This past week Interest rates reached the best levels of the year in response to another soft reading on inflation. Let's discuss what moved the markets last week as we approach the important Fed Meeting this coming week.

"Im going down, down, down, down, down, down" – Going Down by Jeff Beck.

Inflation Headed Lower

The August Consumer Price Index (CPI) inflation reading came in at the lowest levels since 2021. Long-term rates like mortgages, love low inflation so this bond-friendly news helped home loan rates touch the best levels since February 2023!

As we approach the highly anticipated Fed Meeting next week, will this report be enough for the Fed to cut rates by .50%? The markets are saying no, because one of the inflation readings, (the Core CPI monthly reading) came in 0.1% above expectations and the Fed wants to be careful about not letting inflation reaccelerate through lowering rates.

Oil Hits 2024 Lows

Often, you can track oil prices to see what rates are doing. If oil prices are moving higher, it's likely rates are moving higher too. The opposite is true. This past week oil prices hit the lowest levels of 2024, so it's of no surprise that rates also hit 2024 lows as well.

China Struggles are Pushing Rates Lower Too

China is going through some very tough economic times with significant deflation in their housing market. Essentially, they are in the opposite housing position of the United States. Here – we do not have enough homes and everyone wants one. In China, they have too many homes and no one wants them. In China, to spark demand, they are lowering rates and even taking homes off the market (government purchases) to help stem the deflation or price declines in their markets. The weak economy is putting downward pressure on rates around the globe.

It remains to be seen what happens as China attempts to stoke inflation and housing demand in their faltering economy and if it will push inflation and rates higher around the globe.

Treasury Auctions Did Well

Every couple of weeks, we watch how much the Treasury Department will sell in new debt to fund our government. When these auctions do well (and buying interest is high at current rates), it helps keep rates stable to lower. If the auctions do poorly, it can lead to a spike in higher rates. The good news? Even with rates at the lowest levels of the year, there was high demand to purchase the debt in the bond market and this helped rates too.

Yield Curve Disinversion Continues

As we shared last week, the 2/10 Note Yield curve inversion turned positive and has remained so throughout this week. Meaning, the 2-yr Note yield has normalized beneath the 10-yr Note yield. The markets are reading this as a warning sign of a potential recession in the not-too-distant future. It seems odd that this is possible, but the disinversion back to a positive or normal yield curve has quite often accurately predicted a recession in the past.

Bottom line: The trend is our friend as rates are at the lowest levels of 2024 and threatening to touch the best levels since early 2023. Moreover, the Fed is going to start cutting rates next week.

Looking Ahead

Next week is the end of "higher for longer" as the Fed is going to cut rates, breaking a streak of 14 months where the Fed Funds Rate has been kept at 5.50%. In addition to the Fed Meeting, there are a bunch of market moving reports, including Retail Sales – a gauge on consumer health.

Mortgage bond prices determine home loan rates. The chart below is a one-year view of the Fannie Mae 30-year 5.0% 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 how prices have touched the best levels of 2024.

Chart: Fannie Mae Mortgage Bond (Friday September 13, 2024)

Economic Calendar for the Week of September 16 - 20