of the Fed members projecting 3.50%.
This disconnect between what the Fed members are saying, and what the markets have been predicting, is another reason why mortgage rates did not drop this week. As time goes by the Fed member projections will either move closer to the Futures market’s projections, or vice versa. In the meantime, this disconnect creates a downward pressure on MBS prices and an upward pressure on bond yields and mortgage interest rates.
Where and when will mortgage rates go? Many leading economists, including Freddie Mac, Fannie Mae, and the MBA are predicting mortgage rates will be in the mid 6’s for the rest of this year and could be in the high 5’s by the end of next year. Rates in the high 4’s are possible by the end of 2027.
The future direction of the economy will be a key influence on how fast mortgage rates drop. If we have a soft-landing scenario in 2025, this would lead to a gentle drop in mortgage rates. If we have a hard landing scenario, meaning a deeper recession and a spike up in unemployment rates, then this would lead to a sharper drop in mortgage rates.
Next Week’s Reports.
There will be no material economic reports released on Monday.
On Tuesday, we will see the Consumer Confidence report for September with the markets predicting an index of 103.8 up slightly from the prior month’s 103.3. Since consumer spending drives 2/3rds of the total U.S. economy, this report will give the markets a forward-looking view of potential consumer spending levels, as more confident consumers are more likely to spend money.
The next material report that could impact MBS prices would be the Thursday Durable Goods report that is expected to show a 2.6% decline in August, compared to the 9.8% increase in July. Durable goods purchases are usually somewhat discretionary for businesses and consumers, so an increase typically reflects a growing economy, and a decline can indicate a slowing economy. A growing economy pushed mortgage rates higher.
We will also see the final estimate of GDP for the second quarter of this year. The markets are predicting a 2.9% number down from the 3.0% previous estimate. A recession is defined as two quarters in a row of a negative GDP. If Thursday’s report comes out lower than 2.9% this would indicate the economy is slowing down more quickly than estimated and this would push mortgage rates lower.
The PCE inflation rate for August will be released on Friday, with the markets predicting the monthly increase in Core PCE to be 0.2% with an annual rate of 2.7%. If these numbers come out higher, this would create a downward pressure on MBS prices and an upward pressure on mortgage rates.
Surprise comments from Fed officials could happen any day next week and these could definitely impact MBS prices.
Please do not hesitate to contact your Secondary Marketing Team if you have any questions about the markets or your rate locks.
Thank you, AL
This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Company.
