The weather may be plenty hot to start the summer, but it's starting to look as though the climate for the economy and inflation are in a cooler if not cooling pattern. If nothing else, there seems to at least be a few clouds to block some of the inflationary heat, but what of course isn't clear is whether they will produce any lasting impact.
The housing market is already quite cool, and mortgage rates hanging around the 7% mark don't provide a strong reason for potential homebuyers or homeowners to jump in and get a new mortgage. The Mortgage Bankers Association reported that in the week ending June 28, requests for mortgage credit declined by 2.6%, pulled down by a 3.3% decline in applications for funds to purchase homes, as well as a 1.5% drop in those to refinance existing loans. A firming in mortgage rates, vacation season getting fully underway, and the Independence Day holiday last week made it very unlikely we'll see any improvement in mortgage activity.
Signs continue to accumulate that the economy is becoming more sluggish, and that the factors that can influence inflation (and inflation itself) are starting to retreat again. While this has not yet resulted in a meaningful change in the Fed's stance toward policy or in market-based interest rates, it might not be all that long before both start to tilt in an easier or lower direction. Of course, this does depend on at least one more months’ worth of improving inflation reports coupled with some economic data that reinforces the cooler pace of economic growth.
We won't have to wait long for the next inflation reports, though. Although the economic calendar is light in terms of data, next week we'll see the June Consumer and Producer Price Indexes. Last month, a favorable May report helped trim annual CPI inflation to 3.3% and core CPI back to 3.4%, its lowest level since August 2021. Another step in this direction could be enough to start to end the Fed the kind of confidence needed to consider cutting rates by September.
Of course, there's a lot of time before then and much can happen. In the nearer term, the influential yields that underlie mortgage rates found reasons to decline last week, as the incoming news on labor markets and the overall economy was on the softer side. Last Friday, the quarter-and-month end market activity that lifted yields and mortgage rates to start July had mostly reversed, setting the stage for a decline in mortgage rates this week. Freddie Mac reported a nine-basis point increase in the average offered rate for a conforming 30-year FRM last week, rather a bit more of an increase than we expected; presently, it looks as though most if not all this increase will be erased when the next Freddie update on rates comes Thursday.
