Mortgage rates retreat as wave of data suggests economy is cooling

In less than a week, a series of reports has changed the outlook for the timing and magnitude of future Fed rate cuts, 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 consecutive business day on Wednesday following a slew of data releases pointing to an economic slowdown.

Data tracked by Optimal Blue showed borrowers were locking in rates on 30-year fixed-rate conforming mortgages at an average of 6.93 percent Tuesday, down 34 basis points from a 2024 high of 7.27 percent registered April 25.

Optimal Blue data lags by a day, but an index compiled by Mortgage News Daily showed rates on 30-year fixed-rate mortgages falling for a fifth consecutive day Wednesday, bringing the total decline in the last week alone to 31 basis points. A basis point is one-hundredth of a percentage point.

Mortgage rates retreating from 2024 highs

Yields on 10-year Treasurys, which mortgage rates track closely, dipped to 4.29 percent Wednesday, down 45 basis points from a 2024 high of 4.74 percent on April 25. Bond market investors who fund most mortgages have a bigger appetite for such investments if they think the Fed is poised to cut rates in order to head off a recession.

Ed Yardeni

Ed Yardeni

“The financial markets seem to believe that the Fed Put is back,” Yardeni Research founder Ed Yardeni said in a “quick take” with Eric Wallerstein Tuesday. “The recent batch of weaker-than-expected economic indicators raised the number of expected 25 [basis-point] cuts in the federal funds rate from two to three over the next 12 months.”

In less than a week, a series of reports has changed the outlook for the timing and magnitude of future Fed rate cuts:

  • The Bureau of Economic Analysis on May 30 revised downward its estimate of first-quarter gross domestic product (GDP) annual growth, from 1.6 percent to 1.3 percent, saying consumer spending rose less than previously estimated.
  • The Federal Reserve’s preferred gauge of inflation eased to 2.65 percent in April, closer to the Fed’s 2 percent target, the Commerce Department reported Friday.
  • On Monday, the Federal Reserve Bank of Atlanta’s GDPNow model estimated that the economy grew at an annual rate of 1.8 percent during Q2 2024, not 2.7 percent as estimated on May 31 (GDPNow “is not an official forecast of the Atlanta Fed” but a running estimate of real GDP growth based on modeled data).
  • A survey by the Institute for Supply Management (ISM) released Monday showed a slowdown in manufacturing activity in May.
  • The Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) report, released Tuesday, showed job openings falling to a three-year low in April, to 8.06 million, down from 9.9 million a year ago.

Another ISM survey released Wednesday showed that after contracting in April for the first time since December, the service sector expanded in May.

But the ISM services index’s employment index was up by only 1.2 points in May, less than half of a 2.6-point drop in April, leaving hiring plans “at a subdued level,” Pantheon Macroeconomics economist Oliver Allen said in a note to clients.

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 gains and pay growth are slowing going into the second half of the year,” said ADP Chief Economist Nela Richardson in a statement. “The labor market is solid, but we’re monitoring notable pockets of weakness tied to both producers and consumers.”

Futures markets see Fed rate cuts coming

CME FedWatch Dec 2024 6.5.24

Where futures markets predict the federal funds target rate, currently 5.25 percent to 5.50 percent, will be after the Fed’s final meeting of the year on Dec. 18. Source: CME FedWatch Tool. 

Futures markets tracked by the CME FedWatch Tool on Wednesday predicted that there’s only a 6 percent chance that the Fed will keep the short-term federal funds rate at the current target of 5.25 percent to 5.50 percent for the rest of the year. On May 29, futures markets were pricing in a 21 percent chance that the Fed would stick to its “higher for longer” rate strategy and not implement any rate cuts this year.

Bets placed by futures market investors as of Wednesday implied that the odds of three or more rate cuts by Dec. 18 are 25 percent, up from 7 percent on May 29. The CME FedWatch Tool predicts there’s a 66 percent chance of two or more rate cuts by the end of the year, up from 36 percent on May 29.

While the recent decline in mortgage rates has been dramatic, it remains to be seen how much of an incentive the pullback will provide to would-be homebuyers.

A weekly survey of lenders by the Mortgage Bankers Association found that for the week ending May 31, requests for purchase loans were down by a seasonally adjusted 4 percent from the week before, and 13 percent from a year ago.

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