In less than a week, a series of reports changed the outlook for the timing and magnitude of future rate cuts from the Federal Reserve, sending mortgage rates into a five-day tailspin.
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Long-term Treasury yields and mortgage rates continued to slide for a fifth straight day on Wednesday after a slew of data releases pointed to a slowing economy.
The average rate borrowers locked in on a 30-year fixed-rate conforming mortgage on Tuesday was 6.93%, data tracked by Optimal Blue showed, down 34 basis points from the 2024 high of 7.27% recorded on April 25.
Optimal Blue data lags a day, but an index compiled by Mortgage News Daily showed 30-year fixed-rate mortgage rates fell for a fifth straight day on Wednesday, bringing the total decline to 31 basis points last week alone. A basis point is one hundredth of a percentage point.
Mortgage rates fall from 2024 highs
The 10-year Treasury yield, which is closely linked to mortgage rates, fell to 4.29% on Wednesday, down 45 basis points from its 2024 high of 4.74% on April 25.
Ed Yardney
“Financial markets seem to believe that the Fed puts are back,” Ed Yardeni, founder of Yardeni Research, said in a “Quick Interview” with Eric Wallerstein on Tuesday. “A recent batch of weaker-than-expected economic indicators has raised 25 expectations [basis-point] Cut the federal funds rate from 2 to 3 over the next 12 months.
In less than a week, a series of reports have changed the outlook for the timing and magnitude of future rate cuts by the Fed:
- On May 30, the U.S. Bureau of Economic Analysis lowered its first-quarter gross domestic product (GDP) annual growth forecast from 1.6% to 1.3%, indicating that consumer spending growth was lower than previously expected.
- The U.S. Commerce Department reported on Friday that the Federal Reserve’s preferred inflation gauge fell to 2.65% in April, close to the Fed’s 2% target.
- On Monday, the Atlanta Fed’s GDPNow model estimated that the economy would grow at an annual rate of 1.8% in the second quarter of 2024, instead of the 2.7% estimated on May 31 (GDPNow is “not an official forecast from the Atlanta Fed,” but is based on model data to provide a running estimate of real GDP growth).
- A survey released on Monday by the Institute for Supply Management (ISM) showed that manufacturing activity slowed in May.
- The Job Openings and Labor Turnover Survey (JOLTS) report released by the U.S. Bureau of Labor Statistics on Tuesday showed that job openings fell to a three-year low in April, falling to 8.06 million from 9.9 million a year ago.
A separate ISM survey released on Wednesday showed the services sector expanded in May after contracting in April for the first time since December.
But Pantheon Macroeconomics economist Oliver Allen said in a note to clients that employment in the ISM Services Index rose just 1.2 points in May, less than half the 2.6-point decline in April, leaving hiring plans “at subdued levels.” “.
Also on Wednesday, the latest ADP national employment report showed private sector employment increased by 152,000 jobs in May, down from 188,000 in April.
“Job growth and wage growth are moderating as we enter the second half of the year,” ADP chief economist Nela Richardson said in a statement. “The labor market is solid, but we are monitoring significant weaknesses related to producers and consumers.”
The futures market predicts an imminent Fed rate cut
The futures market predicts that the federal funds target rate (currently 5.25% to 5.50%) will be announced on December 18 after the Federal Reserve’s last meeting of the year.
The futures market tracked by the CME FedWatch tool on Wednesday predicted there was only a 6% chance that the Fed would keep the short-term federal funds rate at its current target of 5.25% to 5.50% for the remainder of the year. On May 29, the futures market predicted that the probability that the Federal Reserve would stick to the “long-term higher” interest rate strategy and not implement any interest rate cuts this year was 21%.
As of Wednesday, investor bets in the futures market indicated a 25% chance of three or more rate cuts by Dec. 18, up from 7% on May 29. The likelihood of deeper cuts by the end of the year is 66%, up from 36% on May 29.
Although mortgage rates have dropped significantly recently, it remains to be seen how much of an incentive this drop will provide to potential homebuyers.
The Mortgage Bankers Association’s weekly survey of lenders found that purchase loan requests fell a seasonally adjusted 4% in the week ended May 31 from the previous week and were down 13% from a year ago.
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