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The debt ceiling debate is all over the news, but it’s a different ceiling that’s getting more of the bond market’s attention. Still, we won’t say that the debt ceiling is irrelevant, so let’s take a brief moment to address its implications for the housing and mortgage markets.
The most direct impact of the debt ceiling debate is the general volatility in the market and the flow of risk sentiment. If this resolves without issue, investors may become slightly more interested in buying stocks and selling bonds. The latter puts upward pressure on interest rates and was a common theme this week.
The 10-year Treasury yield is a good benchmark for rate momentum. Some of this week’s upward momentum can be attributed to possible progress on the debt ceiling, but we really didn’t find any concrete evidence that traders were on the edge of their seats over the political drama. This would rock the markets as a true “default” on US debt, and is highly unlikely.
Markets found the Fed and the economic outlook to be paying more attention this week. Tuesday morning’s retail sales data set the direction for the week. Traders were more receptive to a group of Fed speakers who echoed the same general sentiment: The fight against inflation is not over and data will determine when the Fed will hike rates.
At the beginning of the month, right after the last Fed meeting, market participants had almost completely priced in an additional rate hike. By the end of this week, we’re back to about a 50% chance of another hike in June (the rate outlook of 5.0% has moved up to 5.11%, which is roughly half of a 0.25% rate hike).
Fed comments and economic data had an even bigger impact on longer-term expectations. Here’s how the market views the December Fed meeting:
Economic data remains mixed. There are certainly ways to conclude that this is in trouble for the economy, but there is resilience on many fronts. Even though retail sales may be down on a month-over-month basis, it’s far better than many analysts expect, well above the trend.
More negative evidence against the economy is seen in the most sensitive sectors such as housing. The current home sales numbers were not very encouraging this week.
But it’s worth remembering that the ultra low inventory housing market isn’t just a gimmick for cheerleaders. It’s legitimately pushing up the sales numbers. Incidentally, this also stands as proof that 2023 is nothing like 2008.
Things are a little better for the new home market because builders don’t have to wait for the home seller to decide to relocate or refinance before those units are on the market. The construction numbers show a high to moderate improvement, but are still in line with the pre-Covid trend.
Builders were gung-ho about an interest rate hike in 2022, but this week’s NAHB index (essentially “builder confidence”) suggests their mood is improving. The index rose from 45 to 50, beating the median forecast of 44.
The Fed’s reminder about economic flexibility and the rate outlook came at a time when the bond market was rapidly running out of room to maneuver inside the prevailing range. The result is a breakout from that range, most easily seen in the case of the 10yr Treasury yield rising above 3.60%.
And to reiterate, the 10yr yield is a good benchmark for mortgage rates. They too broke down.
These breakouts mean that the market is not oblivious to the risk that it is not yet time for a major reversal towards lower rates. The saving grace is that the market isn’t even convinced that rates need to be any higher than they were at the beginning of this year or at the end of last year. Sure, we can break out of a narrower, more recent range, but there is a long-term consolidation that is very much intact. This is a debate that we think will take weeks or months to resolve.
Meanwhile, the volatility may increase within these levels. There will be ups and downs based on data and events. Next week’s biggest ticket regarding PCE inflation data on Friday and additional Fed speeches throughout the week.
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