In what was supposed to be the quiet week, where Federal Reserve officials do not talk or speak about monetary policy, it was anything but that. Let's discuss the market moving events of this past week as we approach the July Fed meeting next week.

"Bang your Head" – Metal Health by Quiet Riot

The Quiet Period Gets Voice Bombed

In the 12 days leading up to the Fed meeting, there is a period called the blackout or quiet period. During this time Fed members do not have speeches or speak publicly on monetary policy. With the Fed Meeting approaching next Wednesday July 31st, last week was supposed to be free of Fed speak. Well, it was and it wasn't.

Former New York Fed president, Bill Dudley, offered an opinion piece with Bloomberg titled "I Changed my Mind, The Fed Needs To Cut Now". The piece talks about how changing facts have changed his outlook on the economy, rates and that waiting too long to cut elevates recession risks.

That is all the bond market needed to hear for interest rates to move. The 2-year Note which moves in response to Fed hikes and cuts, fell sharply, beneath 4.40% and the lowest levels since February. This on the idea that a Fed rate cut is fast approaching.

Will the Fed cut rates next week? Likely not, but as of this moment, the Fed Funds Futures are now pricing in .75% of Fed rate cuts by year-end, meaning they see a rate cut in September, November and December, thereby lowering the Fed Funds Rate to a range of 4.50% to 4.75%.

Bad News Is Finally Bad News 

Outside the first look at 2nd Quarter GDP which came in better than expected, the incoming economic news was disappointing and led many economists and market thinkers to suggest that the economy is headed towards a recession.

Existing home sales was unfortunately an utter disappointment, showing the worst June sales activity since 1999. The lack of mortgage demand, due to high interest rates and limited but growing housing inventory were the culprits behind this disappointing reading.

Durable Orders, which are purchases of big-ticket items were also a large disappointing miss - highlighting the notion that people are slowing their spending.

Problems Abroad As Well

Besides the weak economic data here at home, Germany and France also reported disappointing economic news with the former showing a surprise contraction in economic activity. Bad news in other parts of the globe pushes global interest rates lower. This is a reason for the sustained bid or buying of US Bonds.

China Surprise Rate Cut

On Thursday morning, China surprised the world by lowering their mortgage rates to stimulate their sagging economy and slumping housing market. The region is suffering from outright deflation in housing. This is a phenomenon where prices continue to fall because there is no demand. This is the opposite of what is happening here in the US and let's hope we do not see any deflation in our economy.

4.20%

The 10-year Note has been unable to move beneath 4.20% and this has limited the improvement in mortgage bonds and mortgage rates as well. This can be seen in the MMG bond chart below.

Bottom line: The economic story here in the US is changing quickly with disappointing economic news putting pressure on short term rates and greatly elevating the chance of a Fed rate cut. It was just a few weeks ago, at the June meeting when Fed Chair Powell said they were going to cut rates just one time. Now markets and former Fed officials like Dudley above, say the Fed needs to act sooner and more aggressively with rate cuts to lower the risk of a recession.

Looking Ahead

As we mentioned, next week's Fed Meeting is a big deal as Fed officials now must address the slowing economic news and the calls from former officials and market thinkers to cut rates sooner and more often in the coming months. It's also Jobs week with an important Jobs Report next Friday. If the unemployment rate ticks higher, the calls for rate cuts will grow louder. The opposite is true.

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, how prices have been stuck near a ceiling dating back to March, which has limited any further rate improvement.

Chart: Fannie Mae Mortgage Bond (Friday July 26, 2024)

Economic Calendar for the Week of July 29 - August 2