At 9:44 a.m. ET on Wednesday, the mortgage-rate story was pretty simple: sit tight and wait for next week’s economic data.
Then, at 9:45 a.m., the market apparently decided that “waiting patiently” was overrated.
Enter S&P Global’s preliminary Purchasing Managers’ Indexes, or PMIs. These reports measure business activity in manufacturing and services and, under normal circumstances, are about as exciting to the rate market as watching paint dry.
Not this time.
Both PMI readings came in dramatically stronger than expected — by the widest margins in years — and reached their highest levels in years. Companies also reported that input costs were rising at the fastest pace in nearly four years, while selling prices and employment were picking up too.
In other words, the economy showed up to the party wearing steel-toed boots.
Bond traders immediately took notice. The 10-year Treasury yield jumped above 5%, and the selling didn’t stop with the initial reaction.
This was especially important because it was the only economic report this week with a reasonable connection to next week’s much more important data: the ISM surveys, job openings report, and monthly jobs report.
So why did the market suddenly care so much about a report it normally shrugs off?
The short answer: traders were already nervous.
Following last week’s Fed meeting, comments from Fed Chair Kevin Warsh suggested that additional rate hikes could be coming. That left traders wondering whether the market had been too optimistic about the future path of interest rates.
Since then, several Fed officials have added fuel to the fire, suggesting that the Fed’s recently updated rate outlook could end up being too low if the economy continues strengthening or if inflation turns out to be driven more by strong consumer demand.
Then Wednesday’s PMI report came along and poked both of those concerns at the same time.
The numbers raised the possibility that next week’s economic reports — the ones that REALLY matter — could also come in stronger than expected.
And this wasn’t an isolated surprise. It was simply the latest in a string of unpleasant developments for the rate outlook that began in earnest with the Fed’s late-August Jackson Hole speech.
Taken together, longer-term expectations for the Fed Funds Rate have risen by nearly 0.75% since then.
What happened next is what we call a repricing of the rate outlook.
Basically, the market collectively looked at the numbers and said, “Wait a minute…maybe we need to rethink all of this.”
A repricing happens when traders rapidly adjust their expectations for how many Fed hikes may be needed and how soon they could happen. The result is usually higher bond yields and higher mortgage rates.
And once that process gets going, it can develop a little momentum of its own — almost like opening Pandora’s Box, except instead of unleashing mythical creatures, you get higher mortgage rates.
In this particular case, the repricing really played out on Wednesday and Thursday.
Friday finally brought some signs of recovery in the bond market, although it took a fairly sharp drop in oil prices to help make that happen.
Mortgage rates, meanwhile, were not exactly eager to follow the bond market’s lead. They actually started Friday even higher.
Thankfully, later in the day, several mortgage lenders released updates — much later than usual — and those changes brought the average rate back to just below Thursday’s latest levels.
So, Friday afternoon technically counts as a victory.
A very small victory.
The problem is that mortgage rates still finished the week roughly a quarter point higher than they were the previous week.
So, is the worst over?
That’s the big question.
Next week should provide a much clearer answer. The upcoming economic reports will help determine whether this week’s market panic was simply a false alarm or an early warning that rates could remain under pressure.
Oil prices and geopolitical headlines will continue to matter, but the market’s biggest question is much more straightforward:
Is the economy getting strong enough that the Fed’s latest rate forecast is already outdated?
We’ll have a much better idea after next week’s data rolls in.
Until then, the rate market will probably continue doing what it does best: keeping everyone guessing.