Did the Fed break the economy? ??

7/29-8/2 Headline: Mortgage rates DROP to a 12-month low on recession fears

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Well, it looks like the Fed should have started cutting rates last week. Every labor market report published last week spelled bad news for the economy and now the concern is that the Fed may have overshot its chance at a soft landing. Stock markets are falling and so are interest rates.?

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The good news for homebuyers is that the conversation has turned from "when will the Fed cut rates?" to "how much will the Fed cut rates in September?" AND "do we need an emergency rate cut?"

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As a result of the change in conversation, the average rate on a 30-year fixed rate conventional loan DROPPED to 6.43% (down from the 6.75% reported last week).? One of the biggest 1-week drops we've seen since the pandemic.?

Unemployment JUMPS as Labor Market Looks ICE Cold

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Labor market data went 0/3 last week as 3 major reports came in worse than expected.

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First, job openings?reported that there are 8,18M openings currently, which is slightly better than the market anticipated (8.1M expected). However, employers hired 5.3 million people, which is the fewest since April 2020 (aka peak pandemic!).?

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Next, private payrolls came in well below expectations.? Just 122,000 jobs were added by private companies in July, the slowest pace since January and far below the 155,000 expected. In another blow for workers, ADP also reported that wages for those who stayed in their jobs increased 4.8% from a year ago, the smallest rise since July 2021 and DOWN 0.1 percentage point from June.

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Finally, the biggest market mover - the US employment report for July came out on Friday and it sent shockwaves through the market. The unemployment rate jumped to 4.3% (vs. 4.1% expected) and just 114,000 jobs were added (vs. 185,000 expected)!?

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These numbers are some of the worst we have seen since the pandemic and the current state of the labor market has people wondering.... ?

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Did the Fed break the economy?

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The Fed met last week and it felt like a bit like Groundhog's Day. At the July 31st meeting, Powell once again stated the Fed needs to see more data before cutting rates. The market got excited when Powell admitted that if good data continues that "I would think that a rate cut could be on the table at the September meeting." But, just 2 days later, Powell got more data than he hoped for. The employment report showed us that the Fed may have waited too long!??

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It looks like the Bloomberg article asking the Fed to cut rates at the July 31st meeting was right! After all, England's central bank cut their rate on August 1 and the European Central Bank started cutting rates in June.

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Panic ensued after the employment data and the stock market went tumbling (along with mortgage rates). Are we heading for a hard landing?

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As of Friday, most analysts and traders are saying yes unless the Fed acts quickly (and makes BIG cuts). JP Morgan and Citi are expecting 50bps cuts in September and November along with a 25bp cut in December!?

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One misunderstanding I hear ALL THE TIME from borrowers and realtors is that buyers are waiting for the Fed to start cutting rates before buying because their rate will be lower. That's not true... here's why:

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Mortgage rates are based on the bond market and the bond market, like the stock market, is priced based on expected future results.

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As of Thursday, August 1st, the bond market expected (and priced mortgage rates based on) 3 rate cuts totaling 85bps in 2024. Friday's labor market news changed that expectation and because of that mortgage rates fell.

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When the Fed actually starts cutting, mortgage rates may not react on the news if the Fed acts in a way that everyone already expected. An example of mortgage rates following expectations happened in November 2023 when everyone started predicting up to 6 rate cuts starting as early as February! The Fed rhetoric seemingly supported early cuts and mortgage rates started falling despite the Fed not cutting. When inflation and the labor market got hot in Q1 2024 forcing the Fed to hold off on rate cuts, market expectation changed and rates went back above 7%.?? The phrase "buy the hype and sell the news" applies just as much to mortgage rates as the stock market.

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Of course mortgage rates can continue to fall as the economy continues to become more and more broken resulting in an expectation that the Fed will need to cut rates further and further. As of the time of this newsletter on Monday morning, global stock markets are selling off on a mix of the worst day in the Japan Stock Market since 2020 (following a rate hike by the Bank of Japan that couldn't have come at a worse time) and a hangover from the awful data received last week. Stock markets falling can have a heavy influence on the Fed as we saw in 2020.? If the stock market slide continues, expect rates to slide with it!

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On top of all this, we still have A LOT of data left to digest before September 18th. 4 key inflation reports, 1 BIG employment reporting week like we just saw and a few pieces of major housing data to unpack between now and the September Fed meeting.

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Who knows how the economy will look in 6 weeks?!? That's where this newsletter comes in handy! I'll keep you informed every step of the way! But if I had to guess it won't look better than it looks today.

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Remember in March when the "Chief Economist" for Apollo predicted 0 rate cuts?? How times have changed. Readers of that newsletter might remember that I called BS!

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Pending Home Sales Up!

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Pending home sales (i.e., homes under contract) was up 4.8% month over month. Inventory is on the rise and more buyers are starting to get off the sidelines as rates fall (especially after this week) so it makes sense. Looking forward to see what happens as we get to lower rates.

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RATE CUT WATCH:

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There's a 100% chance of seeing a rate cut on September 18th!

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72% believe we'll see a 50bp cut and 28% believe we'll see a 25bp cut.?

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With global stocks falling Sunday and Monday morning, I am seeing more and more chatter about an EMERGENCY cut.?Polymarket - the world's largest prediction market where you bet on the outcome of future events in a wide range of topics, like sports, politics, and pop culture - currently has odds of an emergency cut at 44%

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If anything unexpected pops up that affects interest rates, you'll want to be sure to follow us?on Instagram for immediate reactions!?

Key reporting dates this week:?

Mon, 8/5: S&P final U.S. services PMI

Tues, 8/6: U.S. trade deficit

Wed, 8/7: Consumer credit

Thurs, 8/8: Initial jobless claims, Wholesale inventories, Richmond Fed President Tom Barkin speaks

Fri, 8/9: None scheduled

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It's been a long time since we've seen rates fall this fast! If you are looking for a specific interest rate before restarting your home search, please reach out so we can set you up with a rate alert! We will get you preapproved so we know your exact interest rate today and set an alert to reach out once interest rates hit your desired level. Given how much pent up buyer demand there is, you want to be able to hit the ground running as soon as possible!

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I'm always available to chat and always here for you! Call or text me at 512-701-1819 or send me an email.

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Don't forget - the average rate we quote DOES NOT EQUAL your rate. Depending on your credit score and loan qualifications, you could be looking at a rate in the 5% range today!

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Talk soon!

Eric