Home News Biggest Drop of The Week; Lowest Rates Since Early June

Biggest Drop of The Week; Lowest Rates Since Early June

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The market entered this week with a great focus on the upcoming policy announcements from the European Central Bank (ECB).Our focus is Mortgage rates On a completely different continent, major events in the European market most often affect the equivalent US market.

It will prove to be true in some respects by the weekend. In addition to the ECB’s announcement, the market has also responded to major changes in European economic data. By Friday, the rate had plummeted when domestic data sang a similar song.

To understand why the ECB or economic data is important for interest rates, it is first necessary to remember that interest rates are primarily determined by the trading level of the bond market. For example, the 10-year Treasury yield is a prime example.

Second, we need to consider that US bonds are interrelated with foreign bond markets. The EU market is the most notable in terms of correlation. In other words, when something causes a big move in EU bonds, we tend to see a smaller version of that move in the United States.

So what do bonds care about and what lowers interest rates?

Bond yields (also known as “rates”) decline as bond demand increases. Economic weakness is one of the reliable ways to increase the demand for bonds. The economic downturn helps ease inflationary pressures on the demand side (inflation is a major enemy of low interest rates). It also encourages investors to look for safer shelters (investments that don’t lose a lot of money as the economy continues to shrink), and the bond market is a typical safe haven.

Data aside, major policy changes by central banks such as the Fed and the European Central Bank (ECB) can have an immediate impact on bond demand. In this week’s example, the ECB has announced a new bond buying tool that promises to add a bit of demand. This has reduced yields in Europe. US yields were not at a rather aggressive pace.

Demand for additional bond purchases was seen following some slightly weaker economic reports. The best examples arrived on Thursday and Friday in both Europe and the United States.

The Philly Fed Index is one of several economic reports that capture the momentum of a relatively wide range of economies. The headline index (blue line below) has been negative for the first time since the first covid lockdown, and the sub-index, which measures the 6-month outlook, has fallen to its lowest level in decades.

Another broad economic indicator is the PMI or Purchasing Managers Index. S & P Global released PMI data for multiple countries on Friday. France, Germany, the United States, and the euro area as a whole saw significant declines in several key areas. Not only were the numbers lower than previous measurements, but they were well below the predicted level. Following Thursday’s ECB news and weak Philadelphia federal data, this added fuel to the fire of bond purchases.

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When the Treasury yield is declining for 10 years Mortgage rates Even if the ratio can fluctuate, we usually follow. Mortgages certainly don’t benefit much when it comes to overseas expansion, but the feeling of a reversal of the big picture is the same in both cases. By Friday afternoon, average mortgage rates were slightly lower than those seen in early July. You need to go back a month to see anything lower.

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You need an asterisk right now to talk about the big drop in prices. Rate estimates can vary widely depending on the scenario and the lender, but they are not always as different as they look. The reason is the role of “initial cost” in the current market. Historically, avoiding paying additional upfront costs (also known as “points”) in exchange for lower rates has tended to be more economically meaningful. Many borrowers may still agree.

Nonetheless, due to the trading level of the bond market, points are packed with bigger punches than usual, which affects many loan quotes. For example, there are some scenarios where a single discount point can reduce the rate by more than 0.5%. Historically, that point is only worth 0.25%.

There are no universal recommendations here. If you find yourself comparing one quote to another, make sure you take the initial cost into account.

Other eco data and charts of the week (mainly charts)

Not all economic reports have had a significant impact on interest rates this week, but some of them remained of interest, especially for the housing and mortgage markets.

Home inventories are a hot topic, and this week’s existing home sales report showed that inventories remained low, but it’s definitely recovering.

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The graph above is not seasonally adjusted, so changes are difficult to see. The following graph shows the year-over-year change in inventory. It moved to the positive territory for the first time since 2019, mainly due to the sharp decline in sales.

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Sales may be sluggish, but prices have historically risen at a blazing pace. Note: Analysts expect house price increases to continue to cool.

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The combination of lower sales, recent high rates, material / labor shortages, and several other factors has hit builders’ confidence.

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The number of constructions isn’t as dark as the picture, but it’s down from recent highs.

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For “dark”, see one of this week’s headlines on mortgage applications, which hit a 22-year low. Sure, they did, but the weekly changes were by no means extreme.

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Long-term charts add perspective to the current level of your application. Refinancing demand is, of course, hanging near its lowest boundaries, with purchases returning to 2015-2016 levels.

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Future outlook

If economic data and central bank communication can create interest rate volatility, it could be just as interesting next week. We will receive the latest monetary policy installments from the Fed on Wednesday, followed by two major economic reports: Thursday’s GDP and Friday’s PCE inflation. The combination of these events could bounce or accelerate recent rises in interest rates, but for a significant drop in interest rates, we need to see a solid shift towards lower inflation.

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