Hello Everyone.

This is the market update regarding lending and real estate.

Also, quick note that the rates shown on the side are national averages, while the presentation above is today's rate scenarios with The Mortgage Architects. You can access the rate comparison by clicking on the Mortgage Coach presentation on the right, or if you are looking on your phone, it will be below this text.

8.26.2024.

Stocks are higher and Mortgage Bonds are trading near unchanged levels to start the week. The 10-year continues to test formidable support at 3.80%, which is a level yields have not been able to sustain a move below.

2019 Comparison

The Fed is historically tight right now, with the Fed Funds Rate at 5.25% to 5.50%. We know the Fed is going to start cutting on September 18, but they are behind the curve and have a lot of room to cut rates. Let’s take a look at some of the economic readings today vs pre-pandemic in 2019 – There is not much in common and the Fed is clearly overly restrictive.

2019 vs Today

• Core PCE: 1.8% vs 2.6%
• Unemployment Rate: 3.6% vs 4.3%
• Job Openings to Unemployment Ratio: 1.24% vs 1.2%
• Hiring Rate: 3.8% vs 3.4%
• Fed Funds Rate: 2.5% vs 5.375%
• 10-year Treasury: 2.8% to 1.9% vs 3.80%
• 30-year Fixed Mortgage Rate: 4% vs 6.5%

Inflation is higher today but is on the way down. Notably, labor is much weaker across the board, yet the Fed Funds Rate is much higher. 10-year yields are 1-2% higher than 2019, while Mortgage Rates are 2.5% higher today…And we think yields and rates will continue to move lower, albeit not in a straight line and over time.

Durable Goods Orders

Durable Goods Orders in July rose almost 10%, which appeared to be much stronger than market estimates of +5%. But this report is heavily influenced by aircraft orders, and when stripping out transportation, the index fell 0.2%...which was worse than estimates of -0.1%. There was also a big downward revision to June, making this report even weaker.

Core Durable Goods Orders fell by 0.1%, which was weaker than estimates of a flat reading, but there was a positive revision to the previous report. Year over year, capital spending has been weak, up only 1.2% and pointing to a slowdown in the economy.

Also of note, the shipments of those Core Goods, gets plugged into GDP, fell 0.4%. All else equal, this will trim Q2 GDP estimates when revised next.

News This Week

• Monday: Durable Goods Orders
• Tuesday: Case Shiller & FHFA Appreciation reports, Consumer Confidence
• Wednesday: Mortgage Applications
• Thursday: Initial Jobless Claims, Q2 GDP (second reading), Pending Home Sales
• Friday: Personal Consumption Expenditures

The highlight of the week will be Friday’s PCE (Personal Consumption Expenditures), which is the Fed’s favorite measure of inflation. The Core reading was last reported at 2.63%. The market is anticipating some low monthly readings, but because the comparisons from last year are so low, it will be difficult to make progress on the year over year readings.

We do think the monthly readings will be favorable, and possibly beneath market estimates for two key reasons – The Producer Price Index, which was released earlier this month, was below and well beneath expectations. This is important because a lot of the components within the PPI report are shared by the PCE.

Secondly, the Consumer Price Index Inflation report, also released earlier in the month, was pretty low, despite shelter costs artificially keeping it higher. When taking out shelter and motor vehicle insurance, all of the other items actually fell 0.1% in the month. Because PCE has much less of a weighting for shelter, we believe it will not be influenced as much and since all the other items dropped in aggregate, we feel there is a good chance PCE comes in beneath estimates and is favorable to the Bond market.

Technical Analysis

Mortgage Bonds had been able to show important resistance at 100.79 on Friday. Bonds have since back tested this level as support, which is holding for now. Bonds are now in a new range with the next ceiling up at 101.18, over 30bp above present levels.

The 10-year yield is once again testing an important floor at 3.80%. The last few times tested, this level has held up, but a convincing break beneath it means that yields could go as low as 3.68%. If yields are rejected, there is room for them to move higher until reaching a ceiling at 3.92% - 3.95%. Which way yields go will be important to monitor.

Thanks!

Nathan