Market Review - September 5th, 2023

Market Review - September 5th, 2023

Just as Memorial Day is the unofficial start of summer, Labor Day is its unofficial end. Technically, summer doesn't start for about three weeks after the last Monday in May and doesn't end until about three weeks until after the first Monday in September, but regardless of hard dates or definitions, it's generally agreed that the end is somewhere around now.

After investor concerns and disagreements over the summer as to whether the Federal Reserve is or isn't done raising interest rates, the most recent sets of inflation and labor market data are starting to suggest that we may be at least at an unofficial end of rate hikes. Now, that's not to say that interest rates will soon be lowered, or that there's a zero chance of another quarter-point hike yet to come. Even in September, it's not uncommon to have a heat wave as the season shifts, but no one would suggest that the inevitable end of summer was somehow suspended. In the same way, we may yet see less favorable readings on inflation or an unexpected bump in hiring, but it's starting to feel as though a slowing trend for the economy may be sufficient to see the Fed turn to a more sustained pause.

We know that new residential construction has been supported by a lack of houses available to buy in the existing home market. That perhaps makes it a little surprising that the Pending Home Sales Index from the National Association of Realtors managed a positive mark for July, rising by 0.9%, a second consecutive monthly increase. That said, the PHSI is still 14% below year-ago levels. Although that's a bit better than it was in June. If they make it to closing, this measure of contracts signed to purchase should provide a little support for existing home sales for August or perhaps September, but conditions for buyers certainly didn't improve much in August, what with mortgage rates kicking to 22-year highs. Such an increase in cost likely means that somewhat more buyers had no choice buy to rescind offers as affordability declined further during the month.

Despite rates at multi-decade highs, at least some folks came out to seek mortgage credit. In the week ending August 25, applications for mortgages rose by 2.3%, according to the Mortgage Bankers Association. Requests for funds to buy homes rose by 2%; those to refinance existing loans rose by 2.5%. Of course, with market activity very subdued overall, it doesn't take much to move the needle by percentage points, as relatively few additional applications can have an outsized impact. Still, it's good to see that consumers can and will respond despite high-rate conditions.

The data last week had us thinking that mortgage rates were primed for a more considerable leg down next week, but the hawkish comments by Cleveland Fed President Loretta Mester gave the markets pause on Friday. The question is, even acknowledging recent positive developments, what would markets actually expect her or any other Fed official to say, when inflation is still twice the Fed's stated goal?

The sell-off in Treasury on Friday may have been a bit of knee-jerk reaction or simply investor repositioning ahead of a long weekend. Regardless, the yield on the influential 10-year Treasury did manage to finish the week a bit below where it began it, and secondary market yields for mortgages showed a bit more of a decline. There was a holiday for financial markets on Monday and a lighter slate of economic data due out later this week, but it's not clear if Friday's bond market selloff will continue or retreat. The turning of the labor market in July and August may or may not signal an unofficial end to the Fed's rate hiking campaign; however, mortgages and longer-term rates serve masters other than the Fed.

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