Inflation and economic growth… Regardless of our thoughts on the underlying reasons, these two factors have played a key role in skyrocketing rates over the past few years. The Fed won’t signal an end to its “higher for longer” rate policies until it sees lower inflation combined with a cooler economy.
Today’s Retail Sales data, albeit for the month of September, says the economy is anything but cooler. In fact, there were broad-based gains in all of the biggest sectors of the report. It was also the 3rd month in a row that inflation-adjusted Retail Sales were in positive territory and each month has been stronger than the last in that regard.
From an economic standpoint, stronger retail sales are good. Unfortunately, that strength raises concerns about recent improvements in the inflation outlook. Many at the Fed feel that it will be hard to tame inflation if the economy continues generating numbers like this.
As such, the bond market’s response was no surprise. Bond yields spiked immediately after the data came out. MBS (the mortgage backed securities that directly dictate mortgage rates) were simply along for the ride.
Given that we were already fairly close to multidecade highs yesterday, that unpleasant ceiling was easily broken today. The average lender is up to 7.92% for a top tier conventional 30yr fixed scenario. That means many borrowers are already seeing 8% or higher. Conversely, rates in the mid 7s are still a thing, but mainly for scenarios with substantial upfront discount points.
Economic data will continue to set the tone. We need a sustained shift toward cooler numbers in order to see a sustained shift toward lower rates.
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