Market Update – February 27 
From the desk of David Battany Executive Vice President, Capital Markets  

There were no material economic reports today that impacted the bond markets. Later this week we will see several reports that will provide fresh insight into the direction of the overall economy. If these reports indicate a continued cooling of the economy, this would push bond prices up, and mathematically push interest rates down. If any of these reports show any surprise resilience in the economy, this would push interest rates up.

The New Home Sales report came out this morning and showed 661,000 new homes sold in January, below the 680,000 market prediction and down from the prior month’s 664,000 number. Weather and other seasonal adjustments can impact these reports, so this report was not viewed to be a material indication of the overall economy or the housing market. 

The Fed Futures markets have reduced their predictions for how quickly they believe the Fed will cut rates, with the markets predicting as of this morning that the Fed will do one rate cut by July, with a 50% chance it could happen in June. The markets are currently predicting the Fed will do three rate cuts by the end of this year. Less than 60 days ago the markets were predicting up to six cuts would happen this year. A stronger than expected economy and strong labor market are the key reasons why the bond markets have dialed back their predictions of rate cuts. 

This Week’s Reports that Could Impact the MBS Markets.

On Wednesday we will see the 2nd Estimate of GDP for the fourth quarter of last year, with the markets predicting the 2nd Estimate will be the same as the 1st Estimate of 3.3% quarterly growth. GDP measures the entire output of the U.S. economy, so a low and declining number would indicate a slowing economy. If GDP goes negative for two consecutive quarters this is viewed to be the textbook definition of an economic recession. Because the GDP calculation involves an immense amount of data, the U.S. Bureau of Economic Analysis (BEA) provides an initial estimate, then about a month later they release a revised second estimate, and about one month later they publish the third and final estimate. 

Also, on Wednesday we will see the Core PCE inflation rate for the fourth quarter of 2023 with the markets predicting 2.0%. This is the exact level of the Fed’s target rate, so this would be good for bonds if it comes out at this level, or lower. A higher number would indicate a surprise rebound in inflation and this would push bond prices down and push interest rates up. The three individual month reports for the fourth quarter were previously released, so the only way the market’s prediction could be off is if the BEA revises any of the previously released monthly reports. 

On Thursday we will see the January PCE report, with the markets predicting the Core PCE will be at an annual rate of 2.8% which would be a decline from the 2.9% in December. The monthly increase in Core PCE inflation from December to January is predicted to be 0.4% up from the 0.2% prior monthly increase. If this number comes out at 0.5% or higher, this would signal the markets that inflation is increasing, and this would push down bond prices and push up interest rates.

The other key report on Thursday will be the weekly jobless claims report, with the markets predicting 210,000 new claims filed last week, up from the 201,000 number the prior week. An increasing number of new claims would indicate a softening labor market, which usually reduces inflationary pressures, and this is good for interest rates. Also, a softening jobs market usually ties to a slowing economy which is also good for interest rates. Any report above the 210,000 prediction would be positive for MBS prices and would be a downward pressure on mortgage interest rates. However, the markets will likely put more emphasis on the PCE inflation report that morning, so a surprise good or bad result in the PCE report would more than offset the opposite surprise in the weekly jobless claims report. 

To wrap up a busy report week, on Friday we will see the S&P Global PMI reports for the manufacturing sectors worldwide, and the ISM manufacturing reports for the U.S. economy. The manufacturing sector has not been a large driver of inflationary pressures, however, it would give the markets a glimpse of the overall direction of the economy. The last key report this week will be the Friday University of Michigan Consumer Sentiment Survey with the market predicting an index value of 79.6 for February, exactly the same as January. Consumer spending drives 2/3rds of the total U.S. economy so changes in consumer sentiment give the markets a leading indicator of possible future economic growth rates.

This Market Update and similar such communications are for informational purposes only and are based on publicly available information. These materials are general communications, which are not impartial, and are provided solely for discussion purposes, and not in connection with any product or service offering. The opinions and views expressed in this Market Update are as of the date of this communication and are subject to change. Any forward-looking views and statements contained in this Market Update are based on current estimates or expectations of future events or results. Actual results may differ materially from those described in this Market Update. The views expressed in this communication should not be attributed to Guild Mortgage Company as a whole and may not be reflected in the strategies and products offered by Guild Mortgage Account.