Mortgage rates were cruising toward a fairly uneventful week — nothing too exciting, just quietly doing their thing. Then Friday morning arrived, Fed Chair Kevin Warsh gave a speech, and suddenly the bond market decided it was time to panic a little.
The average top-tier 30-year fixed mortgage rate jumped to its highest level in just over three weeks. Apparently, the market had other plans for a relaxing Friday.
The week started with yet another round of headlines about the Treasury buying back its own bonds. Despite all the attention, traders weren’t particularly impressed last week, and they were even less interested this week. Treasury buybacks can influence the relationship between short- and long-term yields, but they aren’t some magical button that makes mortgage rates suddenly behave themselves.
Monday’s modest improvement had much more to do with falling oil prices.
That trend continued Tuesday, as hopes for progress toward a peace deal pushed both oil prices and Treasury yields lower. Oil has become unusually important for mortgage rates because any prolonged disruption in the Strait of Hormuz raises concerns about energy costs — and, naturally, inflation.
Wednesday brought July’s PCE inflation report, the Fed’s favorite inflation gauge. The core reading, which excludes food and energy, matched expectations when rounded to the nearest tenth of a percent: 0.2% versus 0.2%.
But here’s where things get a little nerdy.
The actual, unrounded number was 0.247%, which is about as high as you can get while still being rounded down to 0.2%. Markets love digging into these tiny details for clues, because apparently rounding rules can be exciting when you’re a bond trader.
The result was some additional pressure on rates Wednesday, but it wasn’t nearly enough to steal the spotlight.
That honor belonged to Fed Chair Warsh and his speech at the Fed’s annual Jackson Hole conference.
Warsh painted a relatively strong picture of the economy and labor market, emphasized that the Fed’s 2% inflation target remains firmly in place, and suggested that current interest-rate levels aren’t doing much to restrain financial conditions.
Markets took that as a fairly clear message: don’t get too comfortable with the idea of rate cuts just yet.
In fact, investors began pricing in a much greater possibility that the Fed could actually raise rates again if inflation refuses to cooperate. The following chart shows the change in expectations for the Fed Funds Rate at the September meeting. At one point, the probability of a rate hike moved above 50%.
Of course, it’s always worth repeating that the Fed does not directly set mortgage rates. Mortgage pricing is much more closely tied to the bond market, which reacts to expectations about what the Fed is likely to do.
After Warsh’s speech, short-term Treasury yields jumped by more than one-tenth of a percentage point. Medium-term Treasuries — which have a strong relationship with the bonds that influence mortgage rates — also took a hit.
The result? Mortgage rates experienced their sharpest one-day jump in several weeks.
The good news, if we’re looking for one, is that Friday’s average mortgage rates were only modestly higher than they were the previous Friday. So while the market definitely threw a little tantrum on Friday, it didn’t completely ruin the week.
Looking ahead, next week brings the usual mountain of important economic data that arrives at the beginning of each month. The biggest event will almost certainly be Friday’s jobs report.
If employment data comes in weaker than expected, it could challenge Warsh’s optimistic assessment of the economy and give mortgage rates some room to recover.
If the jobs numbers come in strong, however, Friday’s message could be reinforced — and mortgage rates may remain under pressure.
And then there’s oil.
Fuel prices remain the other major wild card, because apparently mortgage rates weren’t complicated enough already.