Market Update: Rates Drop Toward 3-Week Lows, but Will the Trend Continue?

Blog posted On September 04, 2023

As promised, last week’s economic data shook some things up for rates. Two weeks ago, average rates were trending near a decades-long high. Thankfully they found some relief from the GDP and jobs data last week and fell toward the lowest level in nearly a month. Now the big question is: will this trend continue?

GDP and jobs data come to the rescue

First came July’s Job Openings and Labor Turnover Survey (JOLTS). This showed that job openings fell to their lowest level since 2021. You might be thinking, that sounds bad, but we’ll let Matthew Graham of Mortgage News Daily explain why it’s not:

• “Mortgage rates tend to improve when data comes in weaker. This is both a general truth and a specific consequence of the Fed's current stance on rates.”

What is the Fed’s current stance on rates?

• “The Fed wants to see more evidence that high rates are having a negative impact on the economy.”

Okay but this still sounds bad…

• “Yes, it does seem odd to be rooting for economic pain, but as far as the Fed's concerned, a softer labor market is a good price to pay in exchange for lower inflation.”

Long story short, fewer job openings and an overall weaker jobs market likely indicate that inflation will remain low. As you might remember, inflation is the enemy of bonds, which influence rates. Think of it like this: more people in the jobs market means that more people are earning money. More people earning money means more people will be spending money. More people spending money drives inflation up and brings rates along with it.

            Aside from low job openings, the second quarter GDP estimate came in low. Low GDP is another good indicator of lower inflation. Good for rates.

Next moves: will rates continue their descent?

Now that rates can breathe a sigh of relief, will they keep on that downward trend? As you might have already guessed, it depends on the data. The bond market (and rates) aren’t always THIS data-driven but this is a unique time. Everyone’s kind of looking at each other trying to decide what the other person will do next and then adjusting their position based on those thoughts. A giant game of mind reading between data, bonds, and the Fed.

Coming up this week…

This week is a relatively quiet week for the housing market.

• Weds: Mortgage application submissions
• Thurs: Jobless claims

Let us know your thoughts and questions about recent rate movement or outlook.

Sources: Bloomberg, Mortgage News Daily, Mortgage News Daily, Mortgage News Daily