Mortgage Update - August 5th, 2024
Hello everyone! We had a crazy week in the mortgage world and it’s only just begun. As we kick off a new week, markets are already in a tailspin. But why? We’re here to break it all down for you. Let's go!!
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Read time: ~4 minutes
Powell Signals Rate Cuts!
As expected, the Fed did not cut rates during their much-anticipated press conference last Wednesday. Nonetheless, we witnessed a significant improvement in mortgage rates! This highlights the paradox Nick and I often discuss: the market reacts in real time to events that are months away. The Fed's next meeting is scheduled for September, but the recent rate drop is largely due to anticipated future cuts.
During the press conference, Powell mentioned that a September rate cut is a strong possibility. The next Fed meeting is on September 17th and 18th, and it's almost certain that the first rate cut will happen then unless unexpected data changes their course. Powell emphasized that the Fed considers the data as a whole rather than any single report and strongly rejected the idea that the Fed is influenced by politics. “We never use our tools to support or oppose a political party, a politician, or any political outcome,” Powell said. “Anything we do before, during, or after the election will be based on the data, the outlook, and the balance of risks, and not on anything else.”
Key Takeaway: It's nearly certain that the Fed will cut rates in September. The bond market responded positively to Powell's openness to multiple rate cuts in 2024, and mortgage rates improved quickly.
And Then There was the Jobs Report...
On Friday, we had the release of the all-important July Jobs report and needless to say, it was abysmal! As we've mentioned before, bad economic news tends to be good for mortgage rates.
The jobs data fell far short of expectations. Instead of the predicted 175,000 new jobs, only 114,000 were created, and previous months were also revised down (surprise, surprise). The Unemployment rate also rose from 4.1% to 4.3%, marking a significant jump! Markets reacted sharply, seeing this as an indication that the Fed will have to cut rates substantially starting in September to avert a deep recession.
Nick and I feel as if the current market response feels a little exaggerated. It was just a few days ago, we were desperately searching for signals from Fed Chair Powell regarding a possible September rate cut. Now, the markets are behaving as if emergency cuts are just around the corner. While we might be witnessing some of the best rates of 2024, don't be surprised if there’s a slight pullback in rates once things begin to settle.
Key Takeaway: The big miss in the July jobs report strengthens the case for Powell to cut rates in September. The disappointing economic data led to a welcome improvement in mortgage rates last week. We’ll need that Black Swan event to see rates lower any further.
Black Swan or Black Monday?
If you haven't heard, there was complete chaos in the Japanese stock market last night. Japan's Nikkei experienced its largest crash in history, dropping over 12% in one day, which is triggering a massive global selloff. Stocks and crypto have plunged as investors start to panic.
So what happened? Last week, the Bank of Japan (BoJ) increased interest rates from 0% to 0.25%. This early increase surprised the market. Before this, anyone could borrow Yen (Japanese currency) at no interest, convert it to USD (US dollars), and buy stocks. It was essentially free money.
But there was a problem. Because the BoJ increased their interest rates, the US Dollar crashed versus the Yen. That meant traders borrowing billions in Yen to buy dollars could not cover their debt anymore. What did they do? Sell the stocks they bought earlier with those dollars, which signals a stock market crash.
This may be the "Black Swan" event that could cause the Fed to cut rates sooner rather than later. Odds of an emergency Fed rate cut this week just jumped to 60%! We may be staring down some of the lowest mortgage rates we have seen in a couple of years. Buckle up!