With a virtual guarantee of a rate cut coming at the next Fed meeting, the next logical question is "What size will the cut be?" For that, the Fed has made clear that they "will be data dependent but not data point dependent, so it will not be a question of responding specifically to one or two data releases" and that "the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."
Still, clues and cues in this regard may be taken from the inbound data. Although there will be another round of CPI, PPI and import and export price changes before the mid-September FOMC get-together, there won't be any fresh update of the Fed's preferred measure of prices, derived from monthly Personal Consumption Expenditures data. The most recent figure the Fed will have to work with was released last week, but covers July, so it lags current conditions by a bit.
Mortgage rates were lower in July, but not by much, and existing home prices posted new record highs in June. These aren't the ingredients for a rebound in home sales, and the National Association of Realtors Pending Home Sales Index reflects this quite clearly. The PHSI posted a decline of 5.5% in July, and with the decline this measure of signed contract to buy previously occupied homes dropped to the lowest level in its (23-year) history. Mortgage rates dropped materially last month, ending August on a low note, so it's possible that this may entice some homebuyers into the market, but we'll not know this until the end of September at the earliest. That said, we have also passed the typical spring-summer homebuying "season", so it's hard to know how much improvement in sales might be expected.
We do know that lower mortgage rates by themselves are limited in their ability to improve sales, and that even with recent declines, rates are still in the mid-sixes, albeit at about a 16-month low point. Even with that, requests for mortgage credit aren't exactly booming, but the Mortgage Bankers Association reported that overall applications for mortgages rose by 0.5% in the week ending August 23. Requests for funds to purchase homes edged 0.9% higher, while those to refinance existing loans declined by 0.1%. The fresh decline in rates last week may see a few more refinance applications be filed as homeowners can react more quickly than can potential homebuyers.
The summer unofficially ended on Monday, after which a quickening pace in markets typically occurs. In years past, changes to set the course as we head into the fall usually begin in the first full week after Labor Day, and that may be the case again as investors and the Fed return from holiday to focus on the inbound data.
The economic data last week was painting a pretty clear picture, the influential yield on the 10-year Treasury quietly firmed up for much of the week, closing Friday at a yield about an eighth of a percentage point higher than where it began on Monday. While slightly firmer yields haven't translated into higher mortgage rates of late, that does appear as though it will be the case this week, at least enough to erase some of last week's decline. We think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will show a rise of 3-5 basis points when the next update comes out next Thursday.
