As of Friday, rates had improved so much from recent highs that we could finally consider the 2022 trend to have shifted from “soaring” to “sideways”. Although this possibility can still be considered, the rates for this week are significantly higher.
Here’s what things look like when we zoom in on the last 6 weeks:
Context is important. While these are big swings in normal times, they are normal during the heightened volatility of 2022.
Hoping for a swing to a sideways trend, we just hope to avoid getting back above the peak seen in early May. Such an achievement will likely have a lot to do with economic data.
The most watched economic reports of 2022 are those that directly concern inflation. In fact, for most of the year, the strongest rate reactions followed inflation reports and the Fed’s policy response.
With no headline inflation reports this week, markets have been forced to look elsewhere for inspiration. They found it over the weekend in developments in foreign markets. These included the lifting of covid lockdowns in China and record inflation in the Eurozone.
The holiday shutdown of US bond markets on Monday caused a rough start to the week on Tuesday. The following day, bonds were again spooked by a key report from the Institute for Supply Management (ISM) which showed stronger than expected growth in the manufacturing sector.
10-year Treasury yields do not directly dictate mortgage rates, but they tend to move in the same direction in similar proportions over time. They also give us a way to visualize more granular movements in the bond market. This is useful because bonds are the main ingredient used by lenders to determine mortgage rates. Of course, there are bonds that directly concern the mortgage market (MBS), but they require a little more explanation because they are traded in PRICE (which moves inversely to rates). Anyway, the take away is the same for this week’s rate volatility.
This is interesting to consider how important the bond market reaction was to the ISM data. Although the ISM has one of the best track records among other economic reports for inspiring rate moves, the impact has been milder than normal in recent years. More recently, this could be attributed to the market’s hyperfocus on inflation.
But now that inflation is trying to turn the page, and in a week without no material inflation data, markets were free to consider the implications of other economic data. The interesting part is the magnitude of the reaction RELATIVE where the ISM numbers are entered. The following chart shows the consensus among economic forecasters and the actual outcome.
In other words, it doesn’t seem like such a small deviation from expectations should have mattered. To a lesser extent, so did Friday’s Big Jobs report, which also drove bond yields higher.
And here’s how the number of jobs fared compared to the forecast:
What this tells us is that there is a bit of a disconnect between economists and traders as the market has apparently bought into a gloomier outlook. While the gloom may still prove justified, the disagreement in the data gives pause to recent favorable rate trends.
There were a handful of other economic reports this week and while none of them moved the needle like the ones mentioned above, at least one of them was quite interesting. Specifically, house prices have continued to rise at a pace that suggests very little concern for rates. In fact, for the Case-Shiller index of 20 metropolitan areas, price appreciation set a new year-over-year record.
Does this actually mean prices don’t care about tariffs? It’s a complicated question. Certainly, rising rates combined with sky-high price increases mean affordability has suffered. In turn, the affordability situation will increasingly dampen demand for home purchases. In the coming months, we will likely see the effects in house price data.
So why haven’t we seen it yet? This is also not the easiest question to answer, but there is at least one simple consideration: house price data only covers transactions completed in March. The prices associated with these transactions were decided at least a month before. In other words, there is some disconnect (and yes, there are other complicating factors as well, including but not limited to supply and demand imbalances in many areas) .
At the end of the line, don’t be surprised when the lines in the chart above start to fall. They go. And that’s actually a good thing (because this rate of appreciation is unsustainable). What we currently cannot know is what the reversal in appreciation will look like and whether it will give way to an actual decline in value.