Wednesday turned out to be the most interesting day of the week for mortgage rates, thanks to headlines suggesting the U.S. and Iran were getting close to signing a one-page memo to end the war.
Yes, a memo.
Apparently, even global conflict occasionally needs a nice, clean one-pager before everyone starts drafting the giant legal document nobody wants to read.
Why a memo?
A formal peace agreement would be much longer than one page and would take a lot more time to negotiate, revise, argue over, revise again, send to legal, and then probably revise one more time just for fun.
A memo, on the other hand, can allow the parties to agree in principle on the major details. If that happens, the war could potentially end right away instead of waiting for the full formal agreement to be finalized.
In other words: the memo is not the whole wedding. It is more like agreeing to the engagement.
Why do rates like this news?
Mortgage rates are heavily influenced by bonds.
Inflation is bad for bonds because it tends to push rates higher. Higher oil prices can contribute to higher inflation. And the war has been a major reason oil prices have surged.
So the logic is pretty simple:
War pressures oil prices higher.
Higher oil prices can pressure inflation higher.
Higher inflation can pressure rates higher.
Therefore, ending the war could help oil prices, inflation, and rates move lower.
That is the kind of memo the bond market actually wants to read.
We have seen this relationship play out several times since the start of the war. It is easiest to see when looking at 10-year Treasury yields as a stand-in for mortgage rates, because mortgage rates usually update only one to three times per day.
How did mortgage rates react?
Mortgage rates started the week at their highest levels in more than a month.
Then Wednesday showed up, read the memo, and decided to undo some of the damage. According to MND’s daily rate index, Wednesday alone brought average daily mortgage rates back down to last Friday’s levels.
Meanwhile, weekly rate surveys showed rates moving higher, but that is because weekly surveys are slower-moving. They do not always capture quick day-to-day changes very well.
Basically, the daily data saw the action. The weekly surveys were still checking their voicemail.
What about the rest of the week?
Normally, this newsletter would spend a lot more time talking about Friday’s jobs report.
The payroll number came in at 115,000 versus a median forecast of 62,000. In almost any other market environment, that kind of stronger-than-expected jobs number could have caused rates to spike quickly.
But this time, the market mostly shrugged.
Why?
First, labor market data has been getting a little messier. The payroll number has become more of a moving target, while the unemployment rate has been getting more attention. The unemployment rate came in right in line with expectations at 4.3%.
Second, and more importantly, the rate market is still laser-focused on the war and oil prices.
So despite the stronger payroll number, rates were able to drift just a tiny bit lower on Friday.
Not a victory parade. More like a polite nod from the bond market.
What’s next?
The war will likely remain the biggest focus for markets next week.
That said, there will also be important economic data, especially inflation data. In some ways, the inflation reports could matter even more than the jobs report.
The Consumer Price Index comes out Tuesday, followed by the Producer Price Index on Wednesday. Both will give markets a fresh look at inflation for the month of April.
So next week’s rate market may be watching two things at once:
Oil prices and war headlines on one screen.
Inflation data on the other.
In other words, the bond market’s calendar is full, and unfortunately, none of the meetings could have been emails.