Mortgage Rates Back Over 7% as Markets Digest Economic Data
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July 9, 2023

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Remember those fond days, oh, just a few weeks past, when we thought 7% mortgage rates were as extinct as the dodo bird? Alas, the past fortnight has reminded us that what goes down, can indeed climb back up – and rather ungracefully, I might add! The unexpected muscle-flexing of a few economy reports has played a role of a mischievous toddler, prodding the sleeping giant of mortgage rates back to life.

A little birdie once told me, strong economic data tends to give a sugar rush to the mortgage rates. They just can’t help but bounce with joy! The Fed has chimed in as well, warning us that unless the economy decides to chill a bit more, they’ll keep giving the rates an upward nudge. The recent data, it seems, is having none of that chilling business.

Take for instance the latest ISM’s services sector business activity index. It’s doing the hula-hoop around the moon! See for yourself in Picture 1

The ADP employment data turned out to be the real party pooper, overshooting the median forecast by a moonshot, clocking in at a hefty 497k. ADP’s purpose? Well, it’s trying to play Nostradamus for the bigwig – the Labor Department’s monthly jobs report. This time though, the nonfarm payroll (NFP) played hard to get and didn’t entirely live up to ADP’s prophecy.

Sure, the NFP didn’t totally align with ADP’s sky-high dreams, but with 209k jobs crafted (as opposed to a 225k prediction), it didn’t exactly disappoint. Wages took a minor growth spurt, and unemployment sulked near record lows at 3.6%. Take a look at Picture 2

You’d think all this goodness would make bonds a tad happier, right? But no! Bonds, like grumpy old men, prefer bad news. And the current news just isn’t sour enough to give them a much-needed uplift.

Here’s a fun fact – stocks sometimes root for the bad news too. Boggles the mind, doesn’t it? But it’s all about how this data could influence the Fed’s rate hike itinerary. Basically, the stronger the data, the more uphill the predicted journey for the Fed Funds Rate. Picture 3 will help you see this in a more visual way.

Broadly speaking, the recent data flip is giving a whole new look to the trend in long-term rates. They’re like a fashion-forward teenager breaking out from the norm, as seen in the trend of Treasury yields

Now, you can’t expect mortgage rates to sit by the sidelines while all this drama unfolds. They’re in sync with the long-term Treasuries, showing off their own breakout moves. The result? A groovy new trend of ‘higher highs’ since March

Lenders, doing their own version of the electric slide, stepped well into the 7% zone this week. Quite a leap compared to Freddie Mac’s weekly rate survey which clocked in at a more tame 6.81%. But hold your horses! Freddie’s survey sneaks in some “points” that are unreported, making his rate appear leaner. The MND’s index (the blue line in Picture 5), plays a fairer game, taking points into consideration.

The crystal ball prediction? Keep an eye on how the market responds to economic data. One crucial guest at the party, the Consumer Price Index, is set to arrive next Wednesday morning. Should it bring the chill pill of lower-than-expected inflation, we might see rates take a breather. But if it takes a leaf out of this week’s book and overshoots predictions, brace yourself for more of those ‘higher highs’.

 

 

 

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